Indonesia’s Infrastructure Investments: Finally Taking Off
After years of neglect, Indonesia is ratcheting up infrastructure spending to upgrade roads, ports, water facilities, and power plants. But instead of leaning heavily on public funds to get them done, the government is inviting the private sector to foot a good chunk of the bill and take advantage of investment opportunities.
During next month’s Indonesia International Infrastructure Conference and Exhibition, the government is expected to showcase new infrastructure projects for foreign and domestic investors. Last month, China Railway Construction Corporation signed an agreement to invest in the 30-kilometer Sunda Strait Bridge project linking the Indonesian islands of Sumatra and Java. And last year, Japan’s J-Power consortium won the bidding to build a new power plant in Central Java, which would provide electricity for 8 million people by 2016.
“The progress in infrastructure development in the last two years has been much better than expected,” says Shobana Venkataraman, IFC Principal Investment Officer. “Indonesia’s economy has improved and its sovereign rating has been upgraded to investment grade, making infrastructure investments more attractive to investors and lenders.”
Not only that, Indonesia has eased regulations to make the infrastructure sector more investor-friendly, such as an amending the law on public-private partnerships and passing a new Land Acquisition Law.
Indonesia’s new push for infrastructure development came the hard way. Following the 1997 Asian financial crisis, infrastructure investment in Indonesia has failed to keep up with its economic expansion, resulting in costly business disruptions such as power outages.
“Lack of infrastructure results in bottlenecks, hampering future growth opportunities,” says Karsten Fuelster, IFC senior investment officer, in Jakarta.
The government’s plan includes constructing power plants that would supply 20,000 megawatts of electricity in the next 10 years and 1,095 kilometers of new toll roads to move goods faster across the vast archipelago. The projects will be concentrated in six “economic corridors” or growth centers: Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Papua- Maluku.
The price tag: $150 billion over the next five years. But the government can only finance 30 percent of the cost; the rest would have to come from the private sector.
Bridging the funding gap
“Infrastructure is vital for the long-term growth and competitiveness of emerging economies. It helps create jobs and improves standards of living. However, many Asian countries such as Indonesia are still facing constraints in developing and funding infrastructure projects,” says Sarvesh Suri, IFC Indonesia Country Manager.
To help ease financing constraints in Indonesia, IFC invested 20 percent in PT Indonesia Infrastructure Financing, a company formed by the Indonesian government with support from Asian Development Bank, to provide local-currency financing for privately funded infrastructure projects.
Meanwhile, the government amended the law on public-private partnerships last year to improve transparency and clarity in the tender process of infrastructure projects. It also established the Indonesia Infrastructure Guarantee Fund to arrange government guarantees for public-private partnership projects.
The new measures resulted in the successful tender for the Central Java Power Plant last year, the first public-private partnership deal under the new law and guarantee system. IFC acted as transaction advisor for the project, helping ensure that the bidding was conducted according to international best practices and that the project met international environmental and social standards.
Last December, Parliament passed the Land Acquisition Law, allowing the government to obtain civilian land for public works projects and compensating landowners for the property. Analysts say the law, together with Indonesia’s recent credit rating upgrade, which makes fundraising cheaper, would help jumpstart infrastructure investments this year.
One project up for private sector investment is Umbulan Water in East Java, of which IFC is the transaction adviser. The tender is expected to be completed later this year. The project will supply clean and reliable drinking water to three million residents in Surabaya, Indonesia’s second-largest city, and four surrounding cities.