Infrastructure Development: the Tough Road Ahead for Indonesia
Infrastructure is the artery of the economy. Blocked arteries are life threatening. Similarly, when there is a lack of adequate infrastructure within the economy (whether in terms of quality or quantity) the economy will run in a highly inefficient manner due to high logistics costs, uncompetitive businesses (as the costs of doing business rise significantly), as well as social injustice when, for example, it is difficult for part of the population to reach healthcare facilities, or, for children to reach a school.
Infrastructure and economic development have a reciprocal relationship, meaning infrastructure development gives rise to economic expansion through the multiplier effect, while economic expansion gives rise to the need to enlarge existing infrastructure in order to absorb the larger flow of goods and people that travel across the economy.
Indonesia, Southeast Asia's largest economy, is characterized by the weak state of its infrastructure: there are not enough roads, harbors, airports, and bridges. And not unoften, the quality of existing infrastructure is weak. Several years ago, people in Jakarta often complained that it is cheaper to import oranges from China than to get them from elsewhere in Indonesia. Due to high logistics costs oranges from elsewhere in Indonesia were more expensive in Jakarta's shops compared to imported oranges from China.
But to develop infrastructure in Indonesia (both hard and soft infrastructure) is not an easy task. The Archipelago consists of about 17,000 islands (although it is fair to say that many of these islands are not inhabited and show no economic activities) which makes it more complex to enhance connectivity and implies there exists a need to focus on maritime infrastructure.
Governments in the post-Suharto era emphasize the need for infrastructure development but have not been as successful as General Suharto in achieving such ambitions. This is primarily caused by the different political context: democracy and decentralization mean that the central government can no longer use military strength and pressure to acquire the necessary land for infrastructure projects (instead the government now needs to rely on the ruling of courts, a lengthy process and one that not always goes in favor of the developers), while local governments sometimes fail to support the central government's infrastructure plans because there is not enough (direct) financial gain for the local government.
Meanwhile, for big infrastructure projects that cover land in more than one province, matters become even more complicated as Indonesia lacks smooth cooperation and coordination among central and regional governments (this is partly blamed on the weak human resources at the local level).
Moreover, usually there exist close ties between the political elite and businessmen in Indonesia (both on the central and local level). Both groups are primarily focused on increasing their own welfare, not the welfare of the local society. This can lead to a delay in infrastructure development as the local elite grants concessions to befriended companies (that may have helped to finance the campaign of the local elite), while these companies are not able to complete the infrastructure project. Instead selling the concessions to a third-party for a profit.
Meanwhile, there exists a high degree of bureaucracy in Indonesia that often delays (or results in the complete cancellation of the infrastructure project) as parliamentary rule-making usually covers macro issues, while the fine-tuning is done through numerous ministerial regulations, allowing bureaucracy to play a big role and causes an unclear regulatory framework.
A new approach is therefore required. Tactics that are used by Indonesian President Joko Widodo to speed up infrastructure development include the appointment of state-owned companies to become developers of the key infrastructure projects. These state-owned companies usually have bigger assets compared to privately-held companies and can also more easily raise additional funds from (state-owned) banks. There has also been an increase in capital injections from the state budget into several key state-owned construction firms.
Widodo also tries to avoid long tender processes by organizing tenders in the year before the project is expected to see groundbreaking. Lastly, Widodo shows his support for big infrastructure projects such as the Batang Power Plant and Balikpapan-Samarinda toll road by forcing groundbreaking and being present, personally, at the ceremony, even though part of the local community continues to protest against the projects.
But among the biggest problems of the Indonesian government regarding infrastructure development are the financial resources. Although the central government has raised its budget for infrastructure development drastically in recent years (partly made possible by cutting expensive energy subsidies) it has not enough funds available for infrastructure development and therefore is dependent on private sector participation. To attract the private sector, especially for the long-term and capital intensive infrastructure projects, a conducive investment climate is needed. One of the most important aspects is to provide more legal certainty in Indonesia.
However, Bambang Brodjonegoro, Head of the National Development Planning Agency (Bappenas), is confident that plenty of non-state budget funds can be collected to finance Indonesia's infrastructure development in 2017, originating from direct investment as well as part of the fund repatriations under the tax amnesty program of Indonesia.
Based on the National Medium‐Term Development Plan (RPJMN) 2015-2019, a total of IDR 4,796 trillion (approx. USD $358 billion) worth of investment in infrastructure is required to meet the plan's targets by 2019. However, the central and local state budgets can only contribute 41 percent to the financing, while state-owned companies can contribute up to 22 percent, implying 37 percent of funds (equal to IDR 1,752 trillion) need to originate from the private sector. It will require real breakthroughs to achieve this target but we do believe that the Widodo administration is on the right track in terms of infrastructure development.
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