The private sector and infrastructure

By webadmin on 12:18 pm Jul 23, 2012
Category Archive

Scott Younger

For many years it has been recognized that realization of the completion of the required infrastructure to support Indonesia’s economic growth will need at least two units of capital investment from the private sector to match one from the government.

The 2:1 ratio is not exclusive to Indonesia and is increasingly commonplace in developed countries, which in many cases have a large backlog of work to be done to replace old and/or outdated elements that have served for many years. This is true in the UK and America and many other countries.

In the UK, the government, signed off by the Treasury, has set out a hefty document giving considerable detail to the infrastructure considered to be needed over the next five years, to cost 250 billion pounds sterling ($400 billion).

This highlights the underinvestment in Britain’s infrastructure over the past decades. It also highlights the need for the private sector to invest within and without the application of public-private partnership (PPP) arrangements. The detail of the investment profile will provide the basis for a big conference in London in December this year, not unlike those that we have been holding in Jakarta over the past few years.

In America the involvement of private investment in infrastructure is raising much debate, an interesting feature of which relates to the power of state politics in the decision-making process. This is seen as a disincentive for private sector funding in a number of key states where upgrading infrastructure is very important.

In Indonesia we are expecting the six-corridor master plan (MP3EI) to become the foundation of infrastructure build-out in the years ahead and this will provide the basis of the presentations and discussions at the upcoming Infrastructure Conference, delayed from May but now to be held at the Jakarta Convention Center 28-30 August.

A key feature of the conference will be Governors’ Day, which will focus on regional presentations depicting perceived infrastructure needs in order that the regions can start making a real impact on economic growth.
As McKinsey reported in a March 2011 quarterly review, the GDP of the country is significantly below where it should be, i.e. nearer 9%, because of lack of infrastructure in the regions.  

Varied priorities

Bearing in mind the problems towards delivery faced by developed countries, what are the challenges that are to be faced in Indonesia?

While the six-corridor master plan focuses on 22 different activities which form the backbone of the Indonesian economy, with food and commodities featuring alongside the need for investment in infrastructure, the focus on each of the corridors has necessarily some distinctively different priorities. The part to be played by infrastructure development stresses the importance of connectivity, in due time feeding into that for the ASEAN region as a whole.

For Java in particular the emphasis has to be on hard infrastucture – roads, power and rail with good connections to ports – without ignoring the considerable improvements required in water supply to support increasing industrial and domestic demand. Without good water supply the current and potential industrial output will be impaired.

A number of the infrastructure projects that will be required can be considered for development as PPP. However, the big handicap here has been the laws and regulations and their interpretation by the bureaucracy and the legacy of ‘multi sign-offs,’ often by people without sufficient appreciation of what is to be addressed. This leaves the private sector nervous about taking on risks inherent in long-term investment, especially when the pay-back period is not something to be realized in say the first five years of a project.

The political dimension relates to tariff structures. For toll roads the bi-annual adjustments that have been applied over the past six years are now providing a sufficient level of comfort to investors to accept that this is the norm, largely because this is no longer a political issue and is properly handled as a regulatory matter.

However, at the other end of the scale, the development of the water sector with the introduction of private investment is still at very early stages and there are no pointers that would suggest that tariffs are going to be protected from the whims of local government political jurisdictions.

While there is much discussion on the issue, too many areas still languish behind a lack of understanding in local politics to the realities of providing sensibly-priced clean water for citizens.     

Long repayment periods

For the off-Java areas of the six-corridor master plan, in eastern Indonesia for example, where the emphasis has to be on agriculture and fisheries and production of processed food items, whether for the domestic market or overseas, as well as the development of untapped reserves of minerals, the infrastructure to be put in place must be geared towards the facilitation and expansion of these activities.

Accordingly, much of the detail within the plan focuses on this with the marking out of the infrastructure projects needed to support these developments.

However, while the building of the needed infrastructure for the above activities, in what are relatively sparsely populated areas, has an important economic benefit towards the local GDP and thus overall nationally, it is generally difficult to make a case for a satisfactory financial return as required for any private investment. Debt repayment periods are too long.

There will sometimes be a case for securing private investment for a new regional road, for argument, where its construction is considered vital for the successful development of some important key agricultural initiative which is attractive to a private investor.

Regions should be thinking, in such cases, on how such a situation could be best packaged together, in order to attract private funding for a needed public asset. It is worth recalling that the country has the lowest road link density in Asia; many thousands of new kilometers have still to be built.

Except in such an instance, however, most core infrastructure projects in these off-Java corridors will have to be supported directly from government budget or on the back of soft loans, while the private sector focuses its investment on agriculture, fisheries and the extraction of minerals, along with the processing of goods.

In all cases, however, there will be a clear need for enlightened thinking at local government political levels and a streamlining of bureaucratic procedures to be employed by local government staff, for which training in most cases will be required.

So, come what may, fundamental to the success of the MP3EI will be its whole-hearted adoption by the nation’s governors, regents and their local parliaments, coupled with an understanding of the right approach for a given situation, whether PPP or not, for delivery of the various projects set out in the masterplan.

At the same time, the regions must be given their head to deliver what is prescribed and whatever sensible variations evolve as delivery proceeds.