Legal and regulatory risk hinders Indonesian infra

The results of a new survey present a mixed bag as far as the future of infrastructure investing in Indonesia is concerned. While the potential of the country is recognised, there are strong reservations regarding its legal and regulatory frameworks.

A survey of over 100 global infrastructure and energy firms by international law firm Norton Rose reveals that 86 percent of respondents believe investment in Indonesian energy and infrastructure will increase in the next two years. Furthermore, 94 percent say the private sector has an important role to play in projects in these areas.

“We are certainly seeing increased interest in Indonesia, and not just from Asian neighbours, but from much further afield,” says Jeff Smith, a Singapore partner and head of South East Asia at Norton Rose Group. “Investors from Europe and India in particular seem much more interested than before.”  

So far, so good. However, the Norton Rose Inward Investment into Indonesia survey also found a preference for commodities over infrastructure, with mining and minerals rated as by far the best investment opportunity according to respondents with 92 percent saying it had good or very good investment potential. Telecoms was rated second and palm oil third, followed by ports in fourth and roads in fifth.

While nearly 90 percent believe infrastructure and energy investment will increase over the next two years, only 21 percent think the increase will be “significant”. There are strong reservations about legal and regulatory risk, with 95 percent viewing this as significant or very significant. Respondents did not appear to be convinced that the legal framework would be enforced in a way that would provide enough certainty for long-term finance. Unsurprisingly perhaps – in light of this – the lack of availability of foreign finance was cited as the second-biggest drawback.

There was, however, support for the Indonesia Infrastructure Fund and Indonesia Infrastructure Guarantee Fund, which were introduced in 2009 as an alternative source of funding and support for infrastructure projects. More than three-quarters (79 percent) thought that the funds have an important role to play in the future development of Indonesian projects.

But while the funds were viewed as a boost to public-private partnerships (PPPs), questions remain about government assistance for non-PPPs. “The critical question remains the same – what government support will be offered for non-PPP projects?” asks Laurie Pearson, of counsel in Singapore at Norton Rose. “Some form of government support is still key for financing many power and other domestic projects.”

The survey received views from 109 respondents globally with the majority from the infrastructure and energy sectors and all of whom have either invested into Indonesia or anticipate making an investment.