By Agung Cahaya Sumirat (Sesparlu 54 #8 blog)
Source pic:http://cdn.klimg.com
Indonesia has to redouble its focus in infrastructure development if it really wants to boost a long-term growth and enhance its competitiveness. Compared to other emerging economies, Indonesia is now lagging behind in many parameters of infrastructure capacity. Based on the World Economic Forum’s (WEF) Global Competitiveness Index (GCI) in 2015-2016, Indonesia’s rank has been on the 37th, dropping off from its 34th position of the previous year.
Under such circumstances, Indonesia is also facing an inter-regional infrastructure gap particularly between Java and the other non-Java regions. 70% of overall financial circulation has centered in Java. Rice, gasoline and cement are much more expensive in eastern Indonesia than in Java or Sumatra due to expensive transportation costs. How can Indonesia enhance its infrastructure capacity while facing this pressing complexity?
Lack of infrastructure has made Indonesia’s logistics costs very high. This in turn has contributed to reducing the country’s competitiveness and attractiveness to potential investment. More or less 17% of a company’s total expenditure is used for logistics cost, mainly for land and sea transports. While in other regional economies, the average logistics cost is already below 10%.
However, the most pressing challenge in infrastructure development is the limited sources of financing. Indonesia needs 450 billion USD to develop its infrastructure in five years’ term. The government expects to finance 50% of this figure while the rest should come from private sector. As a matter of fact, it is not easy to seal the deal on the private sector’s investment. Indonesia has to compete harder with the other “thirsty” Asian countries to tap as much as source of investment. Asia countries need 10 trillion USD of infrastructure financing in the next ten years.
Positive Trends
The Indonesian Government has shown a strong commitment to develop infrastructure particularly roads and ports. The Government has an additional financing of 230 trillion rupiah (about USD 8 billion) from halting policy of fuel subsidies. 60% of that figure will be spent on infrastructure development. It has also allocated 100 trillion rupiah to the Ministry of Public Work to execute infrastructure development programme.
The Government has increased the village fund allocation in the state budget from 20.7 trillion rupiah in 2015 to 46.98 trillion rupiah in 2016. This aims at creating a positive economic cycle in the villages.
Furthermore the Government has established a national infrastructure plan which has been laid out in the 2015-2019 National Medium-Term Development Plan. This covers among others the production of 35,000 megawatts of electricity in the next ten years, the development of 1,095 km of new toll roads, 5,000 km of railways as well as 15 airports and 24 seaports development in the next five years. The projects will be concentrated in six “economic corridors” of Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Tenggara, and Papua-Maluku.
While in boosting the scheme of Public-Private Partnership (PPP), the government has amended the law on PPP which aims at improving transparency and clarity in the tender process of infrastructure projects. It has also established the Indonesia Infrastructure Guarantee Fund to arrange government guarantees for PPP projects.
The Parliament has passed the Land Acquisition Law which allows the government to obtain civilian land for public works projects. The law also provides adequate compensation to the land-owners.
Possible Options
Considering the on-going positive trends in enhancing infrastructure development, there are options to be considered for the next policy follow up namely:
First, Indonesia should enhance its international networking to obtain alternative sources of funding including through Asian Infrastructure Investment Bank (AIIB). Indonesia has an adequate bargaining on AIIB since it is a founding member of the AIIB. The AIIB is set to focus on infrastructure projects of larger scale, such as toll roads and seaports. This may fit in the Indonesia’s infrastructure development priority. The AIIB can complement the existing multilateral financial institutions like the Asian Development Bank (ADB) and the World Bank.
Second, there is a need to follow up the President’s commitment to allocate 60% of the national budget to support the eastern part of Indonesia’s development. Out of 122 of impoverished regencies or “kabupaten”, 83 of those are in eastern Indonesia. It therefore needs a strong political will to realize this commitment.
Third, there is a need to realize the political will to de-regularize policies which inhibits development process, particularly the reduction of 42,000 regulations as mentioned by President Jokowi. In the same spirit, there is also an urgent need to improve harmonization of policies and coordination among government’s stakeholders in facilitating investment potentials.
Conclusion and Recommendation
Attracting investment in infrastructure sector means that the Government needs to push more for creating a conducive investment climate. Indonesia needs to send a strong message that it really means business. Otherwise, the business circle will not see any lucrative point out of the government’s serious efforts.
In that regard, I would pick up the third option as the preferred recommendation. The Government needs to continue its deregulation policy. The main source of the lack of infrastructure investment has been on the excessive and overlapped of regulations. Scrapping the excessive regulations should be the first priority. Since tackling this problem will not only be able to enhance policy coordination among various government agencies, but this will also enhance much bigger opportunity for investment including for the remote places and eastern part of Indonesia.
Jakarta, 8 April 2016
AGUNG CAHAYA SUMIRAT 