For many years, Indonesia’s sizeable infrastructure gap has hindered industrial development. In Java – the country’s most densely populated island – roads, airports and seaports are under pressure due to the large amount of people and goods that need to be moved. At the same time, Indonesia faces challenges connecting other islands across the vast archipelago.
Nevertheless, infrastructure and transport have been key priorities for the government in recent years. At the start of his second term in office in 2019, President Joko Widodo, better known as President Jokowi, launched a $412bn programme to boost investment in the country’s transport infrastructure. The planned changes will bring significant economic benefits by decreasing logistics costs and creating new employment opportunities. However, funding shortfalls faced by many state-run companies will make these goals challenging to achieve. In the shorter term, infrastructure development is also likely to be affected by the disruption caused by the global outbreak of Covid-19 in early 2020. Therefore, moving forward, the government will need to ensure that major projects are attractive to private investors.
Structure & Oversight
The ministry responsible for overseeing infrastructure development is dependent on the nature of the project. However, the government bodies most heavily involved in the sector are the Ministry of National Development Planning, the Ministry of Finance, the Ministry of Energy and Mineral Resources, the Ministry of Transportation, and the Ministry of Public Works and Housing.
Given limited state funds, the current administration has started to embrace the public-private partnership (PPP) model. This is supported by the Committee for Acceleration of Prioritised Infrastructure Delivery, which was formed in 2014 and acts as the coordinating body for the relevant government stakeholders in PPP agreements, and the Indonesia Investment Coordinating Board, which provides a one-stop-shop licensing point for private businesses involved in various sectors, including oil and gas, tourism, electricity and manufacturing.
Since he was first elected in 2014, President Jokowi has recognised the need to invest heavily in infrastructure development. In May 2019 Budi Karya Sumadi, the minister of transport, announced plans to invest approximately $412bn in infrastructure projects before the current administration ends in 2024. Of this total, 40% will be sourced directly from the government, 25% through state-owned enterprises and the remaining 35% from the private sector. While some infrastructure projects stalled during President Jokowi’s first term, investors are confident that his re-election will inject fresh energy into ensuring that these ideas reach fruition. Low tariffs, particularly for services at air and sea ports, are not based on cost recovery principles and seen as an impediment to investment; incentive-minded reform would help the government achieve its private investment goals.
Under the National Medium-Term Development Plan 2015-19 the government prioritised improving transport links, strengthening the maritime sector, integrating remote areas, offering multi-modal transport options and improving urban mobility. As part of these plans, infrastructure spending was increased by $10bn per year compared to the previous five-year period. President Jokowi has also granted infrastructure projects to a number of state-owned enterprises (SOEs), which typically have larger assets than private companies and are able to raise funds more easily through state-owned banks. However, as a result of the recent shortfall in funding for SOEs, the government has become more reliant on the private sector, especially in the form of PPPs, to achieve many of its projects. With this in mind, the government has implemented regulatory changes to improve the transparency of the PPP bidding process and enhance the bankability of such projects.
Roads & Bridges
In 2018 Indonesia’s total road length was 554,000 km, the majority of which was city roads, followed by provincial roads and motorways.
As of 2019 the country had an estimated 146m vehicles on its roads, a considerable increase on 114m in 2014. As part of its national infrastructure drive, the government aims to develop 1500 km of toll roads by 2024 and an additional 4479 km of toll roads by 2030, in order to improve mobility across the country. Toll roads have become a preferred option of the government as it seeks to improve road infrastructure without assuming financial risk. The project will cost an estimated $47.4bn, with funds coming from the state budget as well as the private sector. The islands earmarked for road developments include Java, Sumatra, Kalimantan, Sulawesi and Bali.
Another major component of the road-building drive has been the 1150-km Trans-Java Toll Road, which runs from Merak in Banten to Banyuwangi in East Java, connecting the major cities of the island. One of the main purposes of the road was to stimulate investment by improving regional connectivity, reducing costs and increasing job opportunities. The road opened in early 2019 and has generally been met with a positive response. In 2019 during the Eid Al Fitr holiday, when Jakarta is at its busiest, traffic on conventional roads fell by 75.1% as many people opted to use the toll road to reduce journey times.
The success of the Trans-Java Toll Road in improving transport links and easing traffic congestion has inspired similar developments across the country, including the 2048-km Trans-Sumatra Toll Road, which will help to connect the large, sparse island. The project is divided into four main corridors: Lampung-Palembang (358 km), Palembang-Pekanbaru (610 km), Pekanbaru-Medan (548 km) and Medan-Banda Aceh (460 km). By the end of 2019, 501 km of the road was operational, but the project suffered some delays as a result of land acquisition disputes. While the outbreak of Covid-19 has delayed some infrastructure works, the government had not called off any projects by mid-May 2020, at which time it proposed a Rp56.5trn ($4bn) recovery budget, with funds for infrastructure projects and human capital development.
President Jokowi’s plans also include the construction of new bridges to connect some of the country’s islands. In 2019 the government announced that it was looking to build a 7-km bridge linking the islands of Batam and Bintan. The project will cost around Rp4trn ($282m) and aims to draw tourists from nearby Singapore. Construction is expected to start in 2020 and take three to four years to complete.
The country’s road and bridge expansion plans offer significant opportunities for private sector involvement. The government has made clear that it does not have the funds needed to complete these projects independently and is relying on private companies to fill the gap – providing an opportunity for PPPs. Private firms can capitalise on this opportunity by investing in one of 33 existing toll road enterprises (BUJT) or by establishing their own.
The majority of Indonesia’s railways are located on Java and are used for both passenger and freight transportation. There are also a several railway lines in Sumatra, and small industrial railways are used in other parts of the country, primarily to transport sugar cane and palm oil. During his first term in office, from 2014 to 2019, President Jokowi’s administration saw some progress in improving railway connectivity: Indonesia’s total railway length increased from 5196 km in 2014 to 8357 km in 2015. Plans for double tracking and new railways are smaller components of current infrastructure plans, but there are still a number of projects in the pipeline. One example is the medium-speed train project connecting Jakarta and Surabaya, Java’s two largest cities.
The development has faced considerable delays in recent years, but in late 2019 the Indonesian government signed an agreement with Japan to proceed with the project. The 715-km railway, constructed with the financial and advisory support of the Japan International Cooperation Agency (JICA), is expected to increase the top speed of travel between the two cities to 160 km per hour. This would reduce the travel time from nine hours to less than seven hours. According to Japanese media reports, it will cost Rp60trn ($4.23bn), funded by Japanese loans, with completion planned for late 2022.
While a decision was made to give preference to Japanese and Indonesian companies for this project, China is involved in another railway development: a high-speed line between Jakarta and Bandung, which is located about 150 km south-east of Jakarta. The project has faced numerous delays in recent years, which Indonesian officials attributed to mismanagement. However, the authorities have since made changes to the project team, which is expected to prevent a repeat of similar issues. The rail line is being funded by loans from China Development Bank, although some officials have expressed concern that Indonesia must take care to avoid accruing debt.
The aviation sector forms an important part of the government’s plans to improve connectivity. In recent years, the growth of the middle class and the emergence of low-cost carriers have contributed to the rapid expansion of Indonesia’s air travel industry. According to the World Bank, the total number of air passengers carried in Indonesia almost quadrupled, from less than 30m in 2009 to more than 115m in 2018. Of the latter, 10.1m were international arrivals, a 4.3% increase compared to 2017. As a result, the government recognises the importance of investing heavily in this sector and has a number of airport expansion plans in the pipeline.
A major development currently being considered is the construction of a new greenfield airport in Jakarta, which would serve as an alternative to the capital’s Soekarno-Hatta International Airport. Plans had initially been discussed to construct the new development at Karawang, east of the city centre, but this idea has now been shelved as the proposed site was part of a conserved forest.
A preliminary study is under way to determine whether state-owned firm Angkasa Pura II will construct the new airport on its own or in collaboration with another company, with the Ministry of SOEs set to make the ultimate decision. While the final location has not yet been decided, possibilities include a site close to Soekarno-Hatta, in Banten province, or land reclaimed from the sea. The latter may help officials overcome difficulties that can result from the country’s complex land acquisition laws. As of 2018 Indonesia’s domestic airline market was the fifth largest in the world. Local air traffic more than tripled between 2005 and 2017, to reach 97m passengers. Meanwhile, in Jakarta, Soekarno-Hatta and Halim Perdanakusuma International Airport received a combined 73m passengers in 2018 – most of whom passed through the former, larger airport.
However, the outbreak of Covid-19 in early 2020 led to a suspension of international and domestic travel, with all commercial flights from Soekarno-Hatta suspended until June 1, 2020. According to the International Air Transport Association, the industry could lose a total of $252bn in revenue in 2020. Although broader passenger trends suggest that the air travel industry has considerable growth potential in the longer term, it is yet to be seen how long it will take to bounce back once restrictions are lifted.
Angkasa Pura II has already invested heavily in the construction of a new terminal and runway at Soekarno-Hatta, which is expected to see a passenger increase of 46% by 2030, bringing its total annual arrivals to 100m. The new runway started operations in late December 2019, and existing terminals will be upgraded to accommodate 25m passengers each, up from the current capacity of 9m.
Far & Wide
There are other plans for the development of new airports elsewhere in the country. In early 2020 Angkasa Pura II was in the process of selecting a strategic investor for Kualanamu International Airport in Medan, based on proposals submitted from 16 preferred bidders. Meanwhile, there are plans to construct a second airport on the popular holiday island of Bali, which will be used by low-cost carriers and aims to relieve pressure on the existing Ngurah Rai International Airport in Denpasar, which is struggling to keep pace with rising demand.
However, Bali has been under significant environmental pressure as a result of its popularity as a tourism destination. In an attempt to combat this, the government launched the 10 New Balis programme, which aims to promote alternative tourism hotspots (see Tourism chapter). The initiative identified 10 new destinations, including Lake Toba on Sumatra, Morotai Island on Maluku and Wakatobi in south-east Sulawesi. Part of the planned investment will be used to upgrade existing infrastructure and build new airports outside Bali to support rising visitor numbers.
Angkasa Pura II, which oversees 17 airports in the country, is also planning to expand its operations abroad. As part of its Go Global initiative, the firm is considering opportunities in Africa and throughout South-east Asia. The company took part in the Indonesia-Africa Infrastructure Dialogue in August 2019, where it identified seven potential opportunities for airport investment, namely in South Africa, Morocco, Algeria, Egypt, Ethiopia, Sudan and Zambia.
While Angkasa Pura II has dominated the industry in recent years, there are new opportunities for private companies. For example, a consortium of local firm Cardig Aero Services and Singapore’s Changi Airports International won a bid to operate Komodo Airport near the town of Labuan Bajo for 25 years, paving the way for other foreign companies to become involved in operating Indonesia’s airports.
With an estimated 6000 inhabited islands, sea transportation is a crucial part of the country’s transport network, and ports play an important role. There are around 100 commercial ports across the country, although most only have the capacity to accommodate smaller vessels. For a country that relies so heavily upon sea transportation, Indonesia’s port infrastructure is relatively limited, with major challenges including long waiting times for goods to leave ports after they have arrived.
However, the government has invested heavily in port expansion projects. A new terminal is being constructed at Tanjung Priok Port, Indonesia’s largest port, which will triple capacity to more than 18m twenty-foot equivalent units (TEUs) upon its expected completion in 2023. The project is being carried out in multiple phases, the first of which is the New Priok Container Terminal 1, which opened in 2016 and increased the port’s capacity by 1.5m TEUs.
At the same time, digitalisation at Tanjung Priok Port has helped to reduce waiting times for goods shipments, which fell from six or seven days to three days. Indonesia Port Corporation, the SOE responsible for managing Tanjung Priok, has announced plans to implement full digitalisation in all 12 of the ports under its management by the end of 2020.
Meanwhile, Patimban Port in Subang, West Java, is slated for completion in mid-2020. Despite potential disruption caused by the Covid-19 pandemic, local media reported in April 2020 that the project was still on track to begin operations in September 2020. The port is expected to handle 3.5m TEUs, and will play a crucial part in reducing congestion at Tanjung Priok.
Another major development is under way at Kuala Tanjung Port in North Sumatra. In November 2019 state-owned port operator Pelabuhan Indonesia I signed an agreement to collaborate with the Netherlands’ Port of Rotterdam Authority and China’s Zhejiang Provincial Seaport Investment and Operation Group to complete the expansion project, which aims to transform the port into a global maritime hub and attract significant investment in the Malacca Strait, the main shipping channel between the Indian Ocean and the Pacific Ocean. The first phase, which involved the construction of the Kuala Tanjung Multipurpose Terminal, was completed in 2018, and the second phase involves the development of a 3400-ha industrial port. Later phases will include the construction of a hub port, and upon completion the port is expected to be able to accommodate around 60m TEUs per year.
Although a significant amount of government investment has been directed into port infrastructure projects, the sector may also benefit from greater long-term planning for developments such as Kuala Tanjung, according to Daniel van Tuijll, an independent consultant on Indonesian ports. “Often there is huge time pressure to deliver these projects, with the details not being thoroughly thought through,” he told OBG. “Some projects do not make a lot of sense and appear to be more about prestige than anything else.” Van Tuijll suggested that port development would benefit from a cohesive plan for projects.
One of Indonesia’s major achievements is Jakarta’s mass rapid transit (MRT) system, the first underground rail network in Indonesia, which is a step towards the government’s goal of having 60% of travellers use public transport in Jakarta by 2030. The first phase of the project, a 15. 7-km north-south line, officially opened in March 2019. Future extensions of the MRT network include an additional 7.8 km of the north-south line, as well as a 31.7-km east-west line. The project is being developed by the local firm MRT Jakarta, with JICA providing funding. JICA has also proposed expansions to the rail-based public transportation network in Jakarta, which would see a total of 10 lines added by 2035.
However, there are challenges to implementing a project of this scale. “One of the biggest obstacles is land acquisition. The land situation is complicated and often many people claim to own one plot,” Tomoyuki Kawabata, senior representative at the JICA Indonesia Office, told OBG. According to Kawabata, plans are also being discussed to develop similar public transport systems in Surabaya, Medan and Makassar. However, he warned that in-depth studies need to be carried out to ensure that there is sufficient demand.
As the city continues to grow, officials in Jakarta have recognised the effects of heavy congestion on living standards and the economy. In May 2019 Anies Baswedan, the governor of Jakarta, issued a new decree for the implementation of transit-oriented development (TOD). TOD refers to the construction of a mixed-use community within close proximity to a transit stop and a core commercial area, aimed at boosting economic growth and improving the lives of local residents.“TOD is one component of plans to ease gridlock in the city and encourage people to use public transport instead of cars,” Muhammad Daud, policy manager at the Jakarta Governor’s Delivery Unit, a non-structural institution that assists with policy-making in the capital, told OBG. “For too long, Jakarta has been planned according to the expansion of car use, but we need to instead encourage the use of public transport.”
To this end, the Jakarta government is currently considering proposals for developments at five MRT stations, and is working with a non-profit organisation to improve cycling infrastructure. The authorities are also looking to increase car parking prices to encourage greater use of public transport.
Redrawing the Map
A major development for the infrastructure industry, and the country as a whole, was announced in 2019 when the government drew up plans to move the capital city from Jakarta to East Kalimantan, between the cities of Samarinda and Balikpapan. The relocation is expected to cost approximately $33bn, and will be funded by the state, PPPs and private investment. However, in April 2020 local media announced that the plan had been put on hold as the country shifted its focus to managing the Covid-19 crisis, although funds had already been allocated for land acquisition that year. Nevertheless, according to Sri Mulyani Indrawati, the minister of finance, the relocation may resume in 2021.
Plans to move the capital city from Jakarta – which has an official population of 10m, excluding satellite areas – have long been discussed. The city, which is located on the edge of the Java Sea, is susceptible to flooding and is sinking, largely as a result of overuse of groundwater. Java, the island on which the city is located, is also prone to tsunamis and volcanic eruptions. Therefore, there is an environmental impetus for the move as well as a spatial one. The new capital is expected to cover around 256,000 ha of land, with 5600 ha set aside for the administrative centre. Although specific plans have not yet been announced, the scale of the plans to build the new city indicates that there is a strong future ahead for those involved in the accompanying infrastructure build-out.
“The new capital city is an opportunity to show that Indonesia can design, build and operate a modern urban transport system, which includes maximum opportunities for walking,” Julian Smith, global transport and logistics leader at PwC, based in Indonesia, told OBG. “It is essential the city is designed to minimise the use of motor vehicles in order to reduce carbon emissions and environmental damage.”
The country’s ambitious infrastructure plans cannot be achieved through public spending alone and will require significant input from the private sector, particularly through PPPs. To this end, reforms have been introduced to make the business environment more attractive to potential PPP partners. In 2015 the government amended its regulations related to PPPs: these changes included an extension of the types of infrastructure projects that could be funded through PPPs, improved transparency in the tender process and a degree of clarification of land acquisition laws.
Indonesia’s Infrastructure Investment Fund was created to raise money to finance major road developments, and a similar fund was set up in July 2019 for projects under China’s Belt and Road Initiative.
Prior to the 2019 general election, questions had been raised about what a change of government could mean for infrastructure development, as the opposition had criticised the administration’s plans for not encouraging the necessary growth. President Jokowi’s re-election was therefore an encouraging sign for those who feel that infrastructure development is crucial for broader economic growth. Despite the government’s ambitious plans, a major challenge will be securing the necessary funds. This will only be achieved through significant private sector assistance, and the government must ensure it can attract a large amount of investment from private companies and development partners.
However, in the short term, plans are likely to be disrupted by Covid-19, which has significantly affected the aviation and tourism industries. Although the outlook was unclear as of May 2020, it will be vital for the country to reduce its infrastructure gap to stimulate growth once travel restrictions are lifted.
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