Saturday, May 3, 2014

Indonesia: Infrastructure (Part I)


Indonesia: Infrastructure (Part I)

Infrastructure is the crucial element for mining. Indeed, if there is no way to transport production results – there is no business. In my posts the subject I will try to outline major ideas on the situation in infrastructure, as well as some investment opportunities. Of course, this is a vast subject – and it is impossible to make a comprehensive analysis within the Blog, but I suppose that some of the information will be useful for readers.
Many analysts agree that inadequate infrastructure is one of the main factors that could prevent Indonesia from reaching its full growth potential. Understanding this, the Government is addressing an infrastructure agenda  and doing all necessary to tackle this complex, technically detailed, and challenging issue. The policy to improve infrastructure has been one of the priorities in the past years – a number of policy initiatives and plans were undertaken including the introduction of several sectoral reform initiatives, infrastructure summits, the launching of infrastructure packages, and the introduction of regulatory and institutional reforms – one of the biggest is focused to attract public- private partnership (PPP) in infrastructure. The reason for PPP is simple:  of the estimated requirement of US$140b level of investment, two thirds of the amount was expected to come from private sources.
Watch this Bloomberg video: Progress On Indonesia Under President Yudhoyono
If we look at the transportation sector, roads in and around major cities are heavily congested, while many inter-urban and rural roads are in poor condition. This is very typical for other sectors of the economy: a problem of insufficiency and spatial difference in infrastructure availability and service. There is an acute requirement for upgrade of electricity supply sector – major systems are located far from the points of demand – this affects business operations to a great extent (e.g. blackouts in Jakarta) .
For those who are interested in exploration of the subject I highly recommend Dissertation Thesis by Mohammad Mustajab: Infrastructure Investment in Indonesia: Process and Impact
This is by far the most detailed study (updated in 2009), that among the other things discuss the following:
  • How are infrastructure investment decisions formulated?
  • Who defines the need for new infrastructure investment in Indonesia?
  • What goals of new infrastructure investment have emerged?
  • Whose goals have emerged?
I will suggest looking at this comparative Table:
 © Mohammad Mustajab, 2009

Just today The Jakarta Post  published an opinion: That old song: Infrastructure that I am taking the liberty to reproduce here:
President-elect Susilo Bambang Yudhoyono’s decision to include basic infrastructure development as key programs of action for the first 100 days of his government is  a strategic move given our huge infrastructure deficit.
Crumbling infrastructure, an acute lack of electricity, poor and inadequate road networks, and grossly inefficient seaports and airports have all long been among the strongest barriers to new investment and a primary cause of our economic inefficiency and uncompetitiveness on a global scale.
But we cannot avoid a feeling of déjà vu.
Notably, Yudhoyono also made basic infrastructure a key component of his first 100-day program, during his first presidential term. He went ahead with convening the first infrastructure summit and exhibition in mid-January 2005, despite the massive, devastating earthquake and tsunami that struck Aceh and Nias Island less than one month earlier, killing hundreds of thousands of people.
In early 2006, Yudhoyono launched a comprehensive infrastructure-reform package stipulating more than 150 policy measures, and convened the second infrastructure summit later that year. Among important measures already implemented were the establishment of a US$300 million infrastructure fund company and better regulatory frameworks for the management and sharing of risks and public-private partnership (PPP) in infrastructure provision.
Funding has always been one of the main problems in infrastructure development as it requires long-term investment, while tariffs charged by infrastructure providers or operators are subject to government regulations. Since most bank loans have short maturities, the government-sponsored fund not only could provide alternative financing, but also serve as a catalyst for other creditors and investors.
There have been clear-cut regulations to secure the financial sustainability of service provision, allowing investors to be more confident that infrastructure tariffs will be sufficient for them to repay their investments with a reasonable return but will not be so high that they harm consumer interest or make projects politically unacceptable.
But only a small number of the hundreds of infrastructure projects offered thus far have been taken up by investors, and many of them have been delayed either by protracted bidding procedures or land-acquisition problems.
Foremost among the barriers is land acquisition, the main reason being inordinately weak implementation of the 2005 regulation on land acquisition for public interests, which was hailed as a breakthrough in streamlining the process of land appropriation. This regulation stipulates in technical details the procedures and step-by-step processes for negotiations on land prices; land appraisal; deadlines for negotiations; and composition of land committees for price negotiations; as well as the role of the National Land Agency.
We don’t think the enactment of a law on land acquisition for basic infrastructures  would be a good, feasible way out. Besides such legislation taking a long time to deliberate, it would be politically unacceptable to make such a law in isolation from the long-delayed overall land-ownership reforms.
If the government really is serious about wooing investment to accelerate infrastructure development, it needs only to act firmly in enforcing its 2005 regulation on land acquisition.
This regulation allows for the forceful acquisition of land, yet it is still based on market prices, and even mandates the President to revoke property rights of dissident landowners as a last-resort measure, if all negotiation and consultation avenues have been exhausted.

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