September 7, 2010 / 9:15 AM / 7 years ago

Indonesia tries to leave India's infrastructure shadow

A worker walks at a construction site for apartment blocks in Jakarta August 4, 2010.Crack Palinggi/Files

HONG KONG (Reuters) - Indonesia's efforts to modernise its infrastructure have lagged India's slow-but-steady improvements, though Jakarta's progress could be fast tracked in the eyes of foreign investors with passage of a politically complicated land grab bill.

The legislation, still in an early stage, would enable the Indonesian government to acquire private property for public projects, such as toll roads or power plants, that would improve the economy's longer-term efficiency and growth potential and make it more competitive in attracting foreign investment.

Indonesia has been a laggard among many Asian countries in terms of infrastructure development. A comparison with India, though, would show just how far Indonesia has to go before joining the ranks of the high-profile BRIC emerging markets.

Both have mainly domestically driven growth, run fiscal deficits and require significant foreign investment.

But investments by public-private sector partnerships in infrastructure in India, including telecommunications, have eclipsed Indonesia's by four to five times in recent years, according to the World Bank, after the two saw roughly similar levels in the late 1990s.

"The land issue in Indonesia is a real issue," said Philip Jackson, chief executive of global real assets – Asian infrastructure -- at JP Morgan Asset Management in Hong Kong.

"If you are a financial investor like us where we have money entrusted to us for 10 years by our investors, if a project is going to take 4-5 years to sort out the land and the contractual negotiations it's much more difficult for us to undertake."

Uniform regulation regarding land acquisition has also eluded India despite hard-fought gains in attracting private sector investment. For Indonesia, Southeast Asia's largest economy, it is an issue critical for more foreign infrastructure investment.

POLITICAL TURF WAR

Despite opposition from small parties backed by farmers and other landholders, the land bill probably will have enough parliamentary support for passage, but may not become law until next year, after which it may still take months to become effective.

Some analysts had thought passage could come earlier because the government's self-imposed deadline for submitting a draft for debate was August. However, that has been delayed by political

wrangling over which ministry can carry out land acquisition.

Expedited passage of the bill would of course be a draw for long-term investors such as pension funds and superannuation funds, who would be willing to invest for up to seven years and who may be looking to diversify more in booming Asian economies.

Yet the prospect of more projects as a result of easier and enforceable land access is an attraction in itself as well.

Boe Pahari, head of infrastructure, Asia-Pacific with AMP Capital, said legalised land acquisition helps all governments become more competitive in luring foreign investment.

Of course even if Indonesia has a strictly enforced legal process for expedited land appropriation, it needs to learn to foster more public-private projects (PPPs) to catch up to countries such as India.

Following in India's footsteps, Indonesia could learn to evaluate projects more thoroughly, provide more clarity surrounding project bidding criteria and manage the risks of sharp changes in business cycles, said Pahari, whose team oversees some $250 million in assets.

BIG FUNDING NEEDS

In 2008, infrastructure investment by PPPs in India reached $27.9 billion, while Indonesia's was just $5.7 billion, with the gap widening significantly from a decade ago because of the Asian financial crisis, poor regulation and corruption.

President Susilo Bambang Yudhoyono last month promised to boost infrastructure investment by 28 percent in 2011 to $13.6 billion, but that is roughly the same as 2010 as a percentage of

gross domestic product as forecast by the International Monetary Fund.

Differences in fiscal years and accounting methods make it hard to compare infrastructure investment in the two countries.

But in India, gross fixed capital formation as a share of the total economy has risen to exceed the aggregate for lower middle income countries at 34.8 percent in 2008, World Bank data showed.

Indonesia's 2008 gross fixed capital formation, a broad measure of tangible assets such as roads, bridges and railways, was 27.6 percent of GDP.

The country's foreign funding needs are also greater than India's. As much as two thirds of the expected $140 billion in infrastructure development over the next five years will have to come from the private sector, according to Edward Gustely, a senior adviser to the Indonesian government.

India has forecast that half of the expected $1 trillion infrastructure investment between 2012 and 2017 will come from abroad.

Passage of Indonesia's land acquisition bill is the best way for it to attract that investment.

"Whereas five years ago infrastructure projects couldn't get financing, now domestic and international banks will be willing to provide financing because the projects are guaranteed by government and they know land acquisition will no longer be an impediment," said Mark Matthews, Asia strategist with Macquarie Securities in Hong Kong.

Additional reporting by Sunanda Creagh in JAKARTA and Sui-Lee Wee in HONG KONG

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