In the corridor: The regions are poised to experience unprecedented development

In May 2011 the Indonesian government announced its new master plan for the country’s economic development, from an emerging to an advanced economy.

This has profound implications for the country’s regional policy and its regional economies, as a major thrust of the new strategy is the creation of six, geographically focused development corridors. Each of these is based on the economic comparative advantages of the particular region the corridor encompasses, with the whole project set to advance the country into the ranks of the world’s top 10 economies by 2025.

The ambition of the programme is therefore great – if all goes to plan, Indonesia’s per capita income will be $15,000 by its end, roughly five times its 2011 level. The scheme should also resolve much of the longstanding inequalities of development between different parts of the country, with Rp4.012qrn ($401.2bn) in investment flowing into the six corridors.

FOCUS ON ADVANTAGE: The Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) was first unveiled by President Susilo Bambang Yudhoyono in May 2011.

The plan has three main, inter-related tracks: the development of the six corridors; human resources, national science and technology development; and boosted interconnectivity between parts of the country and with the wider ASEAN world.

At the same time, cutting across these three initiatives are eight main programme areas and 22 primary activities that will help focus development.

The eight programme areas comprise seven sectors – agriculture, mining, energy, industrial, marine, tourism and telecommunications – plus the development of strategic areas. The 22 primary activities are grouped under these general areas. These are: shipping, textiles, food and beverages, steel, defence equipment, palm oil, rubber, cocoa, animal husbandry, timber, oil and gas, nickel, copper, bauxite, fisheries, tourism, food and agriculture, the greater Jakarta area, the Sunda Straits strategic area, transportation equipment, and ICT.

These are the economic areas that are to become the focal points for government efforts to encourage investment. Each corridor is assigned focus activities based on the particular existing strengths of that region. The six corridors are Sumatera, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Papua-Kepulauan-Maluku.

AREAS OF FOCUS: The Bali-Nusa Tenggara Economic Corridor is set to focus on tourism – long established on Bali and more recently on Lombok – and agriculture, with the latter breaking down into fisheries and animal husbandry, two activities also already present.

The other matches between activities and corridors are: steel, shipping, palm oil, rubber, coal, and the Sunda Straits area for Sumatra; food and beverages, textiles, transportation equipment, shipping, ICT, defence equipment and the greater Jakarta area for Java; steel, bauxite, palm oil, coal, oil and gas, and timber for Kalimantan; nickel, food agriculture, oil and gas, cocoa and fisheries for Sulawesi; nickel, copper, food agriculture, oil and gas, and fisheries for Papua-Kepulauan-Maluku.

INVESTMENT & MANAGEMENT: The government expects the Rp4.012qrn ($401.2bn) in investment to be divided between the six corridors, with roughly 18% going to Sumatra, 24% to Kalimantan, 32% to Java, 8% to Sulawesi, 3% to Bali-Nusa Tenggara and 15% to Papua-Kepulauan-Maluku. Managing implementation is a new body, the Committee on Economic Development Acceleration and Expansion of Indonesia 2011-25 (KP3EI), which has the vital responsibility of coordinating all the different agencies involved.

The MP3EI plan suggests the various types of actors that are likely to be participants. According to figures from a KP3EI presentation in April 2012, only 7% of the total infrastructure investment will be directly funded by government resources. The biggest shares are expected to come from the private sector and state-owned enterprises (SOEs). The KP3EI figures showed SOEs providing 25% of infrastructure investment, the private sector 22% and public-private partnerships (PPPs) providing 19%, with a planned-for funding gap of 28%.

In addition, local government – at the provincial and district level – will be closely involved in the plan’s execution, alongside local community organisations.

These agencies will have to tackle a range of challenges, too. Many see the bureaucracy itself as the first of these, with institutional reform also part of the MP3EI. A programme of incentives will also have to be worked out and implemented for the private sector investment that is targeted, particularly in the more remote corridors. There too, substantial investment in hard infrastructure – traditionally an area the private sector is reluctant to become involved in – will have to take place, as transport networks will be necessary before many other economic activities can profitably begin.

Yet the scale of the task has not daunted the plan’s advocates, who are determined to take on what are some of the most fundamental challenges facing the country’s development, and come out on top.

PHASED APPROACH: The MP3EI sees its first, vital stage, running from 2011-15, as almost entirely devoted to legal and physical infrastructure development. Indeed, estimates from the State Ministry of National Development Planning suggest that around 45% of the total Rp4.012qrn ($401.2bn) in investment will be into physical infrastructure alone.

Characterised by the plan authorities as a “quick wins” phase, this period involves the preparation of action plans and the implementation of projects that will see a series of transport hubs established. Simultaneously, human resources and research and development capacity are to be strengthened.

The transportation side of the strategy is already under way, with this seen as a rapid-impact area for bringing in future private sector investment. A series of airport and port expansions have begun across the archipelago (see Transport chapter), including new airports in Sumatra, Papua, Sulawesi and Maluku.

The strategy sees these developments as part of building investment-focused areas, collections or clusters of private sector investments within a specific corridor. These clusters offer the benefits of economies of scale, with government investment in their hard infrastructure able to provide spin off benefits to the private sector outfits locating within them.

Phase 2, which runs from 2015-20, seeks to build on this infrastructure to develop more competitive, innovative and value-adding industries in each corridor, while continuing long-term infrastructure projects. The final phase, running up to the plan’s end in 2025, seeks to consolidate a sustainable, high-tech economy, within the world’s top 10 rankings.

Currently, the first phase is the focus, with the action plans being unrolled. Their implementation involves major efforts in coordinating overlapping jurisdictions and laws. As Indonesia has become more decentralised, implementing a central plan, like the MP3EI, now involves considerably more stakeholders.

LEGISLATION: A comprehensive legislative timetable for 2011 was thus first established, aimed at clearing the way for the MP3EI’s strategies on issues such as PPPs, land use, taxes and incentives, and the acceleration of existing sectoral master plans to become law.

Progress with this appears to have been mixed, by late 2012, although on the ground, the KP3EI reported to the local press in August 2012, 87% of projects slated for 2011 under the Master Plan were on-stream, while 59 projects had been earmarked for 2012, with 65% of these having begun by the end of June 2012.

This would indicate that some of the legislative challenges had yet to be resolved though. In particular, rezoning of areas to a new, MP3EI use, appears to be one area of contention in some corridors, as does securing land for particular projects. The plan’s commitment to environmentally sound and sustainable development has also resulted in slow progress in some areas, as ecological sensitivities are addressed. Resolving these issues is, of course, central to the success of PPP projects and private sector investment overall.

PROGRESS: The state can point to some progress being made at debottlenecking on the regulatory side, as exemplified by the 2011 presidential regulations on land acquisition issued. In the period from October 2011 to April 2012 alone, some 28 other new laws and regulations were passed in support of the MP3EI.

Given the huge size of the plan, it is perhaps inevitable that progress will initially be slow. The MP3EI has to tackle many of the issues that the country as a whole has to address, yet under an accelerated timeframe.

For the regions, the master plan also sets up some clear goals and highlights the need for good coordination between regions, provinces, national government and the private sector, as well as with other interested parties such as non-governmental organisations.

One way forward may be via revisions to regulations affecting the MP3EI’s implementation, with this a speedier route than revising laws themselves. At the same time, more rapid investment could be secured by implementing comprehensive incentives for businesses, which would be welcomed by both the local and foreign business community. For now though, much work is still to be done and much, too, remains to be gained.