From Financial Times

Indonesia woos investors for infrastructure plans

By John Aglionby in Jakarta

Published: November 1 2006 00:53 | Last updated: November 1 2006 00:53

Indonesia is opening to investors up to 110 infrastructure projects valued at $16.5bn (€13bn, £8.7bn) in an attempt to invigorate its sluggish economic recovery after years of crisis and poor management that triggered a collapse in investment.

Ministers are hoping to convince 800 investors at a three-day forum in Jakarta that they have learnt from the disastrous first such conference in January last year, and that conditions are now ripe to venture into what has long been considered one of the most perilous sectors in a risky investment environment.

Resistance from vested interests in the bureaucracy, rampant corruption, the failure to create a more investment-friendly climate by amending labour and tax laws, a messy decentralisation process and a lack of legal certainty are considered the main reasons for the prolonged inertia.

Of the 91 projects offered last year, fewer than a dozen have been implemented. Some of the remainder have been rewritten and are being re-offered this week.

“Since [January 2005] there have been improvements and some developments,” said Boediono, the senior economics minister. “We have prepared much better this time.”

The new strategy has three main strands. The first was to identify 120 regulations needed to ensure legal certainty and boost investor confidence. Mr Boediono told the Financial Times that about 60 per cent of these had been implemented and all should be in place by early next year. These include a risk-sharing package between the government and investors, a government infrastructure fund of Rp2,000bn ($221m) and a land acquisition fund of Rp 600bn for this year and Rp400bn for next year. They do not include any tax breaks.

“In principle government support and risk sharing is there so infrastructure development can proceed,” said Sri Mulyani Indrawati, the finance minister.

The second strand is a focus on 10 “model” projects valued at $4.5bn. “These have been prepared to international best practice and are ready to go now so we can create some momentum and show we are serious,” Mr Boediono said. These are three water supply projects, a ferry terminal, a port, two toll roads, a telecommunications scheme and two power projects. The remaining projects are expected to take some weeks to finalise.

The final innovation is that ministers will hold “surgeries” every day at the conference. “The aim is for investors to be able to ask them anything they want,” Mr Boediono said.

Lawrence Greenwood, a vice-president of the Asian Development Bank, told the Financial Times he thought the government had made “important progress” and was “well prepared”. “This is the coming-out party for the new framework,” he said. But he warned the government it needed to be “bolder in terms of development spending” if it wanted to entice the private sector to invest.

Before the 1997 Asian financial crisis, the government spent about 6 per cent of gross domestic product on development. That fell to 1 per cent in 2000 and is now 2 per cent. The consequence of this, said Mr Greenwood, was that Indonesia’s infrastructure was, in general, “significantly substandard” and in water supply and sanitation, “abysmal”.

Infrastructure experts agree. “President [Susilo Bambang] Yudhoyono was right to make infrastructure a platform of his government but the performance has been slow and disappointing,” said Scott Younger, president commissioner of Nusantara Infrastructure.

This lethargy has caused foreign investors to turn their backs on Indonesia. Foreign investment in the first nine months of the year fell 44 per cent to $4.29bn compared with the same period a year ago.

However, the government estimates at least $65bn will have to be spent on infrastructure by 2009 to achieve its growth target of 7.6 per cent, of which it will be able to contribute only $25bn.

Despite the government’s upbeat talk, investors will take a lot of convincing. “The president and cabinet are aware of the problems, and some senior officials are very aware of the problems, but the bureaucracy seems so unwilling and unable to move quickly,” said Peter Fanning, the chairman of the International Business Chamber, a group of 16 Jakarta-based foreign chambers of commerce.
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