Addressing the infrastructure deficit in Indonesia and beyond

Author: Herfan Brilianto, Jakarta

The size of the infrastructure challenge across Asia is daunting. A 2009 Asian Development Bank Institute study showed that between 2010 and 2020 Asia needs to invest about US$8 trillion — or US$750 billion per year — just to keep up with expected infrastructure needs. In the four years since that study was published, economies have struggled to attract investments large enough to make any inroads into growing infrastructure deficits.

Governments clearly need to spend more on infrastructure. Indonesia is no exception. However, the task is too big for governments to tackle alone. There is scope for the private sector to play a key role in building and operating economic infrastructure that can generate an acceptable rate of return for investors and, at the same time, make infrastructure markets work better. But this simply will not happen unless governments take serious steps to improve the investment climate in a way that attracts greater private-sector participation. This includes reforms and investments in institutions that are capable of developing a pipeline of genuinely bankable projects.

Governments often struggle with balancing short- and long-term spending priorities. Often there tends to be a bias towards short-term spending by elected governments to the detriment of much-needed infrastructure investment, which is generally long-term in nature. Furthermore, public-financed infrastructure sometimes lacks certain features that are needed to maximise efficiency and quality in infrastructure service delivery. For example, since tenders for public-financed infrastructure are often awarded to the lowest bidder, there can be a risk that the process will not generate appropriate incentives for bidders to internalise lifecycle cost considerations, an important factor in ensuring long-term service quality.

While private investors are increasingly aware that infrastructure is a promising new asset class, there are considerable impediments to overcome before investors will be willing to increase their involvement. The lack of a suitable investment climate in general is usually quoted as a classic problem in many developing economies.

To gain access to emerging markets, foreign investors may sometimes be willing to accept a lower rate of return or a higher level of uncertainty in some sectors. But it is difficult to do this in infrastructure where investments are usually large and can take many years to become profitable — even in highly developed markets. A particular problem is an absence of well-prepared projects that can be viewed by the private sector as safe investments. Bidding arrangements are often opaque and delays within governments with poor institutional linkages mean that investments can end up taking many years to achieve financial closure.

Another problem relates to a lack of suitable investment vehicles for different types of investors. For instance, although there are ample opportunities to lure long-term institutional investors such as pension funds to sink capital into infrastructure, developing-economy financial markets often lack appropriate instruments to meet investor requirements for aspects such as scale, ratings and liquidity infrastructure. A 2011 OECD survey showed that there were 28 large pension funds in OECD countries holding total assets of more than US$1 trillion, of which only about 1 per cent was directed to infrastructure investment.

Looking ahead, the Indonesian government, like others, will need to focus energy on building capacity for both long-term infrastructure planning and delivering high-quality investment opportunities for the private sector. That means public officials need to have adequate skills to manage all aspects of projects, from conception through to implementation. In doing this, economies should not work alone. There is scope for enhanced international cooperation to help mobilise resources and knowledge to help developing economies to create appropriate capacity to prepare and deliver successful projects. This kind of capacity needs to be developed across government systems rather than focusing on specific project deals. It is also difficult to underestimate the role that supportive regulatory frameworks can play in building investor confidence. These kinds of reforms will not happen overnight, but they are essential given the long-term nature of the infrastructure challenges confronting Asia.

With these challenges in mind, APEC finance ministers agreed, under Indonesia’s leadership, to create a public–private partnership (PPP) Experts Advisory Panel to help APEC economies to develop capacity to create pipelines of bankable infrastructure projects. The panel’s first task will be to support (as a pilot project) the Indonesian Ministry of Finance’s ongoing efforts to operationalise its own PPP Centre. PPPs can open up new opportunities to scale up infrastructure development in economies and leverage private sector resources to kick-start expensive infrastructure projects that are difficult for governments to fund by themselves. They can also help to encourage governments to take a longer term view or life cycle approach to funding expensive and long lasting assets in the public interest.

The key role in the short to medium term of this addition to the regional architecture is to provide mentoring and advice for new PPP centres — such as those in Indonesia — as a way to build up a capability in PPP centres in the Asia Pacific. In the longer term, the Panel is expected to help mobilise and leverage knowledge and best practices in the region to support good infrastructure practices in emerging markets by creating an opportunity for regional PPP centres to network.

Herfan Brilianto is the Deputy Director of the Center for Regional and Bilateral Policy at the Fiscal Policy Agency, Ministry of Finance, Indonesia. The views expressed in this article are those of the author.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Indonesia’s choices’.