Access to services key to investing in infrastructure
Richard G Little ; Senior fellow
at the University of Southern California Price School of Public Policy
JAKARTA POST, 03 April 2014
It has been the long-accepted wisdom of the international development and finance communities that one of the keys to unlocking Indonesia’s vast economic potential is modern, reliable infrastructure. However, despite the obvious need for greatly expanded capacity in such areas as electric power, transportation, water supply and sanitation, and drainage and flood control, the supply of new infrastructure lags far behind demand.
During a visit to Palembang as a University of Southern California representative to the Pacific Rim Council on Urban Development, I had the opportunity to observe first hand the physical situation on the ground and discuss with Indonesian leaders from government, academia and business the challenges facing Indonesia as it tries to develop infrastructure capacity to match the potential of its people and economy. This has prompted me to offer a few thoughts for how Indonesia might move forward in this critical sector.
First off, it is important to keep in mind that infrastructure development should not become a goal in and of itself. Infrastructure only exists to achieve other objectives and such large capital investments must support broad and sustainable progress in areas such as economic growth, increased productivity and competitiveness and improved public health and well being.
There is no question that foreign investment is necessary. Indonesia, like most nations in Asia, lacks the capacity to finance all its needed infrastructure improvements from its own savings. However, despite the economic benefits of private investment in infrastructure, the experience of the developing world has been mixed.
All too often, the market-oriented reforms so prized by private investors have had short-term impacts keenly felt by those least able to bear them. One way to prevent this from becoming an insurmountable obstacle is to ensure that private investment in Indonesian infrastructure strikes a balance between economic efficiency and social equity and that poor people have guaranteed access to basic services.
The public and private sectors must work together to ensure that private investment benefits all the people of Indonesia while providing investors with a stable investment platform and equitable returns on capital.
If private investment in infrastructure is to play a significant role in Indonesia there also needs to be a robust set of metrics that can quickly and transparently convey to all interested parties how well the venture is working. Success in these matters needs to be carefully defined and based on the input of all stakeholders in the process.
To date, many of these arrangements have lacked the input of the user community who will actually pay for the services with details usually explained after the fact. This creates fertile ground for the skepticism and mistrust which inevitably seems to follow such opaque dealings.
One way to avoid this is to provide for the full and informed participation of local stakeholder groups. However, due to the asymmetry in knowledge and skill sets possessed by corporate representatives, government officials and local community leaders, indigenous stakeholders are usually at a comparative disadvantage in this process.
Building the capacity of local stakeholder groups to participate meaningfully in the development and review of contracts and other documents affecting infrastructure services should be a necessary adjunct to private investment in infrastructure. Similar capacity building efforts for local stakeholders are now routine in the resource extraction industries and such practices would greatly benefit the timing and efficiency of Indonesia’s infrastructure development.
Indonesia’s need for infrastructure and the capital to build and maintain it will continue to grow with increasing population and rising expectations. Although many challenges remain, the ultimate success of Indonesia’s effort to secure private investment will depend on the degree to which the issues discussed in this commentary can be addressed to the satisfaction of both parties.
Revenue-supported infrastructure projects are attractive to the investment community because properly structured, they can produce stable, long-term returns to equity that are particularly attractive to pension funds and other income-oriented investment vehicles. These factors would appear to support an optimistic forecast for the future of private investment in Indonesian infrastructure.
For its part, Indonesia must seek to provide stability to the international financial community if the investment capital so desperately needed is to be forthcoming. Before the private sector will place significant capital at risk, they will need assurances that they are likely to get their money back along with a reasonable rate of return. Indonesian officials must demonstrate this unequivocally; any hint of expropriation risk will quickly throttle investor confidence.
Ultimately, the question for both Indonesia and the private investment community to answer is how the public and private sectors can best position themselves to deliver reliable, equitably priced and universally accessible services to the Indonesian public at large. Fortunately, based on my experience, I am increasingly confident that Indonesia’s leaders are capable and committed to achieving a successful outcome in this most important enterprise. ●