Infrastructure Frenzy

Indonesia

Economic News

22 Jul 2010
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At a conference this week, the government announced the establishment of an Indonesia Infrastructure Fund, in line with its efforts to promote private investment in the country's infrastructure development.



The Indonesia Infrastructure Conference and Exhibition 2006 was organised by the government together with the Indonesian Chamber of Commerce (Kadin). During the conference, it was announced that the fund would be established before the end of the year. Meanwhile, guest ministers took the opportunity to explain their strategic priorities and informed the audience about the ongoing reforms aimed at attracting more foreign investment in developing Indonesian infrastructure.



Ever since the beginning of its term, the government of President Susilo Bambang Yudhoyono has made infrastructure development one of his government's main priorities.



Following the 1997 financial crisis, infrastructure spending in Indonesia dropped from a pre-crisis 6% down to approximately 2% today. Low levels of private investments combined with existing poor infrastructure have been identified as one of the main impediments to the country's economic development.



In January 2005, three months after the government took office, the first summit on infrastructure was organised. The summit was intended to attract foreign investors to finance and develop infrastructure in the country, as a boost for economic development, and a remedy to high rates of unemployment and poverty.



During that summit, 91 infrastructural projects were presented with an estimated value of $22.5bn. To date, only a few of them have shown significant progress due to disappointing investor interest and to slower than expected implementation of legal and regulatory reforms that were promised during the summit.



However, this second conference seems to be more promising as the government together with Kadin have succeeded in overcoming investors' initial cautiousness and scepticism.



In an interview with OBG on November 2, John R. Cooney, the director of the Infrastructure Division at the Southeast Asian department of the Asian Development Bank (ADB) said, "I think it was quite effective because it was pitched at a level that was not overoptimistic, that acknowledged that previous conferences might have been overly optimistic, and made the point strongly that opportunities are huge, but that there are still several challenges, procedures and policies that are still being worked out."



The government has launched three major policy packages this year with clearly defined deadlines.



At a press conference preceding this second infrastructure summit, Suyono Dikun, deputy of the coordinating minister for the economy, said that, so far, only 50% of the regulations of the infrastructure package announced in February had been implemented, but he asserted that many of the regulations were coming along and he expected that, by December, 80% would be implemented.



During the summit, emphasis was put on the framework for public-private-partnerships (PPP). The government announced that it is willing to amend existing PPP regulations if necessary. A special PPP centre has been prepared that will review and evaluate projects before they are proposed to the government for risk sharing considerations.



Another major issue that has prevented foreign investment in large infrastructure projects is the long and costly process of land acquisition, especially for long linear projects such as toll roads, transmission lines or pipelines. Until now, the costs (and risks) for such processes in Indonesia have been put on the developer, unlike in most other countries.



During the summit, Vice President Jusuf Kalla clearly stated that from now on this should become the government's responsibility, and that land should be acquired before a project is tendered. To this end, a special revolving fund has been established within the Indonesia Infrastructure Fund.



In the meantime, the positive momentum of the conference has already translated into increased willingness by foreign investors to financially assist the government. Cooney told OBG, "reflecting the point made by many speakers at the conference, that the approach to acquiring land was a major impediment to developing projects, the Asian Development Bank would be more than willing to work with the government on a land financing operation in order to speed up projects and reduce project costs and risks".

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