Indonesia's central government hopes that local governments team up with the private sector to develop the country's infrastructure. President Susilo Bambang Yudhoyono said that there are two ways through which local governments can stimulate its infrastructure development: cut expenses on other fields and use it on infrastructure development instead, or, invite the private sector to participate in public-private partnerships (PPPs).
Private sector participation is particularly fitting for infrastructure projects that have a commercial value. Indonesia's infrastructure has not been able to keep up with robust macroeconomic growth since recovery from the Asian Financial Crisis in the late 1990s, and as a consequence the country's economy cannot reach its full potential. Due to the lack of adequate infrastructure Indonesia's logistics costs rise steeply, thus reducing the country's competitiveness and attractiveness of the investment climate.
The main problem for the Indonesian government to invest in the country's infrastructure is the lack of financial resources, and for that reason it needs the private sector. However, private investors are only interested if there is a conducive investment climate. Currently, Indonesia's regulatory, bureaucratic and legal framework is still complex, timely, conflicting and inconsistent. And although the president insists on the establishment of a secure environment for investors to invest their money, this will most likely need a long time as well as the presence of more enlightened minds in local governments.
In this year's state budget (APBN 2013), the government has allocated IDR 203 trillion (US $21.0 billion) for infrastructure development, while it has allocated a massive IDR 275 trillion (US $28.5 billion) for energy subsidies, including gasoline. As such, driving a car or a motorcycle becomes cheap and invites more people to buy one, leading to recent record-high car sales, but burdening the country's infrastructure accordingly. The result is immense traffic congestion in the bigger cities of Indonesia. Many voices are heard to reduce the large energy subsidies and instead spend it on infrastructure. But the reduction of these subsidies implies large political risks as it will trigger massive demonstrations (perhaps partly ignited by political opponents of the government). With the elections in sight next year, the government will most likely not introduce such unpopular steps now.