Guarantees Needed to Draw Investment to Indonesia, World Bank Says

Jakarta Globe, Titania Veda, April 13, 2010

The World Bank believes Indonesia must provide incentives for infrastructure investors. (Bloomberg Photo)

Indonesia has the geographic, economic and social potential to become a gateway not only between Europe and Asia but also between the rest of the world and the Middle East, according to Juan Jose Daboub, managing director of the World Bank.

Daboub is in Jakarta to support the Infrastructure Asia 2010 Conference and Exhibition, during which thousands of private-sector representatives are expected to attend from today through Saturday at the Jakarta International Expo in Kemayoran.

In an exclusive interview with the Jakarta Globe, he said that in order to achieve a prominent international position, Indonesia must ensure a healthy investment climate and develop its infrastructure.

What are the issues that may hinder private sector participation?

Indonesia needs the government to provide the appropriate incentives and guarantees to make sure these kinds of investments, which are a little bit riskier than other investments, can be successful. In the case of Indonesia, just like any other country, [this means] having the right regulatory framework, the right contracts and the right financial and guarantee instruments in place.

In this particular case, the World Bank and [its private-sector arm] the International Finance Corporation are working with the government to create the vehicles that will help finance some of the projects and provide the guarantees that are necessary to mitigate some of the risk.

What the World Bank and IFC have tried to do is help address some of the risks that investors see in the infrastructure sector. Once you start with some projects, it becomes easier for other investors to come and put money on the table. In the most positive case, there is a need for $250 billion in investment in infrastructure over the next five years. That’s a lot of money and a lot of resources. I don’t think any country in today’s world, given the financial conditions, would be able to attract that amounts of funding. But by having the IFC and others participating in this effort, you’ll give a greater sense of comfort to the private sector when they try to choose where to invest in infrastructure.

With annual economic growth forecasts as high as 6 percent, will Indonesia become a more attractive investment destination?

Certainly having a good perspective on the growth is extremely important. That will tell the investors the demand is there, that the investments will have the minimum return that any investor is looking for. But just as important is to make sure the rules of the game are there, are clear and are the same for everybody.

Does the government need to move more rapidly to provide certainty to investors on issues like land acquisition?

In terms of internal politics and the timing of when a particular policy is put forward or sent for approval, that’s for the government to act upon. I think that what is important is to get it right and to implement any of the decisions taken in a systematic way and in a way that sends the right signals to investors.

The government is seeking to lift infrastructure spending in the revised 2010 state budget to Rp 105.6 trillion from Rp 93.7 trillion in the original. What is the appropriate spending level as a proportion of GDP?

In an optimistic scenario, the infrastructure sector needs $250 billion over the next five years. That comes out to be $50 billion per year, about 10 percent of GDP. Today, apparently 4 percent is being invested in the infrastructure sector. So there’s certainly room to do more. I think the government is trying to minimize the bottlenecks to get as close as possible to meeting that demand.

How can the World Bank help us prevent complacency from setting in?

This is a phenomenon, if it’s happening here, that’s not exclusive to Indonesia. Many middle-income countries fall into what we call the ‘middle-income trap’ — they reach a particular level of development and then they plateau either because the political conditions aren’t there or because others move faster or more aggressively.

I found from my conversations with representatives in the government and private sector that there’s no complacency and there’s a desire to move forward. But then again, we also need to make sure that there is grassroots support and that the politicians converge into a common agenda that helps the country in reducing poverty.

What the World Bank can do is bring to the table the experiences of other countries that have gone through similar situations and try to provide analytical support on specific areas of interest or where potential areas of stagnation could take place and provide the financial support that might be needed. We are ready to work next to you in that path to prosperity.