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NEWS UPDATES Asean Affairs    14 September  2012

Indonesia devoting $20 billion to upgrading infrastructure


Plans for an MRT network criss-crossing Jakarta were first floated in the early 1980s. Some 30 years on, the first pillar has yet to rise.

Now the Jakarta government says work will start before the year is out, having secured a loan from the Japan International Cooperation Agency.
Seasoned watchers of Indonesia's infrastructure landscape, however, are not holding their breath. Here, deadlines - whether for airports, power plants or toll roads - are often missed, as money runs out or officials change their minds.

Delays, investors say, are understandable. But of greater concern is whether the money they have invested will be protected should there be tussles over land or cancellations for whatever reason.

As Indonesia's economic boom looks like it may be crimped by lack of infrastructure - not having enough roads, for instance, drives transport costs up - bureaucrats are rushing to shed the country's reputation for delays and red tape.

Last month, the government issued new regulations to make land acquisition easier. It is also starting to guarantee investments in infrastructure projects and ministers are trying to make sure local administrations and agencies are on the same page.

"New institutions, new land regulations, high quality consultants hired by government for high profile projects - all of this shows a higher level of interest and seriousness, and is cause for optimism”, said one observer.

The government is also now willing to offer guarantees for investors, helping to allay lenders' concerns, added Raj Kannan, managing director of investment company Tusk Advisory.

This week, the World Bank announced US$4.6 million in technical assistance and up to $25 million in financing for the recently set-up Indonesia Infrastructure Guarantee Fund, which safeguards private investment in infrastructure projects should they be cancelled.

Over the weekend, President Susilo Bambang Yudhoyono invited businessmen at the Asia-Pacific Economic Cooperation leaders' meeting in Vladivostok to help build the infrastructure Indonesia needs.

The government is devoting $20 billion of its state budget to building and upgrading infrastructure next year, but needs the private sector to match that every year for the next five years.

Later this month, Dr Yudhoyono will head to New York to woo investors for, among other things, power plants in Batam and West Java, a drinking water project in Java, a toll road in North Sumatra, a cruise terminal in Bali, and a high-speed rail from the Soekarno-Hatta airport to Jakarta.

Infrastructure experts feel more can be done to get previously stalled projects going.

One example is the Sei Mangke industrial zone south of Medan, where the local regent has yet to sign off on the land transfer. Stretches of the Trans-Java Toll Road that will link Jakarta to Surabaya have also been stalled for years.

Kannan suggests the government bite the bullet and put the projects up for tender again, as they can then be backed by the new guarantees.

"Most of these projects have issues because the government's contractual obligations are not guaranteed. Some were awarded as far back as 2004. It's eight years now and time to start anew," he said.

Scott Younger, vice-chairman of the European Business Chamber of Commerce, said some of the less risky projects - like airport expansion - are usually taken in-house by state-owned enterprises.

The private sector is left with greenfield investments - projects where little or no existing infrastructure exists, like new airports or industrial zones. These not only require larger investments, but their returns are less certain.

Horn suggests turning to local currency bond markets to fund such projects as well, something Indonesia has not yet done. "Indonesia deserves to be treated like other investment grade countries that attract infrastructure investment funds, but investors will also expect the treatment they enjoy elsewhere," he added.

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