Indonesia's Future Depends on Infrastructure

In Asia, countries that put the money and political will into building infrastructure are rewarded with dynamic economic growth. Just look at some of the world's best performing economies: China, Malaysia, Singapore, Thailand, and Viet Nam. All have made the development of infrastructure a priority.

Indonesia was on that same fast track to economic prosperity before the Asian financial crisis hit in the late 1990s. The country spent more than 6 percent of GDP, or about US$15 billion a year, on infrastructure before the meltdown. Today, that figure is down to 2 percent of GDP and most of that is spent on maintenance. In particular, private sector investment in infrastructure dropped from about $8 billion in 1996 to $0.6 billion in 2003.

`The World Economic Forum 2006 report ranks Indonesia at only 89th in terms of basic infrastructure provision out of the 125 countries surveyed. Inadequate infrastructure provision in turn keeps other investments away from the country. `To expand and maintain the roads, bridges, water systems, and the other hardware that keeps society functioning, it is estimated that Indonesia needs to spend more than $70 billion on infrastructure investments over the next five years. `Such investment cannot come too soon. In Indonesia today there are still about 50 million people without access to treated water, 90 million without electricity, and close to 200 million without direct access to a phone or sewage network.

Those hit hardest by infrastructure deficiencies are the poor. A lack of access to safe water and sanitation services keeps people sick and struggling. Poor roads in isolated areas keep people in poverty because they deny access to economic opportunities. Nearly one out of five rural villages in Indonesia is inaccessible for part of the year.

Fortunately, the country's leaders recognize the gravity of the situation and have launched a major reform and investment initiative in infrastructure. Indonesia Infrastructure 2006, a global conference on this issue being held from Nov. 1 to 3 in Jakarta, is attempting to address these urgent problems by reforming the way infrastructure is financed and built in the country. The conference builds on the success of a similar meeting last year.

The Asian Development Bank is working with the government to restore infrastructure to place Indonesia again on a high-growth path. ADB has provided over $7 billion in loans -- or over a third of its assistance -- for infrastructure projects in Indonesia, with a focus on energy, sustainable water, sanitation, and transportation.

The government has so far made significant progress, launching measures to improve the way institutions assisting Indonesia coordinate with each other. It has also taken steps to ensure a more predictable business climate -- one that provides a more level playing field and offers assurance that investors can reasonably expect a fair rate of return commensurate with the risks taken. Such actions are already paying dividends with rising investor interest and confidence being seen.

First and foremost, the country needs to prepare bankable projects.

Second, in parallel, it has to reduce competing and conflicting interests, and change the mind-set of some of those who are used to doing things the old way.

Third, the rules of the game need to be made consistent across all players and all infrastructure sectors. This applies in particular to the principles of project quality, legality, competition and transparency. Effective and consistent implementation of reforms is vital. The absence of a stable and predictable legal and regulatory environment will impede the private sector investments needed to fill the infrastructure gap. Fourth, the risks involved need to be managed transparently, prudently and efficiently.

Finally, it is a matter of great urgency that reforms continue in the country, and that efforts to improve governance and the investment climate persist. Otherwise, Indonesia stands to pay a much higher price later.