Indonesia tries to leave India's infrastructure shadow

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.

"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 four-five 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.

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 that would be willing to invest 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 to catch up to countries such as India.

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.Reuters