Inadequate infrastructure has long been a challenge for Indonesia, the world’s largest archipelagic state. With more than 17,000 islands and a population of around 265m, it is probably the most complicated country in the world in terms of logistics. Since President Joko Widodo was inaugurated, transport and infrastructure investment has become a key pillar of the Indonesian government’s policy agenda. The scale of infrastructure investment under “Jokowinomics” exceeds that of previous administrations significantly.
Among the administration’s initial aims was the construction of 1000 km of toll roads, over 3000 km of railways, 15 airports, 24 seaports, 33 dams and power plants to supply 35,000 MW of energy, altogether costing some $355bn. A further 2650 km of new non-toll roads are also targeted in the government’s National Medium-Term Development Plan 2015-19. Accordingly, the budget for infrastructure went from Rp154.7trn ($11bn) in 2014 to Rp410.4trn ($29.1bn) in 2018. In his independence day presidential address to the nation in August 2018, President Widodo declared, “As a country of pluralism, we want to grow together, prosper together… one thing we may not forget is that building infrastructure projects is building the nation’s mentality and character.” His administration has plans for some 245 national strategic projects, 127 of which are under construction and at least 20 of which had been completed by January 2019. These include roads, bridges, railways and power stations. Many of these projects have, however, seen extended delays caused by red tape and insufficient financing.
The government’s efforts are gradually achieving results, with the World Economic Forum’s Global Competitiveness Index 2017-18 ranking Indonesia 52nd out of 137 nations in terms of infrastructure, a steady improvement from 2015-16, when it placed 62nd out of 140 economies. According to the Indonesia Logistics Association, the country’s logistics costs are the highest in South-east Asia, at 25% of GDP. While Indonesia ranked 46th on the World Bank’s Logistics Performance Index for 2018, a marked improvement from 63rd place in 2016, it still lags behind its neighbours Malaysia (41), Vietnam (39), Thailand (32) and Singapore (7).
Indonesia cancelled 14 infrastructure projects worth a total of Rp264trn ($18.7bn) in April 2018 due to a lack of progress. These included railways in Kalimantan and South Sumatra, as well as airport and seaport projects in Java. The minister of transport, Budi Karya Sumadi, noted that some projects had experienced problems related to land acquisition, investment and feasibility. The infrastructure push has also been impeded by safety lapses and accidents. In the six months to March 2018, 15 accidents occurred at Jakarta construction sites overseen by state-owned enterprises (SOEs). Nevertheless, these challenges are not insurmountable, and clear progress has been made in improving nationwide infrastructure over the past five years, even if some headline targets will not be met before end 2019.
Structure & Oversight
Under President Widodo, infrastructure development across the entire archipelago from Aceh to Papua has been a key focus of the central government agenda. Developing infrastructure for transport connectivity, strengthening the maritime sector, integrating remote areas, offering multi-modal transport options for logistics and improving urban mobility are all highlighted as priorities in the National Medium-Term Development Plan 2015-19. In pursuit of this aim, the state has increased infrastructure spending by around $10bn dollars annually compared to the previous five-year period. The development of infrastructure is overseen by dozens of separate government entities, most notably the National Development Planning Agency, the Coordinating Ministry for Economic Affairs, the Ministry of Finance and its Government Investment Centre, the Ministry of Energy and Mineral Resources, the Ministry of Transportation, and the Ministry of Public Works and Housing. Public-private partnership (PPP) development is supported by the Committee for Acceleration of Prioritised Infrastructure Delivery (KPPIP), formed in 2014 to expedite PPP implementation, and the Indonesia Investment Coordinating Board, which offers a one-stop centralised licensing point for investors in sectors including manufacturing, power, tourism, and oil and gas.
Dozens of SOEs are also active in infrastructure development and financing. Sarana Multi Infrastruktur (SMI), for example, finances major infrastructure projects. SMI was established in 2009 to provide financing, project preparation and advisory services. It supports PPPs through partnerships with private and multilateral lenders, and its mandate includes both hard and soft infrastructure projects.
The company was financed through Rp1trn ($70.9m) of government equity, with the World Bank and the Asian Development Bank (ADB) both providing separate $100m loans. SOEs are involved in about 80% of all projects. According to the Ministry of Public Works and Housing, only about a fifth of infrastructure investment is from the private sector. Most of the government’s construction projects are undertaken by state-owned builders, including Waskita Karya, Indonesia’s largest contractor. Although it has pushed for greater use of PPPs, the current administration has ensured a key role for SOEs in fulfilling the infrastructure mandate, having seen the former administration of Susilo Bambang Yudhoyono make little progress in developing toll roads, ports and railways through the private sector during his eight-year term. State-owned company Jasa Marga has been responsible for the construction and operation of many toll roads in Indonesia since 1978. In 2018 it reported it would be operating nearly 1000 km of roads by the end of the year, an increase from 787 km, as it completed the Batang-Semarang, Salatiga-Kartasura, Wilangan-Kertosono and Gempol-Pasuruan sections of the Trans-Java Highway.
“Inadequate infrastructure is the most widely cited constraint to faster economic growth,” said a Lowy Institute report on Indonesia from August 2018, citing road, port and airport congestion, as well as frequent power shortages and insufficient access to modern water and sanitation systems. Financing of projects continues to be a challenge. In early 2018 the government was still seeking around $157bn to fund the $327bn infrastructure pipeline, with just $15bn allocated from the state budget for these priority projects, with the bulk of investment commitments having come from the private sector, including overseas investors.
The ADB reports that regional and city governments continue to rely on budget transfers from the central government for 70-80% of funding for local infrastructure projects. With per capita public capital stock at only a third of other emerging economies and an eighth of advanced economies, the World Bank estimates that Indonesia has an infrastructure gap of $1.5trn, and the central government does not have the means to shoulder the burden of financing the projects needed to address a deficit of this size. Land acquisition has historically been a major challenge for infrastructure development, especially in densely populated Java. Landowners often report being offered only a fifth or a quarter of the market value of their land by the government. A land acquisition bill passed in 2011 has provided a “more efficient and equitable legal framework for land acquisition for the construction of transport infrastructure”, according to the ADB. “Land acquisition continues to be an issue and can lead to long delays with many infrastructure projects,” Virda Dimas Ekaputra, former president director of West Java Kertajati International Airport, told OBG. “The improvement and advancement of land acquisition procedures between private players and provincial governments will greatly expedite the development of toll roads and other transportation projects.”
However, land acquisition is only part of the picture when it comes to delays in infrastructure construction. Another factor is the unwillingness of some licence holders to invest in the projects they have tenders for, often because of financing issues. Complicated local government regulations form another hurdle for PPP development, while rapid urbanisation and Indonesia’s vulnerability to climate change and natural disasters pose further challenges. Infrastructure investments have not accelerated wider GDP growth in the way that the government had hoped; the infrastructure budget for 2017 increased by 177% compared to 2014, yet GDP growth and employment opportunities lagged behind expectations.
The World Bank has recommended leveraging private sector investment to meet Indonesia’s large infrastructure needs more efficiently and effectively. As part of its concerted efforts to address the national infrastructure deficit, the Widodo administration has increasingly promoted PPPs. While Indonesia does not have the financial means to address its infrastructure deficit through public funds, the private sector can also be hesitant to invest because the cost-benefit case is not always convincing. To address this, the government has created the aforementioned KPPIP, which aims to overcome bottlenecks in priority projects.
Meanwhile, the adoption of new financing mechanisms, including the availability payment scheme (APS), should further incentivise PPP investment and development. The APS was introduced by the Ministry of Finance, and involves periodic payments by the relevant public body to the implementing enterprise for infrastructure delivery based on quality and criteria stipulated in the PPP arrangement.
In October 2018 Indonesian officials unveiled 79 infrastructure projects worth $42bn as part of the Indonesia Infrastructure Investment Forum, held on the sidelines of the IMF and World Bank meetings in Bali. The projects, which will be undertaken in partnership with SOEs, cover a number of sectors, including transport, energy and industry. In addition to unveiling the projects, the government used the forum to encourage SOEs to make greater use of equity-based finance to fund infrastructure projects. “Looking ahead, we will also encourage direct investment, strategic partnerships and innovative long-term project financing,” Rini Soemarno, the minister of SOEs, told forum delegates. The World Bank has recommended that Indonesia improve its complex legal and regulatory environment for PPPs, project planning and selection processes, as well as the transparency and efficiency of SOEs that dominate the infrastructure sector, and the depth of local banking and capital markets. Meanwhile, further efforts to improve tax collection and recover unpaid taxes are likely to translate into increased public funds becoming available for infrastructure development. In its 2019 economic outlook for Indonesia, the OECD concluded that “improving tax compliance, by investing in tax administration, would help fund infrastructure and social outlays”.
FDI & Project Finance
While the Widodo administration has somewhat loosened restrictions on FDI to encourage finance for its infrastructure projects, the OECD ranked Indonesia as the third-most restrictive country in terms of FDI out of 68 economies in 2017, ahead of only Saudi Arabia and the Philippines. Singapore remains the most important provider of FDI to Indonesia, and Japan has historically been a major investor in local infrastructure development; however, under the current administration, China has been increasingly courted to fund infrastructure projects. The country has invested heavily in Indonesia’s electricity sector, including through financing the construction of power plants and ports. Ridwan Djamaluddin, the deputy for infrastructure at Indonesia’s Coordinating Ministry for Maritime Affairs, announced in late 2018 that the government was offering new projects worth up to $60bn to Chinese investors in the hope of capitalising on the Belt and Road Initiative (BRI). These include four hydropower plants in the province of North Kalimantan on Borneo with a combined value of $35bn. This follows a trip to Beijing in April 2018 by Luhut Panjaitan, coordinating minister of maritime affairs, seeking to attract investors to projects including airports, special economic zones and a hydropower plant, based in locations as varied as Kalimantan, Sumatra and Sulawesi. A major challenge is that many private investors only want to back projects in Java, the most populous and prosperous island. Weak rule of law, protectionist rules and regulatory ambiguities have historically deterred foreign investors in regions perceived to carry more risk. One signature BRI project planned in Indonesia is the 142-km, high-speed railway between Jakarta and Bandung, the first of its kind in South-east Asia. It is being funded primarily by loans from the China Development Bank and developed by China Railway Corporation (CRC). While the project has been stalled by land acquisition challenges, the CRC reported in mid-2018 that progress had been made at 22 key construction sites. The train is slated to have a maximum speed of 350 km per hour, which will cut the travel time between the two Java metropolises to just 40 minutes. According to Julian Smith, global transport and logistics leader at PwC, however, such a high maximum speed may not merit the level of investment needed to achieve it. “The economic case for high-speed rail to Bandung is very strong, though for such a short journey, the project could be optimised at less than 350 km per hour,” he told OBG.
In 2018 Indonesia said it would seek to partner with Japan on a 40-km access road in West Java connecting Patimban Port in West Java and a 90-km toll road on the island of Sumatra, costing some Rp4trn ($283.6m). South Korea and India have also been important investors in infrastructure.
Public Transportation Provision
Over half of Indonesia’s 265m people now live in cities. The Greater Jakarta area, a mega-city with a population of roughly 30m, is notorious for its traffic jams. According to the TomTom Traffic Index of 390 global cities, which uses data from satellite navigation devices in vehicles, it is the third-most congested city in the world behind only Mexico City and Bangkok. Despite the clear need for alternatives to private vehicles, public transport development in Jakarta has lagged significantly behind other regional capitals like Bangkok, Singapore and Kuala Lumpur. There has been a steep increase in the number of private vehicles on the roads in recent decades, from 30m in 2004 to 125m in 2016. As such, there is an urgent need for public transport projects to alleviate road congestion and the problems it creates in terms of economic productivity and quality of life. Jakarta’s bus rapid transit (BRT) system was developed in the early 2000s under its then-governor, Sutiyoso, inspired by the TransMilenio system in Bogotá, Colombia. It transports more than 650,000 people every day on more than 125 routes, and is affordable, at just Rp3500 ($0.25) a ride. The electric multiple unit commuter rail system, known as the KRL Commuterline, also serves the Jabodetabek (Jakarta, Bogor, Depok, Tangerang, Bekasi) metropolitan area. These transport systems will be greatly complemented by upcoming light rail transit (LRT) and mass rapid transit (MRT) projects (see analysis), with the government committing to integrate the various forms of public transport in Greater Jakarta by 2023/24. However, planning and implementation of transportation infrastructure in Indonesia remains “unduly bureaucratic and cumbersome”, according to the ADB.
Indonesia’s aviation market is one of the fastest growing in the world, with domestic traffic increasing three-fold from less than 30m in 2005 to almost 97m in 2017. It is now the fifth-largest aviation market after the US, China, India and Japan, with a forecast total of 242m passengers by 2035, according to the International Air Transport Association. Accordingly, the Widodo administration has prioritised airports as part of its infrastructure push. As of June 2018, according to the Ministry of Transportation, 70% of commercial airports were operating over capacity. Domestic air travel still accounts for around 75% of passenger traffic in Indonesia, according to the Centre for Aviation, although international traffic is growing. Indonesian airports handled some 34m international passengers in 2017 and Indonesian airlines experienced 20% annual growth in foreign travellers that year. There are 29 international airports in Indonesia, with Jakarta’s Soekarno-Hatta accounting for 43% of international passengers and Bali’s Ngurah Rai Airport accounting for 32% in 2017. The Surabaya and Medan airports, meanwhile, made up just 6% and 7% of passengers, respectively.
International Air Travel
Soekarno-Hatta International Airport has benefitted from the recent construction of Terminal 3 Ultimate, which has the capacity to handle 25m passengers per year, boosting the airport’s overall capacity to 70m. The government is now shifting its focus to developing and upgrading airports outside of Jakarta, and financing gaps represent lucrative opportunities for potential investors. There are plans to develop 10 new airports with assistance from the private sector. This should support long-term aviation growth, ease bottlenecks at existing airports, and facilitate the growth of second- and third-tier cities. Kertajati International Airport in West Java, some 68 km east of the provincial capital Bandung, opened its first phase in May 2018 when the president’s aircraft, Indonesia-1, touched down.
The Rp4.6trn ($328m) airport is to be built in four stages and will serve the 46.5m residents of West Java – Indonesia’s most populated province. Kertajati will also boast an aerocity with residential, commercial and industrial areas, but the project has attracted some criticism for being far from other urban areas. If fully completed according to current plans, in 2036 it will have a total capacity of 29m passengers annually. Official estimates show that the cargo terminals will have a capacity of 1.5m tonnes by 2020. “Not only will the new airport cater to the needs of passengers from around the province as the major hub for auto, train, and air transportation, but it should also further enhance domestic and international trade,” Ekaputra told OBG, highlighting the ease of access from Kertajati to the new seaport at Patimban.
The Indonesian archipelago boasts more than 100 commercial ports; however, most of these are built to accommodate smaller vessels for domestic trips and only a handful have container facilities.
Indonesia and India pledged to scale up their maritime cooperation during a visit from India’s Prime Minister Narendra Modi to Jakarta in 2018. The two agreed to develop infrastructure and an economic zone at Sabang’s deepsea naval port on Sumatra, at the mouth of the Malacca Strait, one of the busiest shipping channels for global trade. Although firm plans for the joint development of the strategic port had not been announced as of February 2019, previous Indonesian government announcements indicate that it would be developed as a trans-shipment port over two years, with the capacity to accommodate commercial vessels and submarines. Tanjung Priok Port in North Jakarta handles more than 50% of the total goods that are exported out of and imported into Indonesia. Prior to the development of the New Priok Development Project, Tanjung Priok’s Customs processes took six times longer than in Singapore, and the port was infamous for being one of the least efficient in South-east Asia. The project is being developed in multiple phases, culminating in completion in 2023. The first phase was completed in 2016, with the opening of the New Priok Container Terminal 1, which added 1.5m twenty-foot equivalent units (TEUs) to Priok’s existing 7m-TEU annual capacity. When fully complete in 2023, the port’s capacity is expected to have tripled to 21m TEUs. The port’s state-owned operator, Indonesia Port Corporation, known as Pelindo II, is expected to invest $2.5bn to realise the project. Financing will come from Pelindo II’s own resources, national and international loans, as well as funding from shipping and port operators.
In May 2018 the Ministry of Transport announced that three Japanese and two Indonesian companies would be building a new, Japanese-funded port at Patimban, on the northwest coast of Java, around 150 km east of Jakarta. A $1.2bn contract was awarded to the consortium, with the $3bn port expected to have an annual capacity of 7.5m TEUs when complete in 2027. It is intended to become a trans-shipment hub for South-east Asia, relieving pressure on Tanjung Priok and supporting the growth of export-oriented manufacturers in the Karawang industrial area.
Elsewhere, Makassar New Port in South Sulawesi is scheduled to begin operations in 2019. Constructed on 60 ha of reclaimed land in the largest city in eastern Indonesia, a traditional maritime trading hub, construction costs for the port have reportedly reached Rp1.6trn ($113.5m). It will be linked with a logistics zone via a 150-km railway network from Makassar to the town of Pare Pare, which is still under construction. While the project was running behind schedule in late 2018 due to funding constraints, with 40 km of rail tracks built at that stage, the Ministry of Transport awarded a PPP to a consortium of Chinese and Indonesian state-owned companies in early 2019 to complete the project and maintain it for 20 years.
Rail projects outlined in Indonesia’s Medium-Term Development Plan 2015-19 include 3258 km of newly built or rehabilitated rail lines, made up of 2159 km of intercity railways and 1099 km of urban railway. Rail passengership has risen significantly in recent years, with Statistics Indonesia (BPS) reporting that total rail passengers increased from 202m in 2012 to 393m in 2017. In 2018 the Indonesian government sought further Japanese loans and private capital for a $4.5bn rail project in Java, involving upgrading 750 km of track on the Jakarta-Surabaya line and building some 300 flyovers. The Trans-Java railway upgrade would halve the travel time between the capital and Java’s second-largest city to about 5.5 hours. Japan’s involvement in the planned mega-project is widely viewed as consolation for losing out to China in the 2015 tender to build the high-speed Jakarta-Bandung rail link. The Trans-Java rail upgrade has been under discussion since 2016, when the cost was estimated at between $2.5bn and $3bn.
The National Medium-Term Development Plan 2015-19 envisions a total of 2650 km of motorways, including 1000 km of toll roads, which have become a favourite option of the government as it seeks to improve road links without assuming financial risk. A total of 332 km of toll roads were added to the national network between 2015 and 2017, with a further 136 km added between January and September 2018. Another 473 km were expected to be added to the toll road network before the end of 2018 as 13 major projects neared completion.
President Widodo inaugurated four sections of the Trans-Java Toll Road network in December 2018, marking the connection of all toll roads between Jakarta and Surabaya, totalling a length of 741 km. When fully complete, the Trans-Java Toll Road network will span from Merak in Banten to Banyuwangi in East Java. “The Trans-Java Toll Road from Merak to Pasuruan was completed ahead of schedule in 2018 because of tight monitoring by the government,” Djap Tet Fa, president director of Astra Infra, one of the main private investors and operators of the project, told OBG. “The Trans-Sumatra connection between Aceh and Lampung would also be a great attraction for both foreign and domestic investors,” he added.
With elections scheduled for April 2019, a change of government could pose a downside risk to infrastructure project continuity — particularly if public debt and Chinese funding emerge as contentious issues, as was the case in the 2018 general election in Malaysia. The opposition has at times criticised the infrastructure push, arguing that it has failed to invigorate the consumption-driven economy to the level of growth envisioned. The Widodo administration’s infrastructure drive never managed to deliver the ambitious 7% GDP growth it promised, instead averaging around 5% since he took office in 2014. Nevertheless, clear progress has been made in addressing the infrastructure deficit and improving the bankability of projects. If President Widodo wins another term, his administration is expected to renew efforts to encourage private sector involvement in expanding the transport network and addressing infrastructure gaps. Whether President Widodo or his challenger emerges as the occupant of Merdeka Palace, the coming administration will have to face the challenge of catalysing and attracting private investment in much-needed infrastructure programmes without taking on unsustainable debt burdens.
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