Indonesia: Roads to the future

The development of Indonesia’s road network has not always kept pace with its impressive rate of economic growth in recent years but the government is committing substantial resources to overhauling the system, with a number of key projects under way and opportunities for the private sector growing.

On October 3, Malaysian official news agency Bernama reported that PLUS Expressways, a Malaysia-based company, was gearing up to start construction on a RM4.5bn ($1.46bn) motorway in West Java. PLUS said it had secured financing for the construction of the 116-km stretch between Cikampek and Palimanan, which will link with an existing motorway from Cikampek to Jakarta. The land acquisition for the Cikampek-Palimanan project is 97% complete, according to PLUS owner UEM Group. The motorway is part of the Trans-Java Toll Road, which will run across the world’s most populous island.

Investment in road construction is a top priority for Indonesia’s government, as it looks to upgrade the country’s infrastructure to support long-term growth. Parts of the road system are poor, and others no longer have the capacity to handle the rising volume of traffic in a country in which car ownership is on the increase. These issues are widely considered to be crimping Indonesia’s economic development, for a number of interconnected reasons. Parts of the country are poorly connected with modern road infrastructure, hampering growth, while in other areas, crowded roads cause supply bottlenecks, driving up prices. The World Economic Forum’s Global Competitiveness Report 2012-13 ranks Indonesia’s quality of roads as 90th out of 144 countries.

President Susilo Bambang Yudhoyono is well aware of these challenges and is committed to a large-scale programme of investment. The latest budget foresees infrastructure spending rising to Rp194trn ($20.16bn) next year, from the target of Rp169trn ($17.56bn) in 2012. Plans include improving 4431 km of roads.

As PLUS’s announcement shows, extra spending on transportation infrastructure is not new, and foreign companies are already involved in overhauling the road network. The government has also passed a raft of laws promoting investment in the sector, including legislation making land acquisition easier, and its Master Plan for the Acceleration and Expansion of Indonesia's Economic Development (MP3EI) puts enhancing connectivity between economic centres at the heart of long-term policy making.

The deputy minister of public works, Hermanto Dardak, told OBG there are three main priority areas for the government’s transportation development programme. The first involves improving road (and rail) connections between Jakarta and Surabaya, the country’s “second biggest economic hub”, the Cikampek-Palimanan section being part of this route.

The second key area is connecting Jakarta to Medan, a major centre in the north of Sumatra, Indonesia’s second-most populous island. This will involve developing the transport corridor through Sumatra, as well as, over the longer term, the 31-km Sunda Strait Bridge connecting Java and Sumatra, on which ground is currently slated to be broken in 2014. The bridge is billed as “Indonesia’s biggest-ever infrastructure project”, with a cost of Rp100trn ($10.39bn), according to international press reports, though some suggest the overall amount could be much higher than that. The rationale for the bridge is clear, as estimates suggest that 350,000 people and 25,000 vehicles cross the strait every day at present.

The third priority area is to work with local government to synchronise and drive forward the development of provincial and local roads and connect them to the national road network.

Through these projects, opportunities for private investors are likely to grow, both due to rise in public spending and because of the government’s increasing openness to the private sector at a time when Indonesia is also looking to reduce its deficit.

According to Jakarta-based Penida Capital Advisors, Indonesia will need $250bn of new investment in infrastructure over the next five years to continue its average 6% growth rate; two-thirds of this ($166bn), or $33bn per year, will come from the private sector.

“With limited government funds in the development of infrastructure making up only 30% of the overall needs, the role of financial institutions both domestically and internationally will be crucial,” Bintang Perbowo, the president director of Wijaya Karya, told OBG. “Infrastructure development greatly depends on the availability of funds from both local and foreign credit suppliers.”

Indonesia has made progress in recent years in rolling out the concept of public-private partnerships (PPPs) in infrastructure, including in toll roads. The Sunda Strait Bridge may also be a PPP, perhaps unsurprisingly, given its projected cost on one hand and the likely level of revenue-generating traffic on the other.

More might be done to promote private investment in road construction, including further reforms to the land acquisition law, which is still considered an obstacle for some development. The presidential regulation on land acquisition to implement the 2011 Land Acquisition Bill was signed in August. Despite setting a legally prescribed time frame for each stage of the land acquisition process, under the new rules the acquisition process may still be relatively lengthy. However, recent developments show that Indonesia is moving in the right direction in this area of national importance.