Indonesia: Projects in the pipeline

With several major infrastructure projects slated for 2013-14 and a land acquisition reform bill waiting in the wings, Indonesia is clearly working to address one of the most severe restrictions to its competitiveness. The bill will help clear away obstacles for the many public works in the pipeline, but significant legal and financial obstacles remain that will continue to slow growth.

Indonesia’s House of Representatives passed the Land Acquisition Law in December 2011, finally bringing clarity to the complex process of appropriating land for public infrastructure projects. The bill shortens the timeframe for deciding on a project’s location and compresses the appeals and compensation period. The new law applies directly to government projects only, but it allows for public-private partnerships (PPPs) on state-owned land. It will be particularly useful for the construction of toll roads and railways, for which land acquisition has historically been a lengthy process.

Implementation of the reforms has been delayed, however, by the absence of a presidential regulation that would finalise the legal changes. The government had planned to issue such a regulation in March, but the announcement was pushed back to June, and has yet to materialise.

Indonesia has long suffered from infrastructure woes, both in absolute terms and in relation to its neighbours. Indonesia ranks 75th on the World Bank’s Logistics Performance Index (LPI), well behind ASEAN competitors such as Singapore (2nd), Malaysia (29th), Thailand (35th), the Philippines (44th) and Vietnam (59th). Some 83% of respondents to the LPI survey described Indonesia’s roads, railways and airports as being of low or very low quality, compared with around 54% of East Asia and Pacific respondents. Only 33% reported significant progress in infrastructure since 2005.

The deficit has been compounded by chronic shortfalls in government spending. In 2011, for example, the government spent Rp141trn ($14bn), or about 2.1% of GDP, on infrastructure, according to the Indonesian Institute of Sciences. In comparison, China allocates around 9%. Mismanagement and red tape has led ministries to underspend their budgets, and a disproportionate amount of the total that does get spent goes to consultants and other overheads.

In his 2009 re-election campaign, President Susilo Bambang Yudhoyono promised to unleash spending of $140bn on infrastructure over five years, but financing troubles and issues with regulation have disrupted this plan. Eliciting support from the private sector, which is supposed to provide the bulk of the investment through PPPs, has been tricky. Banks have been reluctant to commit massive funding upfront to projects with multi-decade repayment plans.

A May 2011 report from Morgan Stanley, however, showed a rosy forecast for the sector, anticipating a 20% compound annual growth rate in infrastructure spend over the next five years, for a total of $250bn. The report highlighted a number of promising signs, such as a series of pro-investment regulatory reforms and a supportive macro environment, with a rapidly growing economy insulated from external shocks through its reliance on domestic growth.

The passage of the land reform bill is thus one of several indicators that the bottlenecks in developing Indonesia’s infrastructure are being removed. The progress of several large-scale projects will help determine how successful these reforms have been. Two projects that have already been given the green light – a water delivery system in suburban Jakarta and a huge power plant in Java – may show the way forward. Both were privately funded, but are underwritten by Indonesia Infrastructure Guarantee Fund, a government entity created to facilitate these types of PPPs. For the power plant, this means that the government will step in with funding in case the electricity purchaser, state electricity company Perusahaan Listrik Negara, cannot meet its obligations.

Other projects are slowly gaining traction, such as the long-awaited rail link to Soekarno-Hatta International Airport in Jakarta, due to open in 2013. Thanks to a presidential regulation issued in December 2011, the state-owned railway Kereta Api Indonesia will connect Manggarai station in South Jakarta to the airport by extending current lines. A planned express train will take a second route and will be offered under a PPP scheme, but construction on that is not expected before 2013-14. Toll roads in Jakarta and Sumatra are also in the works, and the final implementation of the land acquisition law would assist in speeding up these projects.

The IMF recently called upon the government to show stronger commitment to infrastructure, suggesting that passage of the land bill was one way forward. The IMF’s comments also highlighted the crowding-out effect of burgeoning fuel subsidies, which totalled Rp124.4trn ($12.4bn), dwarfing the Rp30.6trn ($3.1bn) allocated for infrastructure, according to the Ministry of Finance. However, while the pace of implementation remains slow, the importance of infrastructure development is clear, and steps are increasingly being taken towards expediting the highest-priority projects.