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This week Indonesia has been holding its third major conference since 2005 to attract international investment in infrastructure. The three-day conference, hosted by the Indonesia Chamber of Commerce (Kadin), closes today. Next up, in early May, the Overseas Private Investment Corporation of the United States will be hosting a major regional investment promotion conference in Jakarta, part of which will be devoted to infrastructure.

Members of my organization, the American Indonesian Chamber of Commerce — including many long-term investors in sectors such as infrastructure, oil and gas, mining and capital markets — will be attending these meetings, looking for possible projects. Underlying their intent is an acknowledgement of Indonesia’s growing opportunities, and they bring with them ideas of what would help Indonesia attract more investment in infrastructure projects. I will present a few here.

Indonesia’s leaders, such as President Susilo Bambang Yudhoyono, Vice President Boediono, Finance Minister Agus Martowardojo and former Finance Minister Sri Mulyani Indrawati, have brought the country back from financial instability and unacceptably high inflation rates. The country has been doing a very good job attracting nongovernment-related investment but has had more difficulty moving investors from the sidelines to invest in the power, roads, rail and ports so critical to the nation’s future. New approaches are needed to cut through the financial and jurisdictional barriers to infrastructure investment. One of them — a national infrastructure financing institution recently offered by Kadin chairman Suryo Bambang Sulisto — merits serious consideration.

The traditional public-private sector approach continues to attract investment to sectors such as mining and oil and gas, where products are priced in US dollars. Here, the government has created transparent structures to govern them: the production-sharing contract (oil and gas) and contract of work (mining). This approach works less well for power plants, toll roads, bridges and ports. These projects are inherently less secure given they often have large foreign currency liabilities and local currency revenue streams.

AICC and its members believe the opportunity to invest in infrastructure is huge if the right type of policies can be mobilized. We suggest three concrete steps to help solve Indonesia’s infrastructure dilemma.

First, pass a land acquisition law with eminent domain authority. This single piece of pending legislation represents one of the most important hurdles to investment critically necessary to alleviate infrastructure bottlenecks. We are encouraged by reports the law may be passed soon. More than 15 million Jakarta residents spend up to 4 hours a day in traffic jams and the costs of moving goods rises annually without a national network of highways and high-speed rail. To create an integrated rail and road system, governments all over the world assume some type of eminent domain authority to cut through the needless land speculation that impedes projects.

Second, review the public-private sector model. Public-private partnerships were a “compromise strategy” from before the Asian Financial Crisis to allow the government to leverage private sector capital to finance infrastructure projects such as telecom networks and power plants without giving up control. Today, the political discourse in Indonesia has largely moved on from state-led growth. Outright private ownership of infrastructure assets should now be both economically and politically feasible. Government loan guarantees, if professionally administered and limited in scope, can still help steer credit and capital toward projects in the national interest, enhancing the effectiveness of private sector management.

Third, form a national infrastructure financial institution. If staffed with a talented group of engineers and financial experts, we believe a significant amount of capital can be raised locally and internationally through bond offerings that might do for infrastructure what the production sharing contract did for the oil and gas sector. The objective of such an institution should be to catalyze long-term debt and mezzanine project finance.

Providing sovereign guarantee support would be an effective way for Indonesia to leverage its improving balance sheet and sovereign credit rating, thereby raising the level of capital that can be raised from domestic and foreign sources. Indonesia can afford this risk. Funds mobilized through this kind of institution can more readily be matched with project financing from multilateral agencies and other private sector sources. AICC and its members will be pleased to assist in forming such an institution.

 

Wayne Forrest is president of the American Indonesian Chamber of Commerce in New York.