Private function

Last year’s tsunami has left affected countries’ infrastructures in tatters, but there is renewed hope via foreign investment in PPP structures. Hamid Yunis reports

The tsunami tragedy late last year has brought about a massive reconstruction effort. With such a vast task in hand, the governments in the affected countries have been interested in seeking private sector help to rebuild their infrastructure. PPPs may become an important tool to help reconstruct the devastated areas.

The United Nations Office for the Coordination of Humanitarian Affairs and the Business Roundtable, an association of chief executive officers of leading US companies, held a one-day conference on 25 April to discuss advancing PPPs in response to global disasters. It was agreed that the help of the private sector was needed to ensure that the work and results required could be realised. Jan Egeland, the Under-Secretary-General for Humanitarian Affairs, commented that, as the private sector can be cost-effective and efficient, it could play a key part in meeting the world’s humanitarian needs.

New generations of partnerships between governments, non-governmental organisations, charitable groups and private enterprises could be formed to solve problems that had failed to be resolved in the past. It was said that stronger partnerships could have a ‘multiplier effect’ on each party’s ability to contribute. Indeed, Bill Clinton, no less, wanted a move from relief to reconstruction and a handbook to be left behind for alleviating global poverty.

Indonesia, one of the countries worst hit by the tsunami, now has severe problems with its infrastructure, which has been worsened by the fact that there have been years of neglect and political problems in the country. Infrastructure constraints are holding back both its economic growth and access to basic services, especially for the poor. A good-quality, efficient infrastructure would help achieve the development goals of job creation and poverty reduction and would be needed to attract both foreign and local investment in the manufacturing and services industries. Funding is needed not only to invest in the infrastructure, but also to maintain and optimise existing assets.

The Indonesian government held an infrastructure summit in January to invite the private sector to invest in Indonesia’s infrastructure through PPP schemes. Project Finance International has reported that, since then, the government has announced that 91 projects valued at $22.5bn (£12.71bn) will be offered to the private sector.

These projects include toll roads, gas transmission pipelines, water supply projects, a railway access network project and an airport terminal extension project. For certain toll road projects, bidding has already started, and Indonesia’s Ministry of Public Works is currently evaluating the prospective bidders to select. The aim is for the financing to be in place by the end of 2005 and for construction to begin in 2006.

One of the questions is how the Indonesian government will execute the implementation of the projects. Although some regulations have been adopted, some are not clear. Several laws are currently being reformed that are likely to impact on the projects. The laws and regulations need further consideration and, hopefully, this will happen quickly.

As regards finance, Project Finance International has reported that the government might be willing to provide guarantees on a case-by-case basis. This would certainly be attractive to foreign lenders. Foreign finance is likely to be needed, as the Indonesian bank market may not be able to fund such large-scale projects. There is now a call for more funds and support. Investors will be waiting for indications that the country’s risks are lessened. Potential investors, in particular, complain about political interference, policy uncertainty, corruption and enforceability of contracts. These factors have a direct effect on the investment climate. If these issues were addressed, foreign investment may increase from developed nations.

Using private finance can bring efficiency and effectiveness. However, the private sector also has the responsibility to practise high standards of corporate governance, transparency and accountability, which they would also expect from the government involved.

The agenda for infrastructure change will be expensive and the private sector will have to invest heavily. Investor perceptions of Indonesian risk have to shift fundamentally, and the question is whether this is realistic and at all possible. Recent political changes following the election last September and the recent economic growth suggest that the foundations have been laid for a significant increase in infrastructure development in the near future.

Jemal-ud-din-Kassum, vice-president of East Asia and Pacific at The World Bank, has suggested that we need solutions that recognise the complementary roles of the public and private sectors and which reflect the political and social realities of different countries. He gives the example of Indonesia, where recent political changes should be taken into account, including decentralisation, which open up new opportunities for development but which also pose new challenges of effective policy coordination.

Investors may also be more willing to donate funds which are going to a targeted project rather than to the government, where the risk is that the funds will not be used efficiently or for the intended purpose. Within the PPP-type structure, one answer may be for companies to provide aid directly to the companies that are implementing the project and earmark funds for a particular purpose. This may provide a more transparent structure where funds are more likely to be used properly.

Recent reports suggest that foreign direct investment into Indonesia increased significantly between April 2005 and June 2005 and that the economy is growing. The investment and political climate has improved since last September’s election. This is a positive sign which shows that the country is starting to regain the trust of foreign investors.

Although the projects may seem ambitious, this looks like a promising start and it is interesting to see a PPP-type project structure being used in Indonesia and in other countries affected by the tsunami. Whether using PPP will be successful in the reconstruction effort depends on its effective implementation. The projects must be carried out within a transparent and credible framework at both central and local government levels.

Hamid Yunis is a partner and Lucie Thomas a trainee, both PFI/PPP group at Taylor Wesssing