Building infrastructure

Indonesia

Economic News

22 Jul 2010
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Last week, a cooperation agreement between a local investment bank and an investor from the Middle East was announced - the latest in a series of initiatives aimed at stepping up infrastructure development in Indonesia.



State-owned investment bank Danareksa signed a memorandum of understanding (MoU) with the Qatar Investment Authority. The agreement will establish a joint venture that will invest in road and power plant projects in the country.



Lin Che Wei, the president director of Danareksa, also mentioned that the bank will hold a significant share in the joint venture, as reported by local press.



With the second national infrastructure summit almost a month away, the government is trying to get its ailing infrastructure programme on the rails. Next to the cooperation with Qatar, several initiatives have been announced over the past weeks.



During his election campaign, President Susilo Bambang Yudhoyono promised to realise average economic growth of at least 7% during his tenure if he would be elected. One of the main impediments for reaching such growth was the state of Indonesia's infrastructure.



In January 2005, the new government organised a high profile infrastructure summit in Jakarta. With the help of the national Chamber of Commerce (Kadin), the participants at the meeting developed a so-called road map for development. As part of the strategy, the government has been busy trying to ease rules and regulations for (foreign) investment in infrastructure.



To this end, an extensive policy package on infrastructure development was announced in February, in addition to several incentives announced in 2005. However, as many businesspeople in Jakarta have observed, implementation has lagged.



This slower than expected progress has been the reason that the second infrastructure summit, a direct follow-up of the first, was postponed. Originally planned to be held in the second half of 2005, it is now scheduled for November 1-3.



In late August, Suyono Dikun, the deputy economic minister for infrastructure, said that only about 30-40% of the infrastructure policy package had been implemented as of that month. Dikun, who is also the executive chairman of the National Committee for the Acceleration of Infrastructure Provision (KKPPI), expected that by November approximately 70% would be implemented, as reported by local press.



The infrastructure policy package contains 153 new measures, aimed, among others, at clarifying and simplifying land acquisition procedures for development of public facilities, a contentious matter in Indonesia. It also included several incentives aimed at promoting the role of the private sector in infrastructural development projects.
Not only had the infrastructure policy package experienced a delay in implementation, measures to improve the general investment climate have also been delayed, affecting investors' appetite for the infrastructure sector as well.



Uncertainty about contract sanctity and legal security are among the often-quoted issues that discourage investors. Moreover, the current regulations on tax and labour are considered very business unfriendly. While the government has tried to reform legislation, to date little has changed.



The draft for a new, more flexible labour law was withdrawn after fierce protests in May, and the government is now preparing regulations to address the most crucial issues for investment such as termination procedures, severance payments and outsourcing.



New, more business friendly tax legislation is expected to be implemented in the second half of 2007.



Next to the cooperation agreement with Qatar, the government is currently establishing a revolving infrastructure fund.



This fund, in which the government injects a base capital of Rp2 trillion ($217m), will be primarily used for land acquisition for toll roads, as reported by a local news website. The organisation that will manage this fund will also issue bonds with a value that is three to four times higher than the injected capital.



While this should help expedite the realisation of toll roads in the country, recently the International Finance Corporation (IFC), which is one of the main sponsors of the planned infrastructure summit, expressed its readiness to play a major role in infrastructural development.



The country manager of IFC for Indonesia and Malaysia, German Vegarra, told OBG last week that "when Lars Thunnel, the head of IFC was in Jakarta earlier this month, IFC proposed to vice-president Jusuf Kalla to create 2 or 3 model projects".



"IFC presented two ideas in particular, an airport railway link in Jakarta, and the construction of rural independent power plants. IFC could help put together the transactions in a way that it would become bankable, organising a transparent but fast bidding process, which would attract the right investors" Vegarra said.



Vegarra also disclosed to OBG that the IFC is currently looking into the possibilities of creating an infrastructure facility in Indonesia that would allow them to support regional infrastructure development, primarily in rural areas.



This week the government indicated that it is willing to provide loan guarantees for major infrastructural projects. However, only if investors undertake to deliver the projects on time and if they can fulfil their output targets, they will be eligible for such guarantees.

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