Bill Guerin, Jakarta – The Asian Development Bank has predicted that Indonesia's economy will grow by only 4.5 percent in 2004 and 2005, and warned that foreign direct investment (FDI) was urgently needed to improve infrastructure, especially in transport, power and telecommunications.

The warning, in the bank's annual report on regional economic development, was coupled with criticism of the Indonesian government's lack of clarity in its laws and regulations, and the lack of adequate law enforcement, which worsen the country's investment climate and discourage investors.

With parliamentary election results announced just last week and presidential elections scheduled for early July, there are still no clues as to how the next government will approach infrastructure needs. But figures from the Investment Coordinating Board (BKPM) project that foreign investment sentiment will likely be wholly negative before a new administration takes the reins, though infrastructure improvements currently being pursued by the government may attract some investment.

The 1997-98 regional economic crisis took a heavy toll on major projects in the transport, power and telecommunications sectors, many of them financed privately. most were canceled or deferred because of allegations that they were unlawfully awarded. Since then, the public sector has more or less monopolized infrastructure projects.

The tight monetary policy implemented at the behest of the International Monetary Fund (IMF), however, has severely restricted Jakarta's ability to fund infrastructure programs that would create jobs and get the real economy moving.

The development of roads and public sanitation, especially in large cities, still depends on financial aid from the government. But without the continued involvement of the private sector in funding labor-intensive infrastructure projects, there is little chance of significantly reducing unemployment, estimated at some 40 million.

The National Development Planning Board (Bappenas) estimates that slightly more than US$72 billion in investment will be needed to upgrade the infrastructure network, boost employment and help achieve targeted economic growth of 6 percent between 2005 and 2009. The Ministry of Finance says government investment will be capped at $40.8 billion, leaving a financing gap of $31.34 billion to be filled by private investors.

There is already evidence of severe infrastructure deterioration: a limited road network that cannot cope with the rise in traffic volumes, and power outages that reflect the heavy demands placed on power generation, as higher economic activity requires heavier power consumption.

As a result of poor infrastructure, productivity suffers. Foreign investors lose confidence and become concerned with efficiency and costs.

Moreover, investments in the infrastructure needs of Asia's less-developed economies such as Indonesia entail bigger risks for investors, compared with Japan and the region's so-called tiger economies of Hong Kong and Singapore.

Whether or not the new government of Indonesia will be committed to infrastructure reforms remains to be seen. Stable macroeconomic policies will be needed to attract private investment, as will government guarantees.

Bappenas chief Kwik Kian Gie, the state minister for national development planning, during the recent launch of a book titled The Economic Landscape of Indonesian Infrastructure, underscored the importance of the private sector's participation in infrastructure projects, because of the financial constraints faced by the government.

In what cynics might have deemed a lesson in high school economics, Kwik pointed out that such participation, however, must be conducted as fairly and evenhandedly as possible. He said the commercial risks should be handed down to the private sector, while the government would bear the risks in regulations and politics.

Expenditure on infrastructure also creates indirect benefits for supporting industries. The business potential is enormous.

The good news is that the existing government plans to move on with several infrastructure projects it considers to be urgent – this at a time of a stalemated parliament where no party has a majority and continuing uncertainty about who the country's next leader will be. These high-priority projects include the construction of toll-road networks throughout Java, as well as the development of a natural-gas pipeline and telecommunications networks to connect rural villages.

A plethora of projects

A major revamp is to start with an expansion of the existing 93,700-kilometer network of public roads. As many as 17 toll roads are to be built at a cost of some Rp77.3 trillion ($8.5 billion). The government has encouraged investors to bid for different sections of the planned trans-Java highway, which will connect Merak in Banten with Banyuwangi in East Java, and has pledged to guarantee bank loans needed by construction companies bidding for the project.

It is hoped that the ambitious project, which is expected to start before the end of the year, will be completed by 2009. In a bid to expedite construction, the Ministry of Finance has agreed to provide Rp10 trillion ($1.18 billion). The government also plans to issue bonds to raise cash to help finance 70km of the toll roads, including unfinished sections of the Jakarta Outer Ring Road (JORR) and the Cikampek-to-Padalarang Stage II toll-road project in West Java.

State-owned toll-road builder and operator PT Jasa Marga (Jasa Marga) currently manages 383km of the country's 520km of toll roads. The remainder are operated by the private sector under build-operate-transfer (BOT) schemes.

Jasa Marga wants the majority share in three of the toll roads to be built: Gempol-Pasuruan, Semarang-Bawean and Cikampek-Cirebon roads in Java. Majority ownership of the seven other projects will be offered to private contractors.

The company plans to go public in November, and most of the Rp1.5 trillion ($166 million) it hopes to raise will be earmarked for working capital needed to participate in building parts of the new highways.

In keeping with the trend over the past three years for Malaysian money to flow into Indonesia, mainly into the banking, telecommunications and infrastructure sectors, one of Kuala Lumpur's largest conglomerates, the UEM group, is to collaborate with Jasa Marga on joint opportunities for the development of toll roads in Indonesia, Malaysia and other countries.

The group employs 20,000 people and has 35 major operating companies, 11 of which are listed on Bursa Malaysia Securities Bhd and one of which is listed on the London Stock Exchange. Two of its subsidiaries, United Engineers Bhd and Teras Teknologi Sdn Bhd, last week signed memorandums of understanding prior to tenders for the construction of 10 of the new toll roads; seven in Java, two in Sumatra and one in South Sulawesi.

The Japanese government has also provided 104.63 billion yen ($913 million) in soft loans, part of its official development assistance (ODA) to Indonesia for this year. The money will be used to finance seven major infrastructure projects – three for power-generation, three port-facilities and one railway project.

Yet another massive infrastructure project is the construction of a $15 billion, 33km underground twin tunnel, connecting Java and Sumatra. The project, expected to be financed under a build-operate-transfer (BOT) scheme by a consortium led by European Union investors, is due to start early next year and be completed by 2008.

To cover the government's contribution of a mere $2 billion for the initial construction and another $4 million per year for operational and maintenance costs, there will be a toll charge of approximately $20 per vehicle, per trip.

Plans also are in the works to build a Rp178 trillion ($19.7 billion) gas pipeline network from Sumatra and Kalimantan to Java and to several end-user countries, including Singapore and Malaysia. The project will take between five and 10 years to complete, according to the Ministry of Energy and Mineral Resources.

Other planned infrastructure projects include generating 21,900 megawatts of electricity, installing 11 million fixed-line telephones, providing drinking water to 30.5 million people and providing sanitation systems for 46.9 million people. In Jakarta alone health problems due a lack of water cost an estimated $1 billion a year plus lost productivity because of poor health.

Though the telecommunications sector rapidly because of private sector inputs, fixed-line telephone density amounts to only 6 percent of the country's 220 million population. The sector plans to complete the installation of 43,000 Universal Service Obligation (USO) telephone lines in remote villages across the country by 2009.

In keeping with this plan, lines were laid in 3,010 villages last year, and 17,000 villages will benefit in 2004, according to the ministry of communications.

The International Telecommunications Union (ITU) and Asia Pacific Telecommunications (APT) have formally called on each member country, including Indonesia, to provide all of their citizens with access to basic telecommunication services – telephone, fax and telegram services – by 2005.

Future of foreign investment looks grim

Grim figures from the Investment Coordinating Board (BKPM) highlight the reality that foreign investment sentiment will likely be wholly negative before a new administration takes the reins in October.

Only 38 percent of the $13.2 billion of FDI approved in 2003 was realized, according to the BKPM. In the first two months of this election year, FDI approvals plummeted by 66 percent to $805.4 million, from $2.4 billion in the corresponding period last year.

It is not known what priority the next government will place on infrastructure. In fact, the only public comment so far from those bidding for the top job that was even remotely business- or economy-related came from the current odds-on favorite to win the presidency – Susilo Bambang Yudhoyono.

The former security minister said in a campaign speech this week, "We need to increase investment from in and out of the country. We have to be smart in streaming welfare and economic resources from abroad into the country."

That was it – no expansion, however brief, on how this miracle might be achieved.

The ADB report was particularly critical of the government's tendency to propose simple legislation to expedite FDI approval, leaving critical issues to be addressed by subordinate regulations. Unfortunately, these regulations mostly lacked clarity and predictability in implementation.

Apart from this lack of clarity in its laws and regulations, the ADB said that Indonesia also lacked adequate law enforcement, including legal enforcement for investment project contracts, which further worsened the country's investment climate.

The worst-case scenario is that the new government will be far too focused on political survival to expend much energy on economic policymaking for several months. At the other end of the spectrum of hope is the dream that the improvements in infrastructure about to get under way will, in turn, start to attract more investment.

It is predicted that by 2025, some 50 percent of Indonesia's population will end up living in cities, which is the normal trend for a developing economy.

With the right economic policies in place to ensure that long-term private investment is safe and profitable, the public and private sectors could work together with development agencies such as the ADB and World Bank to build an infrastructure that would continue the current momentum.

Unfortunately, the issues of legal certainty, the reliability of the bankruptcy courts, and the potential for social violence remain poised, like a Sword of Damocles, over the prospects for attracting sufficient investment to help meet the infrastructure needs of 2005 and beyond.