Infrastructure Development in Indonesia: $450 Billion Required
It is estimated that Indonesia will need some USD $450 billion in funds to finance the government's infrastructure development plans for the 2015-2019 period. However, through the state budgets the government can only deliver USD $230 billion, or roughly 50 percent of required funds. The remainder should originate from the private sector (30 percent of total funds) and state-controlled enterprises (20 percent). However, is it likely that the private sector (both foreign and domestic) is to come up with USD $141 billion for investment in infrastructure up to 2019?
During the Susilo Bambang Yudhoyono (SBY) administration (2004-2014) authorities were already well aware about the importance of infrastructure development across the archipelago as this would push down logistics costs, boost the nation's competitiveness, and make the investment climate more attractive. Therefore, the government unveiled its Masterplan for Acceleration and Expansion of Indonesia's Economic Development (abbreviated MP3EI) in 2011. The MP3EI is a long-term development program that aims to turn Indonesia into one of the world's largest economies by the year 2025.
The MP3EI also places high priority on infrastructure development through public-private partnership (PPP) projects. However, there have been few successful examples of PPPs for infrastructure development in Indonesia. This weak performance has been attributed to the difficulty of land acquisition, the high degree of regulatory uncertainty and the general lack of interest from the private sector to engage in costly infrastructure projects that require many years before they can see return of investment (particularly in emerging markets where the number of users of infrastructure projects is regarded to be relatively small). Moreover, the economic slowdown of Indonesia that occurred after 2011 (partly due to heavily falling commodity prices) added negative sentiments to Indonesia's investment climate.
During the last years of the SBY administration we often read about the MP3EI in local media or we heard ministers talk about the MP3EI program. However, since the inauguration of Joko Widodo, Indonesia's seventh president, the MP3EI is rarely heard of. Instead the focus has shifted to the series of economic stimulus packages that have been released since September 2015. These packages contain more concrete measures (although true implementation of reform policies always remains problematic in a vast and diverse country that is ruled by bureaucracy) that aim to boost overall economic growth of Indonesia in the years ahead. Through deregulation and tax incentives these packages also aim at improving the investment climate.
At the 41st Annual Meeting of the Islamic Development Bank (IDB) Group Board of Governors, Himawan Prayoga, official at the Indonesia Investment Coordinating Board (BKPM), said the public-private partnership scheme has not had success yet in Indonesia. According to him the main problem lies in the planning of the infrastructure projects that are envisaged to be developed through a PPP scheme. Since 2001 Indonesia has been transformed by the process of decentralization, implying that regional leaders have become actors in terms of contract-making for development projects.
However, the quality of human resources at the local level has been insufficient, while weak coordination and cooperation between the central and local governments makes the planning process difficult (causing regulatory uncertainty for investors, including uncertainty about the tariffs that are to be charged to the people that use the infrastructure after the project has been completed). This is an issue that cannot be solved rapidly as it will require enhanced education as well as a "mental revolution" that is advocated by President Widodo.
Government-led infrastructure development includes the government's program to add 35,000 MW to the nation's power capacity, 1,000 kilometers of additional toll roads, 3,258 kilometers of railway, 15 new airports and 24 new ports.
Domestic and foreign direct investment in Indonesia in the first quarter of 2016 totaled USD $11 billion. However, most of the funds went to pulp & paper and base chemicals, not to infrastructure development. A simple calculation suggests that it is highly unlikely for the private sector to come up with USD $141 billion for infrastructure development up to 2019 without some real breakthroughs.