Global Business Guide Indonesia

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Business Updates | Concrete Developments in Indonesia’s Infrastructure

Indonesia’s new administration under Mr Joko Widodo has been nothing if not vociferous in announcing its plans to focus on the development of infrastructure to support the continued growth of Southeast Asia’s largest economy. As the foundation of Mr Widodo’s campaign for the presidency, infrastructure development has over the months since his inauguration been touted as the driving force behind the country’s ability to reach the lofty target of 7% GDP growth  (See Outlook: Indonesia’s Economy in 2015).

The concrete steps behind this plan of action, however, are less understood. Beyond announcements from the government regarding its intention to initiate new projects or revive long dormant ones, information needed to move past the rhetoric to gain a nuanced understanding of the strategy to support infrastructure development is lacking. The issue with depending upon the announcement of planned infrastructure projects as the barometer for progress is that they tend to remain just that – a prospective development that struggles to break ground. As evidenced under the previous administration, even projects that proceed into the initial stages of construction are all too often subject to delays and unforeseen barriers that in the worst case lead to cancellation.

Given the false promise of planned project announcements, can it be said that Mr Widodo’s government has thus far lived up to its commitment to infrastructure? Progress in this regard can only be measured by more concrete actions. Recent measures to boost the availability of funding and address the shortcomings of previous land acquisition reform (See An Update on Indonesia’s Land Acquisition Law) suggest that the country is on the right track. Certainly, a record breaking allocation of the state budget to infrastructure development seems indicative of an administration determined to achieve tangible results.

2015 State Budget a boon for infrastructure

The Revised 2015 State Budget (APBN-P) approved by the parliament in mid-February shows a marked increase in planned infrastructure spending and funding. As testament to the new government’s readiness to finance ambitious plans for infrastructure development, infrastructure spending will rise to a record 290.3 trillion IDR in 2015 - a 40% increase from the 2014 State Budget. The availability of these funds is critical to the government’s ability to follow through on investment-intensive projects such as a comprehensive overhaul of the archipelago’s maritime links (See Indonesia’s Maritime Ambitions Require Massive Upgrade of Seaports).

Source: Ministry of Finance, Detik News

Moreover, as reported in the World Bank Indonesia Economic Quarterly, several ministries directly involved in the development of infrastructure are set to benefit from “significant budget increases”, including the Ministry of Transport (45% increase), the Ministry of Public Works (40%), the Ministry of Agriculture (106%) and the Ministry of Energy and Mineral Resources (50%).

Provisions have been put in place to ensure that infrastructure projects are not limited to the country’s more developed areas such as West Java. The 2015 State Budget introduces Village Funds, or the capital budget allocated for transfers to regional governments to be used in building infrastructure in rural areas, totalling 20.8 trillion IDR. This is in addition to plans laid out on 30th April 2015 to provide each regency with approximately 100 billion IDR to spend on their own infrastructure projects at the beginning of next year.

Also covered in the 2015 State Budget is Mr Widodo’s unprecedented move to inject capital into various state owned enterprises in order to provide them with the financial flexibility as well as the capacity to pursue infrastructure projects. With approximately 30 recipients, the parliament-approved capital injection will see a total of 37.3 trillion IDR provided as a means of encouraging state owned enterprises to contribute to much needed infrastructure development. Among the capital injection’s most notable recipients are PT Hutama Karya and PT Waskita Karya, two construction firms well versed in building the country’s major road networks, as well as PT Angkasa Pura II and PT KAI, who manage Indonesia’s airports and public railways, respectively.

Source: The Wall Street Journal, selection of notable SOEs only

On top of this, state owned enterprises are now subject to reduced divided payments (down 10%) to allow for stronger balance sheets and free up further funds to be used in carrying out new infrastructure projects.

Finding financing

Despite the positive steps taken to prioritise infrastructure development in the 2015 State Budget, Mr Widodo’s government will continue to face challenges in the form of obtaining adequate financing for the multitude of planned projects. The National Development Planning Agency (Bappenas) in its National Medium-Term Development Plan estimates that 5,519 trillion IDR is needed to fund infrastructure projects to be carried out between 2015 and 2019, averaging out to 1,102 trillion IDR per year. Clearly, the latest state budget’s allocation of 290 trillion IDR falls well short of this. While the country’s banking sector is poised to provide financing to infrastructure projects as a means of countering weakening loan growth, it is expected to only be able to meet around 30% of total required funds (Mandiri Institute).

The new administration has thus been active in following through with plans to establish other sources of financing, such as the Infrastructure Bank (Bank Infrastruktur) to be formed via a merger between PT Sarana Multi Infrastruktur and the Government Investment Centre (Pusat Investasi Pemerintah). As confirmed on 2nd April 2015 by the Minister of Finance, Mr Bambang Brodjonegoro; this institution is to focus on financing the construction of roads, railways and seaports with funds obtained through bonds. With reports suggesting that the merger will take place during the first half of 2015, Indonesia’s new Infrastructure Bank is scheduled to become operational by 2017 with start-up capital of 25 trillion IDR.

At the international level, Indonesia has also committed to serving as a founding member of the China-led Asian Infrastructure Investment Bank (AIIB). Drawing upon an initial authorised capital of $100 billion USD, this institution will provide Indonesia with another foreign source of financing for infrastructure projects to complement existing initiatives with the World Bank and the Asian Development Bank (ADB).

Given its likely standing as one of the AIIB’s biggest clients, Indonesia has in recent weeks been lobbying for a position of influence among founding members, with early speculation suggesting that at least a vice-president’s position will be reserved for the country (Reuters, 26/03). Success in this regard and in vying to base the AIIB headquarters in Jakarta may expedite the provision of funds for Indonesia’s infrastructure development projects.

Private sector participation

The new administration should be commended for its work thus far in laying the groundwork needed to realise its grand plans for infrastructure development. More attention, however, needs to be paid to encouraging private sector involvement. As quoted in the Jakarta Post (01/04), Mr John Scott Younger as Technical Director of the publicly listed PT Nusantara Infrastructure explained that “over the last five years the number of works done by the public sector is around 70% and it has been increasing to the point that the private sector is only doing about 10%”. Certainly, the release of a new Public Private Partnership book to provide an update on the 2013 edition would go a long way towards showcasing the projects on offer to private sector players and facilitate greater cooperation (See Indonesian Infrastructure: Tremendous PPP Opportunities).

Private sector participation in infrastructure development would also benefit from the realisation of plans from the Ministry of Public Works to hand over toll-road projects via a build-operate-transfer (BOT) scheme. The continued provision of viability gap funding (VGF) from the Ministry of Finance is key to ensuring that infrastructure development is spread throughout the country, and would be in keeping with the government’s recent initiatives to encourage investment outside of Java (See BKPM Regional Offices to Encourage Investment In Indonesia Outside of Java).

With all this said, drawing private sector players into infrastructure development in Indonesia remains primarily contingent upon addressing land acquisition as the primary obstacle to project completion. Early signs point to progress in this troubled domain, following on from the release of a new implementing regulation designed to expedite the land acquisition process. Presidential Decree No. 30 of 2015, unveiled earlier this year, puts in place the legislation through which the private sector will now be authorised to take over from the government in planning, preparing, executing and funding land acquisition. The regulation also dictates that the private sector can provide initial funding, thereby mitigating the need to wait for the state to act. Crucially, guidelines have been put in place concerning restitution from the government in the event of a failed project.

Given its aforementioned headway in other areas, the government would be well-served by focusing on attracting private sector involvement in the plethora of infrastructure projects currently on the table (See An Eye on PPP in Indonesia). Progress in this regard would stand as the latest sign of real, positive change for Indonesia in its attempts to wake up from a decades-long infrastructure nightmare.

Global Business Guide Indonesia - 6th May 2015

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Indonesia Property Snapshot - Infrastructure

Average Government Spending: 2.9% of GDP (2015)
Investment Required: $500 billion USD (2015-19, RPJMN)
Global Infrastructure Ranking: 63/160 (WB 2016)
Infrastructure Quality Score: 2.65 (ASEAN Average 4)
Main Project Areas Under PPP: Toll roads & railways, power generation, water supply & waste management.
Government Bodies: BAPPENAS, BKPM, Ministry of Public Works and Housing, KPPIP.
Relevant Law: Law No. 2 of 2012 on Acquisition of Land for Development in the Public Interest, Presidential Regulation No. 38 of 2015 on Cooperation Between the Government and Business Entities in the Provision of Infrastructure, and Presidential Regulation No. 78 of 2010.