news     October 8, 2015

View Point: Still Waiting Bold Reforms in Infrastructure Sector

We understand the government has been preoccupied with the sharp depreciation of the rupiah and its damaging repercussions on the prices of many basic goods, people’s purchasing power and consumer and business confidence.

Hence, the first and second reform packages launched last month focus on boosting the supply of dollars in the local banking industry, strengthening the purchasing power of low-income people and easing business licensing and operations procedures.

The second reform package included bold deregulatory reform in the licensing system in the forestry sector that will speed up license issuance from the current four to six years to only 12 to 15 days for various permits needed to use or lease forested land.

This reform, considered a “miracle” in Indonesia’s business scheme of things, will be a great boon to the installation of overhead high-voltage power transmission lines and geothermal development.

But given the strategic role of basic infrastructure and the blunt fact that the acute lack of infrastructure and the crumbling condition of existing facilities are among the biggest barriers to investment and the main causes of the unusually high logistics costs, the government should have accelerated the pace of regulatory and bureaucratic reforms in infrastructure.

Infrastructure investment has the potential to increase efficiency and competitiveness, promoting both international linkages and domestic integration and raising output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.

The large infrastructure gap reflects a combination of our institutional and financial constraints, as well as the pressure from rising demand. And the best way to speed up infrastructure development is through public-private partnerships (PPPs) because of the limited financing resources of the government.

The government increased the infrastructure budget this year to Rp 290.3 trillion (US$20 billion), but as of last month only about 30 percent or Rp 90.2 trillion has been spent as a result of bureaucratic inertia.

How can the government expect private investors to put up 80 percent of the $450 billion needed for infrastructure development for the next five years if it is not able to break through its own regulatory and bureaucratic barriers to implement its own projects?

A discussion forum on infrastructure jointly hosted by state-owned PT Sarana Multi Infrastructure and The Jakarta Post on Wednesday cited the acute lack of single leadership, poor inter-ministerial coordination, complex land-acquisition procedures, excessive regulations and inadequate institutional capacity for preparing bankable and investable projects (making detailed designs, feasibility studies and environmental- and social-impact assessments).

With so many government institutions involved as players in the infrastructure sector, coordination has become a big problem owing to the absence of an authoritative PPP management center to drive projects with proper planning, reliable risk analysis and risk sharing, designing, efficient and well-organized tender procedures and construction management.

Currently, PPP projects are handled by the ministries of finance, public works and national development planning without a single leadership. It is little wonder that many infrastructure projects listed in the PPP book published by the National Development Planning Ministry and put to tender still lack proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project input such as international-standard studies for feasibility, environment or social safeguards, uncertain resource assessments and properly secured land.

The Finance Ministry said in July it would issue a regulation to smooth the land conversion process as it seeks to make flexible the government’s land-capping funds, which could soon be used to support stalled infrastructure projects. The ministry said land procurement funds for stalled infrastructure projects could be tapped from the government’s land-capping funds. The land-capping funds are a fiscal instrument whereby the government “caps” land prices at certain levels and provides funds as compensation for private investors if there is any unwanted price increases.

The President has mandated the Committee of Infrastructure Priorities Development Acceleration (KPPIP), which is led by the coordinating economic minister, to create a pipeline of projects to be developed under the PPP scheme.

But the KPPIP, which includes the ministers of finance and national development planning and the chief of the National Land Agency, does not have any teeth at all.

Decisions by the KPPIP are not legally binding and any policies or measures adopted at its meeting have yet to be approved by the ministries that oversee the sectors or areas where the particular infrastructure projects are to be built or developed.

The KPPIP still encounters a complex web of different entities with overlapping roles and responsibilities in the infrastructure arena, since President Joko “Jokowi” Widodo himself did not consider this committee as important.

If the government is really serious about accelerating infrastructure development and wooing investors to this sector, Jokowi should upgrade the authority and role of the KPPIP into the nerve center for all decisions regarding big infrastructure projects under the PPP scheme.

The basic rationale of such a nerve center is that during an infrastructure crisis like the one we are now facing, the KPPIP should act like a hospital’s emergency center when fast decisions and firm measures are much more important than bureaucratic procedures or rigidities.

The leadership provided through such a war-room like operation center would help regain market confidence in the government’s ability to implement its policies through a mechanism that focuses on good coordination, fast-decision making and concrete programs of action.

Infrastructure has been one of the government’s top priorities since 2004, but not much has been achieved. It is high time to go all out with bold measures. – See more at: http://www.thejakartapost.com/

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