Government-led infrastructure development is regarded by most analysts and policymakers as the key to overcome Indonesia’s slowing economic growth as infrastructure development will cause a multiplier effect in the economy (triggering growth in other industries such as cement and property while job availability grows accordingly). In the second quarter of 2015, Indonesia’s gross domestic product (GDP) growth slowed to 4.67 percent (y/y), a six-year low.
However, being plagued by red tape, land acquisition troubles, procurement bottlenecks, poor planning, and weak cooperation between government institutions on the central and regional level the government of Indonesia was only able to spend 11 percent of its total allocated funding (set in the 2015 State Budget) for infrastructure development in the first seven months of 2015. A remarkable poor performance and disastrous for the economy as the lack of adequate (quantity and quality of) infrastructure brings a high price for Southeast Asia’s largest economy. Due to the country’s weak infrastructure logistics costs are high implying that Indonesian businesses are less competitive (on an international scale). Moreover, weak infrastructure causes higher inflation and also limits people’s access to healthcare.
However, there may be light at the end of the tunnel as there has been detected an increase in number of inaugurated infrastructure projects since May this year (see table below). Still, infrastructure projects cannot be realized within the time-span of a couple of weeks only and therefore the impact of these projects can only be felt next year, the soonest.
One of the main obstacles to infrastructure development in Indonesia is the availability of funds. According to the Indonesian Ministry of National Development Planning (Bappenas), the country needs IDR 5.5 quadrillion (approx. USD $416.5 billion) worth of funds for infrastructure development in the 2015-2019 period. Obviously, this cannot be covered by Indonesia’s state budget alone. Private sector involvement is needed but in order to attract more private investors the country’s investment climate should be made more conducive as investors will think twice before engaging in expensive and long-term projects. Particularly nationalistic government policies form a major obstacle to foreign direct investment.
Certainty is something very valuable to investors. Legal certainty has always been weak in Indonesia but the general short-term vision of Indonesian policymakers also adds uncertainty. A good example of the latter is last week’s (last minute) decision to cancel the high-speed railway between the cities of Jakarta and Bandung (in West Java). Reportedly, investors from China and Japan had already invested millions of US dollars to prepare the feasibility (and other) studies for this project. For months, Indonesian government officials had been stating that the country needs this railway and would hold a “beauty contest” among investors to select a winner. Suddenly, however, President Joko Widodo announced that the project was cancelled as a high-speed railway on the 150 km between Jakarta and Bandung (a route that would include over a dozen of stations and therefore the train would not be able to reach its maximum speed) was considered not economically viable. Instead, Widodo requested investors from China and Japan to submit new bids for a medium-speed line. Whether these investors are still interested remains unknown.
In order to make more funds available for Indonesia’s infrastructure development, the Indonesian government said it is willing to guarantee state-owned enterprises' (SOEs) debts with international financial institutions. This move would allow the SOEs to access cheaper financing options. Those SOEs that are 100 percent government-owned, have healthy financial positions, and work on government-approved projects can apply for this guarantee facility. The first and third requirement can be overruled by a presidential regulation if it involves an infrastructure development project.
Recently, international consulting company PricewaterhouseCoopers (PwC) released a report in which it stated that Indonesia is on the right path to realize 80 percent of the country’s infrastructure targets over the next five years. PwC expects to see total infrastructure-related spending in Indonesia (this involves both the public and private sector) to climb to USD $90 billion in 2019 and accelerating to USD $138.6 billion by 2025.
Groundbreaking of Infrastructure Projects in Indonesia in 2015:
|28 January||Kuala Tanjung Port||North Sumatra||IDR 4.99 trillion|
|Medan-Binjay Highway||North Sumatra||IDR 1.6 trillion|
|Aluminium Smelter||North Sumatra||USD $2 billion|
|9 February||Ciawi-Sukabumi Toll Road||West Java||IDR 7.7 trillion|
|23 February||Serang-Panimbang Toll Road||Banten/West Java||USD $385 million|
|9 March||Arun LNG Storage||Aceh||USD $750 million|
|Krueng Keureuto Dam||Aceh||IDR 1.7 trillion|
|30 April||Trans-Sumatra Toll Road||Sumatra||IDR 300 trillion|
|Solo-Ngawi & Ngawi-Kertosono Toll Roads||Java||IDR 625 billion|
|4 May||Jatigede Power Plant||West Java|
|Takalar Power Plant||South Sulawesi|
|Pangkalan Susu Power Plant||North Sumatra|
|19 May||Broadband Fiber Optic Sulawesi Maluku Papua Cable System||Sulawesi, Maluku, Papua||IDR 3.6 trillion|
|22 May||Multipurpose Terminal||East Java||IDR 23.4 trillion|
|28 May||Smelter Project in Morowali||Central Sulawesi||USD $2.5 billion|
|12 June||Gempol-Pandaan Toll Road||East Java||IDR 1.47 trillion|
|20 June||Cikopo-Palimanan Highway & Tanjung Batu Port||West Java||IDR 13.7 trillion|
|19 July||Holtekamp Bridge||Papua||IDR 857 billion|
|26 July||Solo-Kertosono Toll Road||Central Java|
|2 August||Central Processing Plant||Central Sulawesi||USD $1.2 billion|
|Ammonia Plant||Central Sulawesi||USD $830 million|
|28 August||Batang Power Plant||Central Java||USD $4 billion|
Source: Jakarta Globe