The Indonesian government sharpens its focus on new builds

A move to step up the pace of spending on infrastructure in Indonesia is beginning to yield results, in line with the government’s broader growth targets. President Joko Widodo has calculated that at least $400bn will need to be channelled into infrastructure in the current term to achieve his goal of 7% GDP growth by 2020. By contrast, in 2015 Indonesia saw GDP growth slip to 4.8%, down from 5% the previous year. While 2016’s planned record infrastructure spend has been welcomed by industry leaders, well-documented problems relating to disbursement, along with other challenges, remain a concern.

Addressing Underspends 

In recent years the government has fallen short of disbursing its allocated infrastructure budgets – spending only 84.7% of the funds set aside for infrastructure in 2014 – yet figures for the first half of 2016 suggest spending rates are improving.

The Ministry of Public Works and Public Housing had spent almost 27% of its 2016 budget at the beginning of July 2016, according to Taufik Widjoyono, secretary-general for the department, which was up from 15.5% in the same period in 2015, but still well below a first-six-month target of 42%. Widjoyono is confident that 94% of the allocation for 2016 will be dispersed, according to press reports.

The ministry’s spending on infrastructure for 2016 was cut to Rp97trn ($7.1bn), down from initial estimates of Rp104.1trn ($7.6bn). However, its allocation still represents a significant share of 2016’s record infrastructure budget of $22bn. Higher spending on new builds has been facilitated by a number of measures, which include a move to hold tenders for state projects earlier in the year and the promotion of streamlined, online disbursement systems. The government has also injected state-owned enterprises (SOEs) with cash for several infrastructure projects in a bid to enable them to access a greater number of external sources of credit and meet capital shortfalls.

Overcoming Challenges 

The uptick in spending is a promising sign. However, financing and disbursements are just some of the obstacles facing Indonesia’s building industry, with others, such as bureaucratic hurdles and slow project implementation, proving equally problematic. According to Scott Younger, director of Nusantara Infrastructure, an Indonesia-based infrastructure company, industry stakeholders have some questions about the reliance on SOEs to expedite infrastructure expansion.“Because of the general failure to expedite designated public-private partnership projects over the past eight years, the government has focused on SOEs to maintain some momentum in project delivery. These, however, are fully committed, while the volume of work outstanding and to be concluded annually to meet essential infrastructure targets is considerably greater,” Younger told OBG. “Mostly, people in the business trying to facilitate change understand this, but the bureaucratic changes required are not happening at a fast enough pace.”

The government has also implemented regulations that aim to improve Indonesia’s land clearance and acquisition process, which has affected the ability of developers to fully implement their projects. Under the land acquisition law passed in 2015, private players can finance the procurement of land and access a refund from the state budget. Revocation processes are also to be expedited under the new regulations. According to Widjoyono, the land acquisition process improved to an extent in early 2016, but fell short of expectations. “At first, we ran out of liquidity in 2016 to refund the price of land because the process was adopted and then implemented very quickly.

Later on, the Coordinating Minister of Economy and the Ministry of Finance agreed to provide additional funds for land acquisition, which can cover a large part of the budget needed and will be available in the second half of FY 2016,” Widjoyono told OBG.