Indonesia to upgrade and expand key infrastructure

Text size +-

Planned overhauls to Indonesia’s infrastructure are moving ahead, as a raft of new power and transport projects lead the national drive to achieve middle-income status.

The mega-projects – part of a broader Rp5519trn ($398bn) infrastructure spending plan through to 2019 – are expected to produce immediate benefits for South-east Asia's largest economy, helping to boost growth from 4.7% in the first quarter of 2015 to the 6-7% needed for job creation to keep pace with the number of Indonesians entering the workforce each year.

In addition to promoting more inclusive growth across the country, officials will be looking to capitalise on the economic benefits of infrastructure investment. According to a recent study by the OECD, a 10% increase in physical infrastructure stock in China led to a 2-4% increase in GDP.

Infrastructure opportunities

“Indonesia remains significantly underinvested in infrastructure, with its current allocation of 2-3% of GDP for major projects well below the recommended 5%,” Sukatmo Padmosukarso, president-director at Indonesia Infrastructure Finance, told OBG.

Indeed, the country’s current infrastructure deficit is significant. According to the National Development Planning Agency, approximately 2650 km of roads, 1000 km of toll roads, 15 airports, 24 seaports, 3258 km of railways and a combined 35,000 MW of installed capacity is needed to bring the country in line with middle-income benchmarks.

Access to existing infrastructure remains uneven across the country. As per data from International Enterprise Singapore, around 19% and 31% of Indonesian households lack access to electricity and water, respectively, as of 2013.

Logistics costs also remain higher than in many neighbouring countries, with the average transport time per 100 km at 2.6 hours in Indonesia, compared to 1.4 hours in Thailand and 1.2 hours in China, according to the East Asia Forum.

Project performance

To help address the current shortfall, the Widodo administration has inaugurated several major transport, energy and construction projects in recent months, many of which had languished in the planning stages due to legal issues related to land acquisition.

Late April saw the groundbreaking of the 2600-km Trans-Sumatra toll road, a more than Rp300trn ($21.4bn) project to link south and north Sumatra from Lampung to Aceh. While construction on portions of road had been delayed for as long as 10 years, it is now on track to be completed by 2019, with some of the 24 sections to be completed as early as 2018. Four state-owned firms, including Hutama Karya, are undertaking the construction work.

In September, after two years of construction, tunnelling began on the $3bn mass rapid transit (MRT) system, which is being built by an Indo-Japanese consortium in the middle of heavily congested Jakarta. According to local media reports, the MRT is set to be completed by 2018.

Industry infrastructure has also been a priority, with the government inaugurating $5.8bn worth of upstream and downstream oil and gas mega-projects in August, including a $1.2bn central processing plant and a new $800m ammonia plant.

In the power sector, the government plans to add 35,000 MW of capacity by 2025 through a mixture of state-run and public-private partnership initiatives. PLN, the state-owned utility company, will contribute 16,800 MW of the total, with the remaining 18,200 MW to be provided by independent power producers through power purchase agreements with PLN.

Investor profiles

To help fund part of its wide-reaching programme, the government finalised a dozen investment deals totalling $20.25bn with some of the largest companies in the US in October. The projects, which largely focus on energy, aim to spur power generation, enhance linkages in the gas sector and stimulate the development of Indonesia’s renewable energy infrastructure.

As one of the signatories, GE has pledged to invest up to $1bn over the next five years in the power, oil and gas, and health care sectors to support Indonesia’s planned economic development and trade growth. Among other initiatives, the company plans to develop three power projects, adding an estimated 3000 MW of capacity to the country’s national grid.

In addition to foreign investors, state-owned enterprises – which account for roughly one-fifth of GDP – have also been a major focus of the administration’s infrastructure plans to date. In March Widodo announced plans to inject some $3bn directly into state companies involved in infrastructure development.

According to government figures, companies operating in the construction sector would receive the greatest share of the funding – a total of $653m – followed by firms specialising in transport ($462m), electricity ($384m), mining ($269m) and agriculture ($242m).

However, in November the Philippines legislature signalled that it could freeze the disbursements scheduled for next year. If the measure carries, this could trigger a wave of activity in the country’s bond market.

“We will keep carrying out our projects,” Adji Firmantoro, finance director at the Wijaya Karya (Wika) construction company, told local media in mid-November. “If our state capital injection is not approved, we will try to source funding through the capital market.”

Wika has already announced plans to float the 10.05% government-owned stake in the company and issue as much as Rp6trn ($427.2m) worth of bonds over the next five years to cover any potential funding shortfall.

Oxford Business Group is now on Instagram. Follow us here for news and stunning imagery from the more than 30 markets we cover.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In Indonesia

How will China’s economic slowdown affect emerging markets?

With China’s economy slowing on the back of a strict Covid-19 containment strategy, there are concerns about the effects this might have on several emerging markets.

In Construction

Focus Report: New cities and mega-projects are driving growth in Egypt

During a time of heightened global macroeconomic uncertainty, progress on new cities and mega-projects has helped Egypt maintain positive economic growth during the pandemic.


Can grid expansion keep pace with the coming surge in solar power...

As the capacity to generate wind and solar power continues to expand around the world, hopes of accelerating the phase-out of coal as the leading source of electricity may depend on the expansion...