Indonesia giving private sector first dibs for infrastructure projects

Published Thu, Nov 27, 2014 · 09:32 AM

[JAKARTA] Needing some US$450 billion spent on Indonesia's infrastructure by 2019, new President Joko Widodo has ordered ministers to give private investors first pick of money-making projects rather than let state agencies grab them as they usually do.

Mr Joko will have to change entrenched attitudes at government ministries and state-owned enterprises, who have a vested interest in keeping the best projects for themselves.

"The problem is that the projects coming to us are kind of the garbage projects," said Bastary Pandji Indra, director of public-private partnerships at the national planning agency, Bappenas.

Hitherto, the government's contracting agencies got first choice of which airports, railways, toll-roads and other pieces of infrastructure to build. The ones they didn't want were offered to the private sector.

From now on, Mr Joko has told ministers in his minority coalition the most bankable projects should be financed by private firms, said Indra.

"That's Jokowi's new approach," Andi Widjajanto, cabinet secretary and close advisor to Mr Joko, told Reuters, referring to the president by his nickname.

Resistance, however, could come from old-school politicians and bureaucrats who have used the award of public-works projects to build their patronage networks and earn political favours.

Mr Joko, who took office in October, wants economic growth of 7 per cent. But there are glaring infrastructure bottlenecks even with growth running a five-year low of 5 per cent.

By itself offering investors projects that are more attractive won't reverse nearly two decades of neglect since the Asian crisis. Stifling bureaucracy, corruption, price controls and problems freeing up land have all hampered investment.

Clogged roads and creaking, patchy railways mean producers struggle to get goods to market. Ships wait for days to dock at the archipelago's congested ports. And each year the country must add 7,000 megawatts of power - equivalent to about 10 medium-sized power plants - just to keep the lights on.

According to Bappenas, Indonesia needs to spend at least US$450 billion on infrastructure over the next five years.

Planning Minister Andrinof Chaniago reckons central and local governments can finance around half of this.

It is hard to see how the government will raise enough money unless it borrows more - something it's been reluctant to do since the Asian crisis.

Mr Chaniago said state-owned firms can provide about a fifth of the funding and private capital will be needed to cover the rest - about US$140 billion.

Other presidents have also tried to use public-private partnerships (PPPs) to boost infrastructure investment.

Widodo's predecessor, Susilo Bambang Yudhoyono, did something similar when he took office in 2004. Back then, Bappenas published a glossy brochure of projects, but Yudhoyono let the scheme drift.

"What we missed before was the implementation," Finance Minister Bambang Brodjonegoro said earlier this month. "This needs to be prioritised so that each PPP project is ready to run." A contract awarded to a Japanese-led consortium to build a coal-fired power plant at Batang in central Java was one of the few to be signed. Construction still hasn't begun. Villagers at the site don't want to sell their land.

Based on Mr Joko's track record as Jakarta's governor, investors are confident that the new president will remove red-tape and make it simpler to get land. But this won't be enough if the projects themselves aren't viable.

Much of the infrastructure Widodo wants to build is slated for remote places where demand is still developing. "Those investments in the initial years are not going to be bankable," said Raj Kannan, managing director at Tusk Advisory consultancy.

The finance ministry is considering a scheme to share risks with investors, but it still needs to make the leap to offering "viability gap funding", covering losses in the initial years, as governments like India's have done, he added.

Sandiaga Uno, co-founder of Saratoga, a private equity firm, said the government "should only build infrastructure that's not commercially viable".

So far, Indonesia hasn't had a PPP agency with the political heft to ensure projects that are bankable go to the private sector.

Existing agencies lack "authority to call the shots," said Sarvesh Suri, the head in Jakarta of the International Finance Corporation, a World Bank agency that specialises in infrastructure lending. If a big state-owned firm wants "to do the project on their own, then they just do it." Indra at Bappenas thinks this will change. Soon every ministry and local government will have its own unit to manage PPP projects, he said.

Bappenas is finalising a list of 43 infrastructure projects valued at 582.4 trillion rupiah (US$47.9 billion) to be offered to the private sector in 2015, including 10 new airports. It is unclear how many of the others are old projects.

For now, Saratoga's Mr Uno hopes Mr Joko succeeds in stopping state-owned firms crowding out the private sector. "I pray everyday that it happens," he said.


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