The government is pressing ahead with its liberalisation drive to upgrade physical infrastructure and reduce the cost of doing business for the nation’s dynamic private sector. The Regional Long-Term Development Plan, (Rencana Pembangunan Jangka Menengah, RPJM), running from 2005 to 2024 in a succession of fiveyear strategies, provides the umbrella for developing and integrating the four main modes of transport.

The National Development Planning Agency, BAPPENAS, forecasts that if total infrastructure spending rises from 3.9% of GDP recorded in 2009 to 5.9% by 2015, GDP growth will be boosted from the current 6.1% to 7.2%. For decentralisation to succeed, connectivity is crucial. If planned projects, especially in rail, are successful, Indonesia will take a significant step forward in smoothing the flow of goods and in reducing its greenhouse gas emissions. The government’s policy has been to invite the private sector in, starting with a presidential decree in 2005 (No. 67/2005), which sets out the framework for the government’s infrastructure development partnership with private industry.

Investing in infrastructure is expected to pay dividends for the wider economy. Public capital spending grew by 28% in the 2011 budget to Rp26.6trn ($3.2bn), providing funding for 14 new airports, 85 km of railway and 2613 km of new roads. Underwriters are preparing a string of bond floats for the government to finance its share of the expenditure, starting with an Rp1trn ($120m) infrastructure sukuk (Islamic bond) in May 2011 for road and rail projects.

JAKARTA: One of the greatest challenges – and priorities – is the Jakarta Metropolitan Priority Area of Jabodetabek, encompassing key urban and industrial zones of Jakarta, Bogor, Depok, Tangerang and Bekasi. While some attempts at developing multi-modal links in the capital area have fallen through, like the $500m Jakarta monorail, others are still on the table, such as the $3bn Hydrogen Hi-Speed Rail Super Highway from Cirebon to Jakarta and Soekarno-Hatta Airport (see analysis). Wider connections with the capital are also important, with the Ministry of Transport (MoT) is also pushing ahead with a planned Trans-Java high-speed rail system that will link Jakarta to the country’s second-largest city, Surabaya, 685 km to the east. The Korean Railroad Research Institute has signed a memorandum of understanding (MoU) with the Indonesian Chamber of Commerce and Industry (Kamar Dagang dan Industri, KADIN) for the supporting feasibility study, paving the way for a $20bn high-speed train link.

“They could bring investment to Indonesia because they have a good connection and network with Korean banks and investors,” Suryo Sulisto, the chairman of KADIN, said at the MoU signing. The MoT expects to start the project in 2011, with completion set for 2020. Forecasts place initial demand at 15m passengers a year. The project will cut travel times of 10-14 hours to less than three, running at 300 km per hour.

LAND ACQUISITION: The issues of land acquisition and requirements for state guarantees have long plagued infrastructure projects. The government took over the prerogative for land acquisition from operators in 2004 but this proved insufficient to expedite projects.

After years of delays, a new law on land procurement for public interest was passed by parliament in mid-December 2011. The law will facilitate acquisition, although it will take time for the implementing regulations to be enacted. Under the new rules, the government will only have to secure 50% of the land, down from 75%, before development begins. Land values will be appraised independently, while strict time limits are placed on negotiations. Furthermore, the state will also be empowered to revoke landowner rights, which may cause resistance from landowners.

FUNDING: State banks have been reticent to meet their infrastructure loan targets, with Bank Mandiri disbursing only half of its Rp30trn ($3.6bn) target for infrastructure loans in 2010. Land acquisition is the reason most often cited for project delays or cancellations. Particularly since being re-elected in 2009, the government under Susilo Bambang Yudhoyono has expanded its infrastructure financing institutions, establishing a revolving land fund, an investment guarantee and development funds for instance. The first such infrastructure fund, SMI – also known as the Indonesia Infrastructure Financing Facility (IIFF) – was established in February 2009, while Indonesia Infrastructure Finance (IIF), a joint venture with the Asian Development Bank (ADB), International Finance Corporation and the German KfW, opened in mid-2010.

The World Bank-backed Indonesia Infrastructure Guarantee Fund (IIGF) has been operating since December 2009 – it is expected to raise $480m in World Bank AAA-rated funding by the close of 2011. The IIGF aims to be a single window for private infrastructure projects, with a scope large enough to support any project’s financing needs. The government hopes to generate more competitive bidding by private groups at concession tendering, lowering the cost of capital and lengthening maturities on debt.

Beyond this, the IIGF is designed to cover risks for private investors ranging from bureaucratic delays to covering demand risk. By providing these support structures, the federal government is strengthening and guaranteeing the infrastructure insurance market. Indonesia is also using its chairmanship of ASEAN in 2011 to drive greater region-wide logistical integration. The largest country in ASEAN is contributing a quarter of the $450m-480m needed to fund an ASEAN infrastructure fund launched in late September 2011. Structured along similar lines to the IIGF, the ASEAN fund will co-finance projects with the ADB.

PRIVATE CONCESSIONS: RPJM2, which runs from 2010 to 2014, provides for a key role for public-private partnerships (PPPs). State funds will only be able to account for about 30% of the planned $143bn investment in infrastructure in the coming five years. While such expansion may seem ambitious, it pales in comparison to India’s $1trn or China’s $35trn planned spending in the same period. Indeed, US investment bank Morgan Stanley calls for a higher figure of $250bn. Final work on the government’s PPP Central Unit and the PPP Book of Projects should be completed in 2011, providing clear long-term project guidelines to investors and would-be investors alike.

ON THE TABLE: In the meantime, a flurry of 32 projects worth a combined $15.5bn were offered to private investors in April 2011, including 10 rail projects worth $9.78bn, 13 port developments worth $2.59bn, seven airports worth $2.85bn and two road projects worth $274m. These include previously presented projects as well as new ones such as the Tanjung Priok port expansion in Greater Jakarta. The PPP offering has met with keen interest from foreign investors seeking higher returns than in more developed but less dynamic infrastructure markets. “The rate of return on infrastructure projects in Indonesia is usually higher than that in other regions, to take account of the risk profile,” Eddy Rintis, a partner at PricewaterhouseCoopers Indonesia, told OBG. In December 2010 Japan’s External Trade Organisation (JETRO) signed a memorandum of understanding for $24bn worth of infrastructure projects to be developed in the greater Jakarta region.

A master plan for the long-term development of the Metropolitan Priority Area should be finalised in May 2012 and Japan expects its firms to capture some of the business. “Indonesia will need a fund of about $120bn for the improvement of the transportation infrastructure until 2014,” said Takashi Nakayama, president director of JETRO Jakarta. Additionally, the Islamic Development Bank is devoting 26.3% of a $3.3bn soft loan programme to infrastructure development in provinces beyond the Java-Bali corridor.

Meanwhile, China’s rapprochement with Indonesia is set to continue with agreement on $10bn worth of financing, including $8bn for infrastructure projects, reached in late April 2011 during a visit by Chinese premier Wen Jiabao. Specific details on the list of projects involved are only expected later in 2011, but the new financing is set to complement the $6.6bn investment programme in roads, bridges and canals, announced in November 2010. Half of the financing will be provided by China Investment Corporation, while Industrial and Commercial Bank of China (ICBC) and ExportImport Bank of China are also involved. Part of the infrastructure is clearly driven by interest in commodities, with nine Chinese companies declaring their interest in ports and airports in Papua and West Papua in January 2011 for example. But investor interest also extends to developing Indonesia’s transport infrastructure for both passengers and goods.

PARTNERSHIPS: With investors lining up in response to streamlined regulations for PPPs, many are bullish about the prospects for profitably developing Indonesia’s transport networks. Much of the investment has historically focused on commodity extraction supply chains, yet the sheer volume of domestic transport needs is now also captivating investors.

If authorities are able to provide a strong investment framework, private funding looks set to bring new impetus to the country’s transport infrastructure, which will benefit both the sector and the wider economy.