Indonesia is currently characterized by having a lack of quality and quantity of infrastructure hence raising logistics costs (taking up 24 percent of the country’s gross domestic product) and thus making already established Indonesian businesses less competitive. Furthermore, weak infrastructure can make investors decide not to invest in Indonesia. Other obstacles to private sector infrastructure development are severe bureaucracy, land acquisition and low returns on long-term investment. Sugihardjo, a senior official at the Transportation Ministry of Indonesia, said that the country is currently focused on creating a conducive investment climate in order to boost investments (for example through its new one-stop service at the BKPM). Infrastructure development is a prerequisite to achieve the government’s 5.8 percent (y/y) economic growth target in 2015. By 2019, when President Joko Widodo’s first term ends, GDP growth should have accelerated to 7 percent (y/y).

Due to the recent fuel subsidy cuts, the Indonesian government could allocate much more funds to infrastructure spending in the Revised 2015 State Budget. In this budget infrastructure spending is suggested to total IDR 281.1 trillion (roughly USD $22 billion). However, this revised budget still needs approval from Indonesia’s House of Representatives. Although it is a good sign that the government increases infrastructure spending in the state budget, it is still a small amount compared to the country’s total infrastructure needs. Over the next five years, it is estimated that Indonesia needs a total of IDR 5,519.4 trillion (USD $442 billion) worth of investment to support infrastructure development.

The government will use Sarana Multi Infrastruktur to assemble funds to invest in ports, roads and other transportation projects. If the government’s capital injection is approved it would mean a six-fold increase in Sarana’s capital to USD $2.05 billion. By the end of this year, Sarana is targeted to raise its lending to IDR 19.2 trillion (USD $1.5 billion), a three-fold increase from lending at the end of 2014. A government official said that "with higher capacity, Sarana Multi Infrastruktur will leverage the equity by issuing securities and then give out long-term financing based on long-term funding. There will not be liquidity mismatch. This way the infrastructure bank can help overcome hurdles of going through conventional banks, which face risks when providing loans for long-term infrastructure projects due to their short-term funding." The new infrastructure bank should be set up completely by 2017.

Earlier this month, Minister of State-Owned Enterprises Rini Soemarno confirmed that Indonesia’s state-owned companies will fund infrastructure projects through debt sales and rights offerings. Several infrastructure projects that are prioritized include the underwater telecommunications cable linking the two islands of Java and Sumatra, cement and fertilizer factories in Papua, the trans-Java toll road (linking Jakarta and Surabaya), and power stations across the nation as well as ferronickel and bauxite processing plants. State-owned construction companies such as Waskita KaryaWijaya Karya and Adhi Karya as well as state port operator Pelabuhan Indonesia II (Pelindo II) are expected to raise funds in the bond market this year.

At 2.2 percent of GDP, the corporate bond market of Indonesia is small compared to regional peers (much lower than the six percent of GDP in the Philippines, 19 percent of GDP in Thailand and 42 percent of GDP in Malaysia). This is caused by Indonesian companies’ unfamiliarity with the capital markets and the high yields that firms are required to pay (almost double than its counterparts in Thailand and Malaysia) thus preferring to seek bank loans.