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News Analysis: China: A catalyst for infrastructure development
Ten years ago, as it was emerging out of a severe financial crisis, Asia was expected to at best muddle through for the next decade or so
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en years ago, as it was emerging out of a severe financial crisis, Asia was expected to at best muddle through for the next decade or so. Many countries had been hit hard by the collapse of the Thai baht and their economies almost came to a screeching halt.
Providing hard proof of their resilience, the emerging economies of the region instead almost doubled their combined GDP in 2005. Five years later, Asia once again has become a unanimous feel-good story for long-term investors.
Much of that enthusiasm is being driven by the sizzling growth of China since it reopened its economy in the late 1980s. By 2030, the world’s most populous country will eclipse the US in terms of economic size, and is now widely viewed as a rising tide that could lift all boats in the region.
As China’s Premier Wen Jiabao’s scheduled visit nears, Indonesia is focusing on areas where it can expand the scope of its partnership with China to complement each other’s development agendas.
Although talk of trade will loom large, particularly in light of the China-ASEAN free trade agreement, investment from China into Indonesia, especially in infrastructure, will also be a key issue in bilateral discussions.
Across Asia China is the undisputed pace-setter for infrastructure development. In 2005, when Asia was recapturing wide-ranging investor interest, China’s infrastructure spending was 7.3 percent of its GDP. Asia’s two other big economies paled in comparison. India was spending 3.6 percent, while Indonesia, the smaller economy that as an archipelago has more of a pressing need for connectivity, spent 2.7 percent.
Last year China spent around 9 percent of its GDP on infrastructure — a large share of which actually went to the rail sector, which saw a 70 percent increase in fixed asset investment — while India and Indonesia had only modestly increased their proportional spending to a shade above 4 percent and 3 percent of GDP.
The outstanding success China has had in infrastructure development has compelled India and Indonesia to try unabashedly to replicate its model. But seeking to emulate China is the wrong approach because unlike China, India and Indonesia are vibrant democracies, homes to diverse constellations of local constituents that, for better or worse, often complicate infrastructure roll-out crossing multiple jurisdictions. Because of such circumstances India and Indonesia cannot undertake the scale of China’s infrastructure program with the same logistical ease.
The rate at which China is outpacing India and Indonesia in road construction reflects this difference.
China has 3.5 million kilometers of roads, and India has 3.3 million. However, China has been adding tens of thousands of kilometers of roads each year (69,000 in 2006 and 53,900 in 2007), while India is targeting constructing 7,000 per year.
In contrast, Indonesia has 390,000 kilometers of roads and plans to build 4,000 per year, which will be funded using a portion of a US$150 billion budget allocated to infrastructure over five years, of which $50 billion will be borne by the government.
To effectively administer infrastructure spending programs in dynamic and democratic contexts, studies suggest that the establishment of an independent government body — comprising
representatives from different technical ministries and affiliated agencies who report directly to and are held to account by the head of state — can help minimize operational challenges.
In addition, to marry public and private capital for the development of a sector widely seen to produce public goods and services, the leadership of this government body must possess experience in deal design, negotiation and execution. Terms of infrastructure projects are often fiercely contested. The experience and technical skills of leadership are critical to ensure maximum joint value and durable commitment on both sides of the public-private aisle.
Establishing and empowering such a government body, while appointing to its helm qualified leadership, is the template for the Reconstruction and Rehabilitation Agency for Aceh and Nias (BRR NAD-Nias). The operational and jurisdictional independence, direct channels to the President, and leadership from public and private backgrounds all contributed to the celebrated achievement of this government agency in relief efforts following the two natural disasters in Sumatra in 2004 and 2005.
Extending this template for application in Indonesia’s infrastructure development is a far cry from China’s institutional capacity to leap forward in this sector. Still, this approximation could reassure long-term investors that Indonesia, given its funding gap, has credible means to overcome the challenges of public-private partnerships (PPP) in infrastructure, the sector’s increasingly popular financing arrangement.
Specifically for China, it would help strengthen its resolve to revitalize Indonesia’s infrastructure, already the sector in which it invests most, because both countries will have streamlined planning and implementing structures in common for developing the sector, fostering a sense of familiarity and confidence in existing and future investment cooperation.
Furthermore, this will attract not only more Chinese investment directly in infrastructure, but also when China invests in other sectors such as coal or minerals, or makes ancillary investments in the sector — as is expected to occur when Metallurgical Corporation of China Limited (MCC) signs an MoU with PT Aneka Tambang to build a smelter in East Kalimantan during Premier Wen Jiabao’s visit.
By 2025, Asia will account for 40 percent of the world’s economy and more than two-thirds of the expansion of its middle class will come from Asia. The rising affluent societies of Asia will populate overcrowded cities and own multiple motorized vehicles and travel regularly, all putting a significant strain on infrastructure.
Based on forecasts of its economic position by this time, Indonesia’s stage of development will also fit this description. Because other source countries for investment are currently less eager to invest in its infrastructure, Indonesia should turn to China to act as a catalyst for the sector’s development before it crumbles and creates nodes of buzzing economic activity with few roads in between.
The writer is the chairman of the Indonesian Investment Coordinating Board (BKPM)
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Letter to the editor: Clarification from BKPM
The news analysis written by Gita Wirjawan, titled,
China: A catalyst for Infrastructure Development,
contains an inaccuracy. The investment project in
East Kalimantan is still in its preliminary stages,
and the parties to be included in the expected
agreement, including Metallurgical Company of China
(MCC) and PT Aneka Tambang, have not yet been
confirmed.
Hana Makarim
Investment Coordinating Board
Jakarta
The Jakarta Post, May 12, 2010, page 7
