Road to Development

Indonesia

Economic News

22 Jul 2010
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The government's recent announcement that it is to inject a sizeable
amount of cash into upgrading the country's infrastructure comes as a
welcome relief to many Indonesians.



The government said it would allocate at least IDR3 trillion (some
$320m) from the 2006 state budget to accelerate infrastructure
development in the country.



The director general of treasury at the Ministry of Finance, Mulia P
Nasution, told reporters back in May that the funds would be used
firstly for the direct financing of several planned infrastructure
projects. Secondly, they would also act as a guarantee for other
projects that will be financed by the private sector.



Finance Minister Sri Mulyani Indrawati indicated separately during an
address to a business audience on 18 May that Indonesia might allow
its budget deficit this year to increase to between 1 and 1.5% -
instead of the now budgeted 0.7% - in order to finance the extra
infrastructure spending.



The move is also intended to assure investors about the commitment of
the government to infrastructural development.



The necessity of this reassurance relates to President Susilo Bambang
Yudhoyono's election promise of 7% growth by 2009. To achieve this,
his government committed itself to a radical improvement of the
infrastructure, with this to be a catalyst for economic development.



Improving Indonesia's roads, ports and power plants would therefore
be an essential part of poverty alleviation too.



Therefore, barely three months into office, in January 2005, a
high-profile infrastructure summit was organised, intended to attract
foreign investors.



The government estimates it will need at least $145bn in the coming
four years in order to develop the country's infrastructure network,
which has suffered immensely from poor maintenance and construction.
The bulk of necessary investment is expected to be financed by the
private sector.



However, the new government saw itself confronted with so much
overdue maintenance with regards to the investment climate that
tangible results from the summit did not easily materialise. On the
contrary, in its editorial of February 27, the Jakarta Post even
characterised the summit as a miserable failure due to the inability
of the government to swiftly implement the 14 major policy reforms it
promised at the summit.



When back in February, the government announced an economic policy
package - complete with a timeline for its implementation - the
country's rulers met with scepticism from the business community.



Chairman MS Hidayat of the Indonesian Chamber of Commerce (KADIN)
explained that implementation would be the key, since a similar
policy package in October 2005 has been hampered because many
regulations necessary for its implementation have yet to be amended.



The second infrastructure summit, originally scheduled for November
2005, has in the meantime already been rescheduled three times
because of a lack of progress on the regulatory framework. The
policies in the recently announced package should ideally be
implemented before August 2006, when the follow-up summit now is
scheduled.



The team of ministers working on economic issues, led by
Co-ordinating Minister for the Economy Dr Boediono, is working hard
to achieve this target, and to address investors' worries and
scepticism, among others by the allocation of IDR3 trillion for
infrastructure development.



Mulia explained that a revolving fund for infrastructure development
will be established with the money. He expects it will be able to
support the financing of at least three or four major infrastructure
projects this year. A part of the IDR3 trillion will furthermore also
be allocated as insurance for projects carried out by private
investors.



Revolving funds are oftentimes used in financing large infrastructure
projects. The minimum required capital for a project's initial
construction is pooled, after which the project is offered to other
investors. While revenues are obtained from user charges, the fund is
replenished to pay for other projects.



During a statement at the conclusion of the 2006 Article IV
consultation discussions with Indonesia on 19 May, IMF Senior
Resident Representative Stephen Schwartz hailed the efforts of the
Indonesian government to strengthen investor confidence.
"The IMF mission conducting the consultations welcomes the
authorities' recent Investment Climate Policy Package, and its
emphasis on policy implementation," Schwartz said. He also expressed
IMF support for further enhancement of infrastructure investment, as
key component to attract new domestic and foreign investment.



The only hurdle remaining for the imbursement of the funds seems to
be parliamentary approval, since the funds must come from the state
budget. Indonesia still has a long road to travel on its way to
economic recovery and poverty alleviation - but perhaps this will
make the journey a little smoother.

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