The ongoing drive to shift Indonesia’s economy away from raw natural resource extraction and exportation and towards more value-added industries has been gaining momentum in recent years after benefitting from solid government commitments to bolster the physical and regulatory business climate across the country.

While much of the attention of these efforts has been focused squarely on large, capital-intensive infrastructure projects such as the construction of thousands of megawatts of new electricity generation capacity, the expansion of mass transit and the building of new highways, equally, if not more, important investments are being made to bolster Indonesia’s telecommunications sector.

A vital component of modern business and particularly essential for the high-value, high-tech industries that the government is hoping to attract, improving the speed and reliability of Indonesian internet and telephony networks is a key priority for the self-professed pro-business platform of the current administration.

Planning Progress 

While financial incentives, training programmes and regulatory streamlining are a good start to driving demand for these types of businesses, little progress can be sustained without a robust telecommunication foundation to build from. An upgrade of the sector, which has historically lagged in development compared with many regional competitors, is therefore crucial for a government that has set its sights on an ambitious target of becoming the largest digital economy in South-east Asia by 2020.

This ambitious goal, which was first announced by the Governmental Public Relations Coordination Board at the end of 2015, involves the roll out of a programme that is designed to train at least 1000 technology-based entrepreneurs by 2020 in the mould of US-based tech start-ups. The scheme dovetails with the government’s high expectations for the sector, with President Joko Widodo and Rudiantara, the minister of communications and IT, both paying a visit to Google headquarters in Silicon Valley in California in October 2015 in hopes of emulating this success in Indonesia.

The government has allocated 16% of its unprecedented Rp2216trn ($161.8bn) infrastructure spending package from 2015-19 on telecommunications, extraction and social projects. This figures translates into a considerable Rp354.6bn ($25.9m) to be allocated over the five-year span, although the figure is substantially less than that earmarked for big ticket transportation builds which are projected to add up to approximately 37% of this budget, along with 26% for utilities and 21% for manufacturing, according to projections by PwC Indonesia.

Yet while these expenditures are among the lowest of any sector included in the national infrastructure plan, the smaller overall outlays also reflect the significantly lower capital expenditure associated with laying fibre-optic cables or building transmission towers compared to constructing new ports or highways. In addition, further extra-budgetary financing contributed by the private sector and the issuance of debt are expected to significantly bolster spending on infrastructure.

Raising The Bar 

This level of spending in the short term, likely followed by more investment in the longer term, is necessary to bring the unevenly distributed telecoms penetration levels up from their current state. Although many urban areas are well-served with a high degree of quick, stable connectivity for both mobile and landline, Indonesia’s geography and multitude of disconnected islands create a formidable barrier to universal access. The country has also become a victim of its own success as higher mobile penetration and a more educated, tech-savvy population are stretching limited physical infrastructure – especially hardline fibre-optic backbones – increasingly thin.

In fact, Indonesia is ranked 73 out of 139 markets included for network readiness in the Global Information Technology Report 2016”, published by the World Economic Forum, up six spots from the country’s 2015 showing. Looking more closely at this ranking, which consists of 10 different pillars contributing to an average composite score, Indonesia improved or already fared well in several areas such as business (ranked 34), affordability (ranked 38), regulatory (ranked 64), government usage (ranked 65) and business environments (ranked 65).

Yet the inverse consequence of increasing mobile use is the increasing strain this puts on telecommunication infrastructure, which proved to be the sector’s Achilles heel with a ranking of 105, far below its overall placement. Key factors bringing down this ranking were the security of internet servers (ranked 103) and speed of international internet bandwidth measured in kilobits per user (ranked 112). This puts the country on par with African nations such as Liberia and Tanzania. The poor rating for secure internet servers is less worrisome, as the statistics are measured based on secure servers per population, which places Indonesia just behind China and ahead of India as a result of the large populations of the three countries.

Linking Up 

Perhaps one of the most significant steps taken toward growing Indonesia’s performance in the telecommunications sector is the progress made in 2016 in the Palapa Ring project. As linchpin of the country’s Indonesia Broadband Plan (IBP) policy, the Palapa Ring – and it successor Palapa Ring II – were designed to bring greater internet speed and parity across the nation via a vast circular web of subsea and terrestrial fibre-optic cables stretching some 36,000 km.

The Palapa Ring project stretches the length and breadth of the archipelago nation. It is comprised of seven smaller interlocking fibre-optic rings, which are located in Sumatra, Java, Kalimantan, Nusa Tenggara, Papua, Sulawesi and Maluku.

By bringing high-speed connectivity to each of the country’s 514 districts, the national backbone would guarantee better competition for new entrants, particularly in remote areas, allow for much more affordable long-distance rates and serve as a key building block for the transition into a nationwide next generation network. In all, the Palapa Ring is expected to play a central role in providing broadband access to every district by 2019. As of 2015, 74% of all districts nationwide had access to fibre-optic networks, most of them in the more densely populated western region of the country.

Forward Motion 

Although the idea for the ambitious project was floated as far back as 1998 under a government-led initiative then known as known as Nusantara-21, the project has encountered a variety of delays, the Asian financial crisis and budget shortfalls over the years which have resulted in only fits and spurts of forward progress.

This looks to be changing in 2016 with the Ministry of Finance (MoF) signing a Palapa Ring cooperation agreement in March 2016 with the project now included among the government’s National Priority Projects within the larger national strategic infrastructure rollout. The deal marked the first instance of a government and private sector cooperation project in the telecommunications sector, granting it eligibility for special payment mechanisms.

Primary Backers 

The project is being funded partially by Indonesia Infrastructure Finance (IIF), which is tasked with providing lending to viable infrastructure projects in rupiah by raising loans in the domestic market, leveraging its strong credit rating and by providing financial products for public-private partnerships and private projects. The private financing company issued Rp1.5trn ($109.5m) worth of bonds in June 2016, in part to fund the Palapa Ring project. This most recent move by the IIF comes on top of previous financing efforts which saw the IIF disburse Rp5.5tn ($401.5m) from 2011 to 2015, of which 21% went towards telecommunications projects.

This solid financial backing has renewed interest from the private sector in the Palapa Ring project, which has been split into three separate sections – the west, central and east sections – all of which are scheduled to be completed by the end of 2019. The Palapa Ring consortium led by local telecommunications company Mora Telematika Indonesia (Moratelindo) along with submarine cable layer Ketrosden Triasmita won the Palapa Ring West tender issued by the Ministry of Communication and IT in March 2016, which covers all of Riau and Riau islands off Sumatra. The project will have a total length of fibre-optic cable of around 2000 km and is expected to come online in January 2019.

This contract was unique in that the Rp1.7trn ($124.1m) concession will be paid out under an availability scheme in which the consortium forgoes fees normally charged for access to the fibre-optic connection and instead, receives guaranteed payments from the government over the period of the concession, provided they deliver the project as specified. The government banking sector backed the deal shortly thereafter, with state-owned Bank Mandiri signing off on an Rp875bn ($63.9m) loan to Palapa Ring West in July 2016.

New Consortia 

Just five days after the Palapa Ring West tender was inked, a second Rp4trn ($292m) package was awarded a consortium led by state-owned company Len Telekomunikasi for a 15-year concession, also under the availability scheme. The Len Telekomunikasi Indonesia partnership consists of investment firm Teknologi Riset Global Investama, fibre-optic installer Sufia Technologies, shipping company Bina Nusantara Perkasa and IT service provider Multi Kontrol Nusantara. It is tasked with connecting 17 cities in Kalimantan, Sulawesi and North Maluku with approximately 2700 km of land and subsea fibre-optic cable.

As of September 2016, the government had yet to announce a winner for the final east package connecting East Nusa Tenggara, Maluku, West Papua and Papua, which is more geographically challenging and requires time to map out the optimal route through the region. Around 80% of the new cable to be laid there will be located offshore, while very little onshore fibre backbone is in place, unlike the networks in the western region of Indonesia. In addition to the physical cable-laying activities being carried out, the IBP also calls for the better use of capital assets. Among the strategies for use of fixed infrastructure are the sharing of passive infrastructure, open access and greater multi-mode access (fibre, frequency spectrum and satellite).