T

he Indonesian government'€™s recent decision to join the China-led Asia Infrastructure Investment Bank (AIIB) will increase the sources of financing for the US$100 billion investment needed for its ambitious infrastructure programs within the next five years.

The AIIB, with an initial equity capital of $50 billion, will supplement the ASEAN Infrastructure Fund Ltd. (AIF), which was set up in 2012 by ASEAN member countries, including Indonesia. The Manila-based Asian Development Bank (ADB) is the administrator of the AIF and provides technical support.

Earlier in 2011, the government also set up a non-bank infrastructure financing institution, PT Sarana Multi Infrastruktur, which later established PT Indonesia Infrastructure Finance in a joint venture with the World Bank, the ADB and a German development bank.

But even these three specialist infrastructure banks will not be able to provide all the funds needed for huge infrastructure projects '€” in roads, power generation, seaports and airports. Indonesia'€™s domestic savings also are quite small. For example, third-party funds in the whole banking industry are now estimated at only Rp 4 quadrillion ($325 billion) and total outstanding bank lending is Rp 3.5 quadrillion.

Moreover, as Budi Sadikin, the president of state-owned Bank Mandiri, the country'€™s largest bank, argued last week, banks are generally ill-suited to lending to infrastructure because they rely on short-term funding '€” i.e. demand deposits '€” and, aside from mortgages, prefer to fund similarly short-term risks. Hence foreign funds from long-term investors such as insurers and pension funds as well as endowments and sovereign-wealth funds should also play a big role in financing the massive infrastructure program.

Infrastructure is one area where there are long-term income streams that are good for long-term investors. Returns from debts secured against real assets are also high. Financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes.

But the main concern for investors looking for suitable infrastructure projects in Indonesia is long construction delays and cost-overruns due to complex, arduous procedures for land acquisition.

In fact, land-acquisition problems have become the biggest barriers that have stalled for five to six years many major projects such as the access road to the country'€™s largest seaport, Tanjung Priok, in Jakarta, the 20-mile (32-kilometer) railway from downtown Jakarta to Soekarno-Hatta International Airport and more than two dozen other toll-road projects in Java and Sumatra.

Next year when the 2012 Land Acquisition Law comes into full-fledged enforcement it will become the litmus test for the government'€™s commitment to its infrastructure program. This law has been designed to remove uncertainty in land acquisition for infrastructure projects by preventing land speculation, speeding up the process, yet securing appropriate compensation for land owners through independent land valuation.