Media Center

Shamshad Akhtar
Director General, Southeast Asia Department
ADB
17 January 2005

I. Introduction

Mr. Chairman, Honorable Minister of Finance, Distinguished Guests.

It is a privilege to be here this morning. I would like to thank the Indonesian Chamber of Commerce and Industry, KADIN, and the Government of Indonesia for organizing this Summit on a topic of interest to both Indonesia and the region.

Before I begin my remarks, let me reiterate, on behalf of ADB and personally on behalf of President Chino who is unable to be here with you today, our deepest condolences to the people of Indonesia for their losses, and our commitment to support the country in its efforts to rebuild for the future.

The earthquake and tsunami tragedy has drawn new attention to the specific challenges faced by poor and remote regions, such as those that bore the brunt of the impact. ADB, with its focus on poverty reduction, is determined to help these communities recover as quickly as possible, and help rebuild the livelihoods of farmers, fishing families and others who have been affected. Prompt rehabilitation and reconstruction of roads and bridges, schools and hospitals, and other infrastructure is crucial to restoring normalcy.

Beyond this immediate task, we all know that infrastructure development is key to sustained economic growth, poverty reduction and regional integration. The question is: What must be done to meet the demand for enhanced infrastructure? Most critical is the need to develop a conducive, stable, and predictable policy environment backed by a well-governed legal and regulatory framework in order to attract the required resources.

Gearing itself for challenges posed by the devastation wrought by the recent earthquake and tsunami, Indonesia's concurrent adoption of a 5-year infrastructure plan and strategy, unveiled by the Ministers earlier today is impressive and timely. In particular, I wish to compliment the leadership and economic managers of Indonesia for a comprehensive and well-conceptualized vision and short and long-term strategy for infrastructure sectors, which reflects the team's indepth understanding of the issues at hand.

Today, I will offer some regional perspectives on the infrastructure challenges. Then, I will look at the key technical issues that are relevant to Indonesia. And finally, I would like to provide some perspectives on what ADB offers its clients for infrastructure development - and how.

II. Regional Perspectives on the Infrastructure Challenge

I would like to emphasize five points regarding the infrastructure challenge facing the region.

First is the magnitude of the infrastructure investment requirements of developing countries. Over the coming decade these are estimated to start at a minimum of $250 billion per year. Around the world, 2.4 billion people lack access to sanitation, 2.5 billion people are without access to modern energy supplies, 1.2 billion people lack access to safe drinking water and 1 billion people lack roads to reach markets, jobs, and health facilities. The great majority of these people are in the Asia-Pacific region. Rapid economic growth and rising in trade in East Asia, which now accounts for more than 25% of total world trade, also create a steadily increasing demand for infrastructure services.

A second challenge is to improve access of the poor to infrastructure services, particularly in rural areas. ADB studies have demonstrated that rural infrastructure investments significantly contribute to the reduction of rural poverty. For example, limited rural transportation and communication networks result in higher costs and low returns for agricultural producers, greatly hindering their chances to grow.

Third, ADB's experience in the Greater Mekong Subregion and elsewhere has demonstrated that regional cooperation facilitates infrastructure planning, financing, and development, and greatly enhances the positive impacts of such development. ADB therefore actively supports ASEAN's plans for integrated planning of such cross-border infrastructure projects as the ASEAN Power Grid, Trans-ASEAN Gas Pipeline Network, and ASEAN Transport Network, in which Indonesia plays a prominent role.

A fourth challenge concerns financing, as traditional sources of finance will not meet current and future infrastructure needs. Historically, Governments in the region have themselves funded about 70% of the infrastructure investment needs in developing countries, with 22% funded by the private sector and 8% by official development assistance. Fiscal constraints are now forcing Governments to cut back their capital spending over the medium term. This gap can only be filled by domestic and foreign private sector investment as well as official development assistance, which will only increase if proper incentive frameworks are created.

Fifth, proper attention must be paid across the region to the environmental and social implications of infrastructure development. A "Grow now, clean up later" approach to development is no longer viable; heightened local and global awareness of the seriousness of these side-effects of development makes it necessary to fully factor them in from the start.

III. The Infrastructure Challenge in Indonesia

Against this regional background, Indonesia faces formidable challenges.

As we have heard this morning, the infrastructure demands are huge in this country. In international as well as domestic financial markets, Indonesia has to compete for a limited pool of financial resources to meet its infrastructure needs, while avoiding past experiences that resulted in large liabilities for the Government. To attract investments in the infrastructure sectors, major policy reforms are needed in several areas.

First, while a major proportion of investment requirements, particularly those for basic infrastructure, will still have to be met by the public sector, it is prudent to attract the private sector into the financing, construction, operation and maintenance of commercially viable projects and services. The Government recognizes that financing requirements can only be met through an effective and judicious combination of public and private sector resources. Yet, we understand that there are ongoing discussions in Indonesia about the provisions of the 1945 Constitution that call for Government control of important branches of production. International experience suggests that Government control can be effectively exercised without direct Government ownership or management of infrastructure assets, through policy formulation, planning and regulation. Given some recent court rulings, the Government needs to take a firm stance on this issue in order to provide clarity to the private sector.

Second, infrastructure assets and services have at times been offered to the private sector in an ad hoc manner, with unsolicited proposals used as a surrogate for planning. Indonesia should strengthen strategic planning in infrastructure sectors to identify where and when private sector participation should be encouraged, to monitor whether such participation is adequate to meet needs, and to determine the level of complementary support to be provided through public-private partnerships. Private sector investors need clarity and predictability about sectoral incentive frameworks and restructuring plans. This strengthened planning will also enhance the effectiveness of public sector infrastructure investments.

Third, recent technological advances obviate the need for vertical or horizontal integration of infrastructure sectors to reap economies of scale. If handled well, the creation of independent infrastructure providers, such as power producers and distributors, toll-way operators and port concessionaires, can improve efficiency, reduce costs and enhance the quality of service to consumers. To minimize opportunities for corruption, transparent competitive bidding should be adopted both for sales or concessions of existing assets and the selection of sponsors for new infrastructure projects.

Fourth, we have also learned that creating effective markets requires more than private sector participation. In the early and mid-1990s there was a boom in private sector investment in infrastructure in some countries in the region. This era of large-scale investments in infrastructure came to an end when the financial crisis hit in 1997. Not only did the flows of private investment dry up, but it soon became clear that many of the projects carried large, often hidden, public costs. The main reason these costs were incurred was that neither Governments nor the private sector paid sufficient attention to certain fundamental regulatory issues in the infrastructure sectors. The importance of independent and technically competent regulators, transparent regulatory decisions, training and adequate compensation of regulators, and access to the legal system on appeal cannot be overemphasized.

Fifth, tapping domestic currency sources of financing infrastructure development is critical. However, the financial capacities of commercial banks to contribute needs to be carefully assessed given the typical maturity mismatch problems. It is equally important to ensure that banks manage their sector and single-party risks prudently based on a sound governance framework. Long-term capital market instruments that can effectively mitigate the problems of financing by commercial banks should be developed. Given Indonesia's demographic characteristics, measures taken now to deepen the development of pension and life insurance sectors, if their funds are invested in the capital markets, would provide alternative sources of financing infrastructure development.

Sixth, appropriate risk mitigation and sharing is essential. Each reform step in the right direction reduces the need for Government guarantees. The shorter the transition period to credible judicial and regulatory systems, and commercialized and open infrastructure sectors, the lighter will be the guarantee burden. Government guarantees cannot be completely avoided during this transition period in Indonesia, but they should be used judiciously. Since they have an impact on the Government's fiscal position and its capacity to borrow, such guarantees need to be quantified, reflected as contingent liabilities in the consolidated public sector budget, and capped.

IV. ADB Assistance Modalities

Since its establishment in 1966, ADB has lent $7.8 billion for 87 infrastructure projects in Indonesia, or 40% of its total lending to the country. The energy sector accounted for $3.4 billion, transport and communication for $2.6 billion, and urban development, water supply and sanitation for $1.8 billion.

There is a wide range of ADB assistance modalities available to provide further support for Indonesia's infrastructure development. The modalities comprise policy-based program lending, public sector investment loans, technical assistance grants, direct participation in private sector projects and investment funds, partial credit guarantees, and political risk guarantees.

In the future, ADB will be supporting infrastructure sector policy reforms, renewable energy development (particularly in regions outside Java), power transmission and distribution, trans-ASEAN power interconnection, gas transportation, road rehabilitation and expansion, port and airport development, and water supply and sanitation (both in urban and rural areas). Our technical assistance is another means by which ADB can support Indonesia in its efforts to reform and strengthen policies, regulations and institutions. ADB has developed a new Southeast Asia Regional Cooperation Strategy and Program, in which infrastructure development, coordinated closely with ASEAN initiatives, is a central pillar. ADB is providing required emergency assistance for rehabilitation and reconstruction of infrastructure in the tsunami-affected areas.

ADB is in a unique position to assist with private sector mobilization. ADB can make loans without Government guarantees as well as equity investment in infrastructure projects. In addition, ADB can help mobilize commercial financing through its partial credit guarantees and political risk guarantees. The former are instrumental in extending debt maturities and attracting competitive interest rates. The latter protect against expropriation, currency inconvertibility or non-transferability, political violence, and/or breach of contract.

Finally, ADB can help Governments mobilize long-term local-currency financing to mitigate the risk of currency mismatch, either by issuing its own local currency denominated bonds to generate funds for onlending to project sponsors or through cross-currency swaps in the market or with the Government. ADB can also catalyze investments through local currency partial credit guarantees.

IV. Conclusion

Ladies and gentlemen, let me conclude by expressing confidence that Indonesia's enormous infrastructure needs, now further increased by the earthquake and tsunami disaster, can be met by strong joint efforts of domestic and international investors, the Government and its development partners. I would like to wish all involved in this Summit success in the deliberations and I look forward to seeing these discussions being translated into concrete actions and tangible results.

Thank you.