Government enacts large-scale infrastructure development to boost long-term economic growth and improve national competitiveness
As Margaret Thatcher, Britain’s longest-serving prime minister and the first woman to have been elected to that office once famously said, “You and I come by road or rail, but economists travel on infrastructure”.
This wry observation rings particularly true when applied to Indonesia today.
Since the establishment of the Republic in 1949, the Indonesian economy and social development that has been held back by a pronounced lack in the quality and quantity of its infrastructure. Certainly this is due to the lack of investment during the colonial period and the vast damage inflicted onto the country by World War Two and the subsequent struggle for independence.
This applies both to hard infrastructure (roads, railway lines, harbors, airports and electricity generation and transmission assets) as well as soft infrastructure (education institutions, social welfare agencies and health care and medical facilities).
Critically, the development of hard infrastructure linking the nation has not kept pace with its rapid population growth. Indonesia is actually ranked as the fourth most populous country in the world, after the China, India and the U.S.
Geography also plays a key role in the country’s demand for infrastructure. As a vast archipelago of over 17,000 islands, it is impossible for Indonesia to develop its economic potential without dramatically improved connectivity. The free and affordable movement of people, goods and services from island to island and across seas, mountains and jungle requires extensive infrastructure to be built, upgraded or expanded. Without such a nation-wide move, there is no way to effectively facilitate the economic growth of this country of 260 million people.
Currently, there are many short falls not just in the far flung provinces of lightly populated Eastern Indonesia, but also in major centers such as Java and Sumatra. Even these engines of growth have not been able to keep pace with demographic growth and population demand, and suffer from a lack of rail, road, sea and air connectivity, as well as vital utility shortages including energy and water supply.
To counter this, and set the scene for up and coming generations, the Jokowi Administration increased infrastructure spending in Indonesia by 51% last year. This is the first time any presidential administration has devoted so many resources to this key issue – one that has been traditionally overlooked and has plagued Indonesia since independence.
This infrastructure focus is set to transform the country’s macro-economic climate and reduce poverty, if carried out successfully. Though it is not without challenges as the undertaking is enormous in terms of logistics, spending and construction and engineering expertise.
However senior government figures are optimistic about the benefits this program will have for the common citizen. According to the Coordinating Minister for Maritime Affairs, Luhut Pandjaitan, “We are seeing an unprecedented government infrastructure program, this is a historical first. This is creating many job opportunities. However we don’t just want to talk about growth, we also want to ensure equality. You have to create programs across the country, especially in the 74,000 villages, for the ordinary people. If we don’t tackle this problem in the regions, there is a greater chance of radicalism due to poverty. We need urban and rural development to occur in parallel, which will reduce the extremism and boost the economy”
However it is a long walk from government policy to concrete, on the ground construction progress. And every day of lost productivity counts. So focused is the president on closing the national infrastructure gap that during a recent conference he urged government agencies to speed up development, stating, “I have told the Public Works Minister that I don’t want to work just one shift, but three shifts, because we have been left behind”.
Indeed the laundry list of up-and-coming projects is long and covers the full spectrum of infrastructure needs. A total of IDR 2,216 trillion (approx. $165 billion) has been set out in the national infrastructure spending plan covering 2015-2019.
According to the Presidential Chief of Staff, Mr. Teten Masduki, “Spending will be focused on a number of key areas, including power generation through the 35,000 Megawatt program, but also toll roads, railways, harbors and ports. We have some issues regarding logistics cost, for example the distribution of the logistics from west to east leaves a large gap. This has led to uneven economic growth between the western and eastern islands of Indonesia. We have huge potential in natural resources in the east, but due to infrastructure limitations, this area remains underdeveloped”
Even with such a deep war chest, galvanized political will and very capable state-owned enterprises (SOEs) ready to implement projects, the government has acknowledged that it does not have the resources to realize this vision alone. The need for public-private sector collaboration has been openly discussed and agreed on by the government, business community, project beneficiaries and other stakeholders.
It is only natural that given the lucrative commercial returns and the associated economic benefits over boosting nation-wide connectivity, the private sector supports this policy wholeheartedly. Bottlenecks caused by the infrastructure gap will cause stagnation as the economy struggles to accommodate the country’s booming population.
The Chairman of the country’s premier business association, Indonesia’s Chamber of Commerce and Industry (KADIN), Rosan Roeslani is an enthusiastic advocate of the government’s vision.
“Infrastructure development is vital for Indonesia’s future economic growth”, he said during a recent high-level industry event.
Dr. Ir. M. Basoeki Hadimoeljono, Indonesia’s technocratic Minister of Public Works and Housing is open to increased public-private partnership (PPP) and sees cooperation between government and business as a critical prerequisite for achieving the nation’s stated infrastructure development goals.
Dr. Ir. M. Basoeki Hadimoeljono, Minister of Public Works and Housing
“The message is clear, infrastructure is the number one priority program of the Jokowi Government era and there are a lot of things that can be done. Not only to be done by the government, because the government undertakes only 30% or 40% of the projects, the rest would be an opportunity for private and state owned companies” he says.
The precedent has certainly been set through the launch of recently approved infrastructure projects undertaken across East Java, one of the least developed parts of Indonesia’s most populous island.
As Dr. Hadimoeljono tells United World, “We have successfully implemented PPPs in toll roads, as well as in water resources. We are currently looking to implement one on water supply in East Java that was just approved last month. This will be the first PPP in the water sector and Umbulan water supply will create 4,000 liters (1,000 gallons) per second to serve Surabaya and the other five surrounding kabupatens (regencies) with an investment of IDR 3 billion (approx. $224,000)”.
A bridge constructed in Maluku Province
In order to ensure the successful and timely completion of its infrastructure goals, Indonesia’s government has reached out to international development agencies and international lending institutions for funding. Additionally and perhaps more importantly, it has passed a number of regulatory reforms to foster an environment more encouraging for private sector’s participation.
These substantial and pertinent incentives are are sure to bring smiles to investor’s lips. They include allowing increased foreign ownership in certain areas of economic activity, bringing in deregulation packages connected with important sectors of investment, slashing red tape through e-government initiatives (including a one-stop shop for permit application through the Investment Coordinating Board, BKPM), and allowing PPPs based on payment availability.
As a “Plan B” to garnering private sector investment in infrastructure and funds from international lenders, the Indonesian government has devised innovative means of boosting the public treasury.
One critical step lauded by the business community has been the passing of the Tax Amnesty Law in July this year. This move, which encouraged under-the-table traders to declare income, has increased tax revenue substantially. Armed with these bonus funds, the government could support a schedule of greater infrastructure spending and thus accelerate project timelines.
As proof in the pudding, the first phase of the tax amnesty has raised IDR 89.2 trillion (approx. $6.6 billion) for the national budget. This not insignificant amount actually accounts for more than 50% of the IDR 165 trillion program target up until Q1 of next year.
Certainly, even with the funds in place and the active support of the private sector, the rate of project realization is daunting. It will take the nation’s best managers, technical staff, engineers, lawyers and business development specialists to ensure that roads, ports, buildings and other structures are delivered on time, under budget and at a high standard.
Luhut Pandjaitan, Coordinating Minister for Maritime Affairs
Certainly lucrative opportunities for both individuals and firms will be won during this time. Employment in the construction sector will see hundreds of thousands of Indonesia’s architects, engineers, tradesman, unskilled workers and support staff receive generous salaries while building their country’s future.
Certainly, without such an undertaking, Indonesia will find it harder to provide for its people in an increasingly competitive global market. This is a point that has not been lost on policy-implementers.
As the man tasked with realizing much of the task Dr. Hadimoeljono remains focused on the far reaching consequences of successful conclusion for these infrastructure projects.
As he points out to United World, “Now is the era of competitiveness, and to be competitive we need better connectivity, which will reduce the disparity between East and West Indonesia. We also have the challenge of creating employment opportunity and reducing poverty. The role of infrastructure is becoming more and more important in addressing these challenges. This government is focused on serving the people, so when I look back on my term as minister, in 2019, I will be looking at what was achieved for the people, not what was planned.”