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Ross H McLeod
At a large 'Infrastructure Summit' in January 2005 the government made a strong pitch for greatly expanded private sector involvement in the provision of infrastructure, including toll roads, electricity generation plants, gas pipelines, water supply facilities, harbours and airports.
This is regarded as urgent given the infrastructure deterioration that has occurred, especially in the last several years, through lack of spending on both maintenance and new facilities. In turn, the notion is that the private sector will provide the necessary financing, thus relieving the government of an enormous fiscal burden. Some 91 projects, with a total value in excess of $US22 billion, were offered at the Summit.
For years, most roads have been made available free to users, while water, electricity, telephone lines and train services have been supplied at prices far below unit costs. The obvious consequence of this is that the government departments and state enterprises in question made losses providing these services, and therefore had to rely on budget subventions for their survival. Thus the reason the government has failed so clearly to maintain an adequate level of spending on infrastructure is precisely that, the more it provides, the greater the budgetary burden it has to carry.
Instead of utilising the price mechanism to ensure that such services are supplied up to the level at which users are willing to cover the costs, they are supplied only to the level determined by the political process of allocating available fiscal resources. Non-price rationing is then needed to keep supply and demand in balance. People are kept off the streets and roads by high congestion costs; they are kept off the trains by overcrowding, poor service, and other kinds of discomfort; electricity consumption is kept down by blackouts; and the demand for telephone lines is kept in check by long waiting lists.
The projects offered to the private sector at the infrastructure summit all seem to have in common that it would be feasible to undertake them for profit, but in many cases this is not at all straightforward. For example, government-owned water supply companies in Indonesia have probably never charged users the full cost of supplying them with clean water, and certainly do not do so at present. Private sector firms cannot operate in the same manner.
If the government wants to get the private sector involved in the infrastructure business, it will need to give serious consideration to application of the crucially important 'user pays' principle. Put simply, the private sector will not be interested in providing infrastructure services unless it can be confident that it can raise prices to the extent that its revenues will exceed its costs (including the cost of capital) by a margin sufficient to justify the risks involved.
Thus, while there are strong arguments for private sector participation in infrastructure it is hard to see this happening on a large scale in the near future, since it will require significant and highly unpopular price increases.
WATCHPOINT: Will the new government of Susilo Bambang Yudhoyono be willing to risk a political backlash by raising the prices of infrastructure services to the extent necessary to make their provision profitable to the private sector?
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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