Guarantees offered for nervous investors

Urip Hudiono, The Jakarta Post, Jakarta

The government has unfurled a range of risk-sharing, guarantee schemes for investors in major infrastructure projects in the country, part of its effort to realize crucial infrastructure development for higher economic growth.

Schemes range from extending a project's concession years to providing financial compensation, which is expected to cover any possible operational and political risks investors may face.

Investors have been reticent about committing to infrastructure projects due to a lack of legal certainty, with many requesting guarantee letters from the government to safeguard their investment.

Guarantee schemes will be provided on a case-by-case basis, arranged and regulated through Finance Minister Regulation No.38/2006, which the government issued on May 19.

The Committee for the Acceleration of Infrastructure Development, under the coordinating minister for the economy, will assess and propose a project for review by the finance minister, who will decide if the project qualifies for the guarantee arrangement.

Concerning operational risks, the government will grant an extension of concession years or financially compensate investors if they face a delay in clearing land allocated for a project.

The government also will cover any additional expenses up to a specified amount if the cost of the land clearance is higher than initially assessed.

Concession year extensions or financial compensation will be given if there is any delay or cancellation of a project, or of its previously agreed tariff adjustment scheme.

Initial tariffs set lower than had been agreed upon, as well as arbitrary changes in a project's specifications, also are subject to such compensation.

The government also will compensate investors if revenues and demand for a completed project turn out to be lower than the government had initially guaranteed, the regulation stated. In the case of higher than expected revenues and demand, however, the government may request a share of the financial surplus.

Guarantees covering political risks, meanwhile, were not clearly defined in the regulation, except for the statement "compensation can be committed to investors". Political risks include changes in government policies and regulations, an asset takeover by the state and restrictions on repatriating project revenues.

Finance Minister Sri Mulyani Indrawati previously said the government planned to allocate up to Rp 2 trillion (US$217 million) for the risk-sharing schemes, which it will propose to the House of Representatives during the state budget's half-year revision. The funds will be managed by the ministry's Directorate General of the State Treasury.

Indonesia is in dire need of better infrastructure, which deteriorated in part due to the rampant practice of inflating construction estimates. Private investment is essential for its development, as the government may only be able to provide 20 percent of the Rp 1.3 quadrillion needed until 2009.

The latest regulation follows the government's recent February package of 153 policy actions to encourage more private investments in infrastructure development. The government had also issued Presidential Regulations No. 67/2005 on public-private partnership for infrastructure provision and No. 36/2005 on Land Acquisition for Public Use.

The head of the Turnpike Regulating Agency, Hisnu Pawenang, confirmed the government would cover additional land clearance costs above 110 percent according to the regulation, including for eight turnpike projects totaling 191.5 kilometers throughout the country agreed upon with investors.
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