1. Summary. The Government of Indonesia (GOI) issued a strong public invitation for private sector investment in Indonesian infrastructure projects at the January 17-18 "Infrastructure Summit" in Jakarta. President Susilo Bambang Yudhoyono promised an audience of more than 700 business representatives from 22 nations that the GOI would focus its budget resources on economically non-viable infrastructure projects while creating a "new partnership" with the private sector to develop commercially viable projects. Vice President Kalla and Economic Coordinating Minister Bakrie echoed the President's message, vowing to revise laws and regulations creating obstacles to infrastructure investment within six months. Bakrie unveiled a list of 91 priority infrastructure projects with an estimated value of USD 22.5 billion. He promised a transparent, fast-track tendering process for the 91 projects would begin in early March 2005(see paras 5 and 6).

2. The GOI described its sectoral development plans in breakout sessions focusing on power, roads, ports, telecommunications, and water and sanitation. Speakers in these sessions highlighted long-running investor concerns that have held back infrastructure development including pervasive legal ambiguity, the need for strong independent regulators in a number of sectors, inconsistent tariff policies, and land acquisition delays. The summit concluded with the signing of the "Jakarta Declaration" outlining the government’s vision for infrastructure development and underscoring its commitment to remove bureaucratic impediments to private investment. Cautiously optimistic business representatives urged the government to maintain positive momentum by getting 2-3 projects in each sector started quickly, a point Minister Bakrie accepted in his closing remarks. The event closed with a frank admission by Bakrie that the GOI faces a heavy workload in coming months to translate the summit's promise into reality. The regulatory picture in the power sector is particularly unclear. End summary.

Key Themes

3. The Indonesian Chamber of Commerce and Industry (Kadin) and the Coordinating Ministry for Economic Affairs co-hosted Indonesia's first "Infrastructure Summit" on January 17-18. The goal of the two-day event was to jump-start spending on infrastructure, which slumped from approximately 5.34 percent of GDP in 1993/1994 to 2.33 percent in 2002 or USD 8 billion in 1994 versus USD 1.5 billion in 2002. GOI speakers emphasized that Indonesia was also behind its ASEAN neighbors in several areas, for example 45 percent of Indonesian households are still not connected to electricity. President Yudhoyono has made infrastructure development a pillar of his five-year economic development strategy, under which he hopes to raise GDP growth from 4.5 to 7.2 percent by 2009, reduce unemployment from 9 to 5.1 percent, and lower income poverty rates from 16.6 to 8.2 percent of Indonesia's population.

4. The following key themes emerged during the summit sessions. Many summit documents, speeches, presentations and information on priority projects, are posted on the Infrastructure Summit website (http://www.iisummit2005.com).

• Unequivocal welcome to the private sector: President Yudhoyono and his ministers repeatedly promised to improve the environment for private entrepreneurship and called for a new “public-private partnership” for infrastructure development. They assured foreign and domestic private investors that their knowledge, experience and capital are crucial to Indonesia’s economic well-being. Coordinating Minister Bakrie stated that the GOI is counting on the private sector to finance USD 80 billion of Indonesia's estimated USD 150 billion infrastructure needs over the next five years.
• Crucial importance of continued regulatory reform: Minister of Trade Mari Pangestu joked that the summit had been a "trick" to spur reform of ambiguous laws and regulations that have held back infrastructure development in recent years. The GOI announced a package of initial regulatory reforms at the summit, pledged to issue 14 new infrastructure-related regulations by the end of January 2005 and amend other relevant laws within six months. See paragraphs 8-10 for more detail.
• End to the post-crisis impasse over GOI guarantees for private infrastructure projects? In his remarks at the summit, Finance Minister Jusuf Anwar took a carefully calibrated step toward resuming GOI risk sharing for private infrastructure projects. He announced that "in specific cases," the government would "in principle consider only partial guarantees after full analysis of risks, including contingent liabilities." See paragraphs 12-14 for more detail.
• Search for innovative financing mechanisms: GOI and private sector participants noted that raising USD 80 billion over five years will require developing a range of innovative financing mechanisms. Bakrie said the GOI would support "at most" three infrastructure development funds, likely including a USD 1 billion domestic and international investment fund that will channel equity to infrastructure projects. Mumtaz Khan of the firm Emerging Markets Partnership outlined infrastructure investment funds his company has managed in Bahrain and Brunei. Finance Minister Anwar said that Bank Indonesia had agreed to raise the limit from 20 to 30 percent on state-owned banks’ capital that may be used for infrastructure-related lending. The GOI will look to the World Bank and Asia Development Bank to provide about ten percent of financing needs. Bakrie and other ministers noted an important component of the GOI's strategy is to utilize Rupiah funds currently invested in long-term savings accounts, corporate bonds, and pension, life insurance and mutual funds. The Ministry of Finance is also discussing a secondary mortgage market to develop the housing sector.
• Uncertain role for Indonesia's State-Owned Enterprises (SOEs): One exception to the GOI's tightly coordinated message at the summit concerned the role of Indonesia's SOEs in future infrastructure development. SOEs or government-owned corporations dominate each of the sectors discussed at the summit, and most of them are in poor financial condition. Coordinating Minister Bakrie assured participants that SOEs will receive no preference in their bids on commercially viable projects, which will be open only to them and private companies. State Minister for National Development Planning Sri Mulyani Indrawati noted that although the state remains "central to economic development, its role will be increasingly one of a facilitator or catalyst." But Transportation Minister Hatta Rajasa and SOE Minister Sugiharto urged private investors to seek out partnerships with state-owned enterprises in the sectors in which they are interested. Vice President Kalla said that SOEs are "mechanisms [or agents for access to Indonesia's market."] Several private participants noted that it could be difficult to secure financing if investors are forced to partner with SOEs on projects, particularly in the power sector.

List of Priority Projects

5. The GOI announced at the summit an unexpectedly lengthy list of 91 "priority projects" it plans to offer for tender in the first week of March 2005. Many of the projects were developed in cooperation with SOEs prior to the financial crisis but have languished for lack of financing. A detailed list of the projects can be obtained by visiting: http://www.kkppi.go.id, the U.S. Embassy Jakarta website (http://www.usembassyjakarta.org), or the U.S. Commercial Service, Jakarta website (http://www.buyusa.gov/indonesia) for more information. Valued at approximately $22.5 billion (in aggregate), the sectoral distribution of the projects is as follows (in millions USD):

Sector	# of Projects	USD Value (mil)
Gas pipelines	6	2,888
Electricity (1)	12	5,897
Telecommunications	1	1,600
Railway	1	77
Seaport	4	1,485
Airport	5	709
Water (2)	24	386
Toll Road (3)	38	9,428
Total	91	22,469

(1) Includes a proposed LNG regasification terminal in West Java with an estimated value of USD 251 million. (2) Includes 15 small municipal water projects valued at USD 13 million or less. (3) Includes the Jakarta Outer Ring Road (JORR) phase two project valued at USD 983 million.

6. Coordinating Minister for Economic Affairs Bakrie stated that all 91 projects are commercially viable and some have detailed engineering studies. Appropriate ministries will conduct the tender process for projects in their areas, and the GOI will announce winners within three months of the tender offer, a significant improvement from the current opaque process where it can take more than a year before tender decisions are announced. Bakrie said he has written to appropriate ministers asking for a list of all tenders and their schedules. Paragraph 18 provides contact information for relevant ministries with sectoral responsibilities.

Pro-Private Sector Message

7. President Yudhoyono and his ministers delivered a strong pro-investor message throughout the summit. Setting the tone, Yudhoyono told participants that the Aceh earthquake and tsunami had united Indonesia in “tears and deeds.” Out of tragedy, the President said he saw opportunities for new partnerships and progress. His economic targets would be difficult, but achievable, and accelerating infrastructure development would be a key driver of growth. Vice President Kalla invited international companies to invest "on equal terms" and said the GOI would make each class of projects viable based on a consistent policy framework. As a former businessman, he promised to provide business the clarity needed to invest in Indonesia’s “pro-poor, pro-employment, pro-growth” economic policy.

Importance of Continued Regulatory Reform

8. Despite these positive statements, the sector-specific breakout sessions highlighted some long-running obstacles to greater investment in Indonesia. Discussions on power, toll roads, ports, water and telecommunications generated recommendations to address a number of common concerns:

• fix or clarify existing laws and regulations to reduce market risk. Remove discrepancies between central and local laws and regulations.
• create strong, independent regulatory agencies to serve as an objective arbiter between government and business.
• establish “one-stop shopping” whenever possible, to shorten start-up times and reduce project costs.
• revise tariff regimes according to the principle of full-cost recovery, to improve SOE financial health and stimulate private sector participation. Remove distortionary duties.
• clarify and streamline land acquisition procedures to shorten project development and reduce costs.
• strengthen competition. Move away from dominant player models.
• shorten project schedules and reduces costs.

9. Various GOI ministers pledged specific reforms to ameliorate some of the above concerns at the summit sessions. Bakrie announced that the GOI has issued or will issue shortly a number of new or revised regulations including electricity regulations, implementing regulations for Law 38/2003 on toll roads, revised land acquisition regulations, and a revised umbrella regulation on public-private partnerships (Keppres 7/1998). The new toll road law permits tariffs to be specified at the time of contract signing and to be adjusted automatically every two years based on consumer price inflation. Bakrie added that the GOI is committed to quickly establishing independent regulatory agencies in the toll roads, telecommunications, and power sectors.

10. In the water sector, Bappenas Minister Sri Mulyani Indrawati stated that the GOI is drafting a new law that would require local governments to operate their water utilities on an arms-length basis. She added that approximately 60 percent of 307 local water utilities are in default on their loans, and there is an urgent need to reform local water utilities through corporatization and debt restructuring. Mulyani noted that Indonesia's tax laws are currently under review to better reflect private sector concerns.

Power Sector: Unclear Regulatory Status

11. The power sector breakout session raised particular concerns among investors. Power projects represent $6 billion (25 percent) of the GOI’s immediate infrastructure needs. Indonesia’s Constitutional Court nullified Electricity Law 20/2002 in December 2004, reversing the GOI’s efforts to liberalize the power sector. The Energy Ministry quickly drafted a new government regulation, signed by SBY the night before the Summit, as a stopgap measure to clarify the power sector’s legal basis prior to issuance of a new Electricity Law (expected by the end of 2005). Energy Minister Purnomo explained that the new regulation requires private investors to partner with state-owned power company PLN under an open tender process. The GOI would make exceptions for renewable energy, mine-mouth coal, marginal natural gas, excess power, or “emergency” projects, which could be developed on a no-bid basis. Investors commented that the vague new regulation, as well as the continued absence of an independent power regulator and PLN’s poor financial health, would hinder new projects without some form of government guarantee.

Outline of GOI Risk Sharing Framework

12. Prior to the financial crisis, GOI guarantees or "comfort letters" insuring investors against commercial risk underpinned the majority of private infrastructure projects, particularly in the power sector. The GOI has refused to issue such guarantees in recent years because of the disastrous losses it suffered during and after the financial crisis. In his remarks, Finance Minister Anwar said the GOI policy on guarantees would follow an “adaptive and pragmatic” policy for private infrastructure projects. He announced that the GOI would “only extend a guarantee on government performance and regulatory risks in well-defined areas and where it is absolutely necessary to complete the transactions for priority private projects. This will only be offered after a complete assessment of the risks, including contingent liabilities. And where there are “no other forms of mitigating instruments available to cover such risks.”

13. Anwar outlined the GOI's preliminary thinking on its approach toward various types of project-specific risk:

• Construction/project completion risk: The GOI will not bear this type of risk.
• Fuel risk (principally for power projects): Fuel prices and availability are linked to sectoral policies. This type of risk "can be shared by the GOI" based on careful analysis.
• Policy/regulatory risk: Anwar said the GOI would consider bearing this type of risk based on careful analysis.
• PLN repayment risk (for power projects): Anwar said this type of risk involves complex issues including electricity tariff policies and subsidies, [and will need further study.
• Force majeure: Anwar said that the new draft investment law addresses this risk, and recommended that businesses explore coverage from the Multilateral Investment Guarantee Agency (MIGA) or bilateral investment insurance agencies.
• GOI support for toll road projects: Anwar said that although Law 38/03 separates the regulatory and operational functions of the state-owned toll road company, "institutional and regulatory reform will not be sufficient to attract private investment." He stated that the GOI would need to develop a risk-sharing framework analogous to that in the power sector.

14. Anwar added that the GOI has requested help from the World Bank and ADB in developing risk allocation and mitigation frameworks. He also said he is considering establishing a small unit in the Ministry of Finance to work with the appropriate ministries to analyze projects and recommend levels of GOI support.

Summit Follow-Up

15. All ministers stressed the GOI's commitment to follow up on commitments made at the summit and be responsive to private sector questions and concerns. The GOI announced the formation of a "Committee on Policy for the Acceleration of Infrastructure Development (KKPPI)" to monitor and coordinate infrastructure policy in the future. The Coordinating Ministry for Economics and BAPPENAS will co-chair the committee, which will meet regularly and channel recommendations to Indonesia's top leadership. The GOI also announced the "Consolidated Indonesia Infrastructure Forum" (CIIF) to serve as the GOI's conduit for continued dialogue with the private sector and the public-at-large on infrastructure development plans and projects. Both of these committees will work together to carry out the Declaration’s goals and prepare a second infrastructure summit in November 2005. Minister Bakrie said the GOI plans to tender an additional $57.5 billion in projects at the November 2005 summit.

"Jakarta Declaration"

16. The Summit concluded with the signing of the Jakarta Declaration by Bakrie and representatives of the 22 country delegations in attendance and representatives of international financial institutions. The American Chamber of Commerce signed the declaration on behalf of the U.S. business community. The Declaration details the GOI’s vision for infrastructure development and lists priorities for the GOI to remove bureaucratic hurdles to private investments.

Private Sector Reaction

17. Cautious optimism prevailed among business representatives at the conclusion of the two-day summit--one private sector speaker noted that the business community is "tempted to believe" the GOI's upbeat message. In general, regional businesses (i.e. Singapore) were more forward leaning while westerners were more reserved in their enthusiasm. Potential private investors, both domestic and foreign, were generally encouraged by the Yudhoyono Administration’s public commitment to infrastructure development and promises to remove barriers that hinder investment. Nearly all attendees agreed that SBY and his ministers had demonstrated the political will to accelerate infrastructure development and had likewise shown they understand that follow-up and implementation will be the key to success. Some participants recommended bundling together some of the smaller projects on the priority list to make them more attractive to international investors, a point Minister Bakrie accepted in his closing remarks. They noted that "some checks in the win column" would do much to convince foreign investors that Indonesia is indeed again open for business.

Contact Information for Projects

18. Contact information for sectoral ministries follows:

a. Gas Pipeline Projects: PT Perusahaan Gas Negara (Persero) Jl. KH Zainal Arifin No. 20 Jakarta 11140 Phone: +62-21-633-4838 Fax: +62-21-633-3080

b. Electricity Projects: Director General of Electricity and Energy Utilization Jl. KR Rasuna Said X-2 Kav. 7-8 Jakarta 12950 Phone: +62-21-522-6072 Fax: +62-21-522-5186

c. Telecommunications Projects: Director General Post & Telecommunications Jl. Medan Merdeka Barat No. 8 Jakarta 10110 Phone: +62-21-315-6000 Fax: +62-21-386-0754

d. Railway Projects: Director General of Land Communications Jl. Medan Merdeka Barat No. 8 Jakarta 10110 Phone: +62-21-350-6204 Fax: +62-21-350-6204

e. Seaport Projects: Director General of Sea Communications Jl. Medan Merdeka Barat No. 8 Jakarta 10110 Phone: +62-21-344-7017 Fax: +62-21-381-1786

f. Airport Projects: Director General of Air Communications Jl. Medan Merdeka Barat No. 8 Jakarta 10110 Phone: +62-21-350-5136 Fax: +62-21-359-5135

g. Water Projects: Director General of Urban and Rural Development Jl. Patimura No. 20 Jakarta 12910 Phone: +62-21-727-96-158 Fax: +62-21-727-96-155

h. Toll Road Projects: Director General of Regional Infrastructure Jl. Patimura No. 20 Jakarta 12910 Phone: +62-21-727-93-789 Fax: +62-21-727-93-789