Emerging Markets: Agus says new Indo infrastructure law coming soon

Emerging Markets, May 6 2011

Indonesia’s finance minister believes a crucial new law, one he hopes will galvanize the country’s flagging infrastructure sector, will be passed in the third quarter of this year.

The development of infrastructure is widely seen as the biggest impediment to Indonesia growing from its solid growth rates today – 6.1% GDP growth in 2010, and an average of 5.7% a year since 2006 – to being a true leader in global growth. “To be frank with you, the bottleneck [stopping] our economic growth achieving 7% or higher is infrastructure, so it is a national priority,” said Bambang Brodjonegoro, head of the Fiscal Policy Office within the Ministry of Finance.

One of the biggest problems, particularly endemic for highways, is disputes over the rights to the land the highways will pass through. This has stopped development and impeded a public-private partnership (PPP) infrastructure program taking root. “If we review PPP projects in Indonesia for the last eight years, we have to admit that no one can be executed,” said Agus Martowardojo. “One of the main obstacles is land acquisition.”

To counter this, a draft law, the Land Acquisition Bill, was put into parliament earlier this year. The bill – naturally somewhat controversial among Indonesian landowners – means that land rights in public infrastructure will be cancelled and owners compensated. Vitally, where disputes arise, a court must rule on them within 30 days. This is in sharp contrast to the situation today where disputes often take two years or more, sometimes longer than building the road itself.

Asked about the bill’s progress by Emerging Markets, Agus said: “The government has already reached consensus with parliament that we will have a special law for land acquisition. We believe by the end of the third quarter, we will have that law.

“With that law, we are confident that infrastructure projects can be executed faster.”

Analysts say progress here is vital for the broader economy. “The only major drawback for Indonesia is still the infrastructure,” said Ferry Wong at Macquarie. “Inflation and the fuel subsidy are challenges, but not so much of an issue, as the government can absorb high oil prices. Infrastructure is the main problem.” Mr Wong said that infrastructure development would have spillover effects into the economy such as encouraging greater and more confident foreign direct investment.

In every other respect, the Indonesian economy is humming: a commodity rich economy in a demographic sweet spot; a stable democracy with vibrant domestic consumption and record high foreign currency reserves that passed US$100 billion earlier this year. “The vital signs for the Indonesian economy are at their strongest in the last decade, and the fundamentals are improving,” Mr Agus said. He is targeting growth rates of as much as 7.7% annually by 2014. Rating agencies, most recently Standard & Poor’s in March, have been upgrading the country, with all three international agencies rating it just one notch below investment grade. There are only two concerns: inflation and the danger of a sudden outflows of foreign capital.

“Even though there is pressure from commodity prices, specifically food, core inflation has been relatively stable,” Mr Agus said. “We are confident the government will be able to retain inflation within the target for 2011.” That target is 5.3% and not everyone agrees with him: Fitch, which calls inflation “a near-term risk to economic prospects”, estimates it will average 6.5% in 2011.