Indonesia: Government enacts large-scale infrastructure development to boost long-term economic growth and improve national competitiveness

Government enacts large-scale infrastructure development to boost long-term economic increase and improve national competitiveness

As Margaret Thatcher, Britain’s longest-serving prime minister and the initial 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 authentic at the same time as 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) inclunding soft infrastructure (education institutions, social welfare agencies and health care and medical facilities).

Critically, the development of hard infrastructure linking the country has not kept pace with its rapid people increase. Indonesia is actually ranked as the fourth most populous country in the world, next the China, India and the U.S.

Geography as well plays a key role in the country’s request 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 country-wide move, there is no way to entirely facilitate the economic increase of this country of 260 million people.

Currently, there are a lot of short falls not just in the far flung provinces of lightly populated Eastern Indonesia, but as well in major centers such as Java and Sumatra. Even these engines of increase have not been able to keep pace with demographic increase and people request, and suffer from a lack of rail, road, sea and air connectivity, inclunding vital utility shortages inclunding energy and water supply.

To counter this, and set the scene for up and coming generations, the Jokowi Government increased infrastructure spending in Indonesia by 51% last year. This is the initial time any presidential government has devoted so a lot of 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 initial. This is creating a lot of job opportunities. However we don’t just want to talk about increase, we as well want to ensure equality. You have to create programs across the country, particularly in the 74,000 villages, for the ordinary people. If we don’t tackle this problem in the regions, there is a better luck 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 evolution. And each 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 inventory 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, inclunding power generation through the 35,000 Megawatt program, but as well 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 increase 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 national-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 country-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 people.

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 next economic increase”, 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 country’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 national 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, inclunding 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 initial 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 additional importantly, it has passed a number of regulatory reforms to foster an environment additional 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 significant sectors of investment , slashing red tape through e-government initiatives (inclunding 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 gain, has increased tax revenue substantially. Armed with these bonus funds, the government could support a schedule of better infrastructure spending and thus accelerate project timelines.

As proof in the pudding, the initial phase of the tax amnesty has raised IDR 89.2 trillion (approx. $6.6 billion) for the national budget. This not insignificant all actually accounts for additional 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 country’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 next.

Certainly, without such an undertaking, Indonesia will find it harder to provide for its people in an increasingly competitive world 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, “Presently is the era of competitiveness, and to be competitive we need better connectivity, which will reduce the disparity between East and West Indonesia. We as well have the challenge of creating employment opportunity and reducing poverty. The role of infrastructure is becoming additional and additional significant in addressing these challenges. This government is focused on serving the people, so at the same time as I look back on my term as minister, in 2019, I will be looking at what was completed for the people, not what was planned.”