Govt quick fixes are wilting

Anggi M. Lubis and Tassia Sipahutar, The Jakarta Post, Jakarta | Headlines | Mon, April 29 2013, 10:48 AM

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After years of luring domestic and overseas private investors to bid on government-run infrastructure projects, little progress has been made to get the initiatives running, pushing things to their breaking point.

Traffic in Jakarta, the nation’s economic and political center, is constantly in gridlock, while the flow of goods from Tanjung Priok, the nation’s main port, continually suffers from bottlenecks.

Meanwhile, airports in major cities are overcrowded, while electricity and water supplies have failed to keep pace with soaring demand.

Overall, investment in infrastructure has remained lethargic in the past decade, coming in around 3 percent of gross domestic product (GDP), compared to the period before the 1997 Asian financial crisis, when the figure stood at 7 percent of GDP, according to the Public Works Ministry.

The World Bank noted in a recent report that Indonesia’s average infrastructure investment rate was well behind most of the nation’s neighbors in Asia, such as China, Thailand and Vietnam, which have each averaged infrastructure investment rates above 7 percent.

One notable cause of sluggish investment rates has been a failure to mobilize needed private sector funds for the projects.

The government’s medium-term development plan for 2010 to 2014, called on the private sector to contribute more than 70 percent of the needed US$150 billion investment.

The government’s Masterplan for the Acceleration and Expansion of Indonesian Economic Growth (MP3EI), meanwhile, called for 51 percent of a needed $468 billion in infrastructure investment between 2011 and 2025 to come from private sources.

The lack of investor engagement has been attributed to flaws in proposed Public-Private Partnership (PPP) plans, where the government and investors sign contracts to share the risks and responsibilities for certain infrastructure projects.

The Public Works Ministry, which is responsible in part for executing PPP projects, has acknowledged the flaws, saying that the ministry was working on several breakthrough policies. “We understand that the PPP scheme is far from working. We are now trying to patch the holes,” Public Works Deputy Minister Hermanto Dardak said recently.

According to Hermanto, the patches would comprise providing more incentives and increasing the state’s funding of joint ventures with the private sector. “Some companies are eligible to carry out the projects, but have been reluctant to step in,” Hermanto said. “We will encourage them by providing viability gap funding, in which the government covers 40 percent of the cost.”

The pilot project under the scheme, according to Hermanto, would be the development of the toll road to link Kuala Namu International Airport with Medan and Tebing Tinggi in North Sumatra.

Another scheme, Hermanto said, would be the leasing of projects built by the government using state funds. “This scheme will be applied, among other projects, to the toll road heading to Tanjung Priok port.”

Finance Ministry fiscal policy chief Bambang Brojonegoro said that the ministry had recently set up a unit to coordinate, monitor and finance incentives and viability gap funding to jump start the initiatives. “The unit is expected to help speed up execution of the PPP projects.”

Businessmen, however, have remained unimpressed.

“Problems related with land acquisition remain despite the new regulations,” Erwin Aksa, whose Bosowa Group has been building toll roads and power plants, said. “Officials from the central and local administrations still cannot help clear the needed land. Poor planning and preparation in the offered projects have also become a concern.”

“Take the example of toll roads. The government offers toll sections to different investors, and they are not connected. Trouble in one section can jeopardize the business plan of other investors. That’s why many investors are pulling out,” Erwin said.

According to a World Bank report released last year, project preparation and selection problems have led the government to issue tenders for many unfeasible or difficult projects.

In addition, a lack of coordination during the selection process among relevant agencies has led to project overlap, creating confusion for investors, the report said. “One of the factors slowing PPP implementation progress is that many PPP projects have been offered with inadequate due diligence undertaken prior to tendering,” the report added.

The World Bank called for priority to be given to budget preparations and for the project selection process to be enhanced to ensure that selected projects receive high-level leadership support and risks are properly evaluated and shared.

Such problems have recently taken a toll on a PPP project to build a 2,000 megawatt coal-fired plant in Batang, Central Java — the largest project of its kind in Southeast Asia and with an estimated cost of $4 billion. State power company PT PLN initially expected that the plant would be complete by 2016, assuming that land acquisition and permit issues would have been settled in October last year.

However, problems have emerged that have kept construction on hold due to legal uncertainties and landowners who have refused to sell unless investors pay a markup.

“Indonesia already has sufficient resources to build its needed power plants, including investor availability, and abundant coal and gas to fuel the plants. All we need is firm regulations and good bureaucracy,” businessman Sandiaga Uno, whose firm is involved in several power plant projects, said.

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