Infrastructure Development Update Indonesia: Trans-Sumatra Highway

Before construction will kick-off, the government of Indonesia will first focus on necessary land acquisition, which is expected to need at least four years (2015-2019), as it has learned lessons from its experience with the Trans-Java Highway. This road, which is still not 100 percent completed today, has already taken 20 years to develop, mainly due to land acquisition and funding troubles.

Djoko Murjanto, Director General at the Ministry of Public Works, said that the government will use Law No. 2 of 2012 and Presidential Regulation No. 71 of 2012 for land acquisition for public facilities. These new laws were designed to speed up the land acquisition process notably as it deals with the revocation of land rights to serve public interest, puts time limits on each procedural phase and ensures safeguards for land-right holders. Previously, infrastructure projects were seriously hampered by expensive and time-consuming land disputes. However, the progressive new law has not been used yet and therefore it is difficult to assess the effectiveness of the new law.

One of the problems of developing the Trans-Sumatra Toll Road is its funding. In 2005 and 2008, Indonesia's central government tendered parts of the Trans-Sumatra Toll Road to the private sector but there was a lack of interest due to the large costs in combination with the low internal rate of return (IRR). Investors are put off as a feasibility study has shown that all 23 sections of the toll road are economically feasible but not financially feasible. The government will re-tender parts of the toll road but if there is no interest from the private sector, it will appoint 100 percent state-owned enterprises (SOEs) to construct the project. Hutama Karya is one of the SOEs that has been mentioned to participate in the construction of the Trans-Sumatra Toll Road. The central government will inject IDR 5.1 trillion (from the State Budget) into the company as working capital.

Currently, the lack of quantity and quality of infrastructure in Indonesia has made the country's logistics costs among the highest in Southeast Asia and thus curbed economic growth. In the 2012 Logistics Performance Index (released by the World Bank), Indonesia is ranked 59th (out of 155 countries), well below other emerging peers such as Malaysia (29), Thailand (38), the Philippines (52) and Vietnam (53).

One major cause of the current fragile state of Indonesia's infrastructure is the lack of public investments in this sector. Government spending on infrastructure is only two percent of the country's gross domestic product (GDP), well below government infrastructure spending in other emerging economies such as Thailand (4.5 percent of GDP), Malaysia (6.0 percent of GDP), and China (8.5 percent of GDP). If we add infrastructure spending of SOEs and the private sector, infrastructure investments in Indonesia reach about four percent of GDP.

Sumatra is a vital asset to the economy of Indonesia as it is resource-rich. The island, the second most populous Indonesian island (after Java), contains palm oil, rubber, coal, tin, steel, liquefied natural gas (LNG) and oil. Geographically, the island is the second-largest Indonesian island (after Kalimantan) and the world's sixth-largest island. Due to its economic value, it is important to improve infrastructure on Sumatra. The island was designated as a "center for production and processing of natural resources and energy reserve" in the first economic corridor of the Masterplan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI). The Trans-Sumatra Toll Road is part of the Sumatra High Grade Highway which forms the main road infrastructure corridor on the island.

Construction of the Trans Sumatra Toll Road was stipulated through Presidential Regulation No. 86 of 2011 on the Strategic Area Development and Sunda Strait Infrastructure.

‹ Back to Business Columns

Discuss

Please sign in or subscribe to comment on this column