How to solve Indonesia’s infrastructure crisis

Authors: Nicholas Morris and Irene Tsjin, Tusk Advisory

Indonesia faces a serious infrastructure crisis, which could slow or even halt its economic development if not addressed effectively. Today, only 81 per cent of households have modern access to electricity, only 61 per cent are connected to sanitation systems and only 69 per cent have access to clean water. Logistics costs are much higher than in neighbouring countries — average transport time per 100 kilometre is 2.6 hours in Indonesia compared to 1.4 hours in Thailand and 1.2 hours in China. And dwell time for containers in Indonesia’s largest port is eight days compared with two days in Hong Kong and 1.1 in Singapore. Power blackouts and brownouts are the norm in many parts of Indonesia, and ‘fast track’ plans for new electricity infrastructure are way behind schedule.

Over the last two years, the Indonesian planning ministry, Bappenas, has undertaken a systematic assessment of infrastructure needs. It estimates that 2650 kilometres of roads, 1000 kilometres of toll roads, 15 airports, 24 seaports, 3258 km of railway network and 35,000 megawatt power plants are needed in order to bring Indonesia up to international benchmarks suitable for a middle-income country.

Overall, including necessary improvements to social infrastructure, such as schools, health facilities and social housing, Bappenas identified a substantial funding need in excess of 4796 trillion rupiah (US$363 billion) during 2015–2019. Although substantial increases in public budgets for infrastructure have been announced by the Jokowi government, some 2817 trillion rupiah (US$213 billion) of this funding need is still to be found.

Unfortunately, Indonesia’s past performance in delivering infrastructure projects does not inspire confidence that the infrastructure gap will be filled. Poor coordination between different levels of government, long delays in permit issuance and major difficulties with land acquisition have led to major delays for even those projects where funding was available. And this has discouraged private investors from participating in public–private partnerships.

The Indonesian government, of course, recognises these problems and has taken many helpful initiatives to redress the situation. An improved public–private partnership scheme is expected to improve the situation. Greater access to government guarantees, new Viability Gap Funding arrangements and greater flexibility to bundle different types of project, will all play a role in unlocking the potential of public–private partnerships.

But the real key to accelerating Indonesia’s infrastructure development lies in a more effective implementation process for important projects. Lack of coordination between agencies and between different levels of government, combined with often conflicting regulations, has made administrative processes lengthy and labyrinthine. And, in the past, land acquisition processes have fallen foul of conflicts between ministries and have failed to achieve community acceptance.

Recognising this, the Indonesia government introduced ‘Law No. 2/2012 on Land Acquisition for Development in Public Interest’, which came into full effect in 2015. The Law outlined clear work responsibilities of each assigned institution, appointed a new National Land Agency as the champion for development, stipulated timelines, structured an accountable appraisal mechanism and facilitated land rights revocation processes.

Importantly, subsequent revisions to the Law (especially Presidential Regulation No. 30/2015) have facilitated more timely funding for land acquisition. Under the new law, private investors can provide funds at an early stage, confident that these funds will either be refunded directly or through revenue arrangements as the project proceeds. This contrasts with previous arrangements whereby land acquisition had to wait for disbursement of the state budget, which is often limited and subject to a long budgeting cycle. The new Law has already aided the development of the first section of the Palembang–Indralaya Toll Road, which was completed in less than half the original timeframe.

Permit problems have also often delayed the use of land for national projects, especially where the project crosses or utilises land allocated to forestry. In January 2015, the Indonesia Investment Coordinating Board launched a single platform for investors to apply for permits online, eliminating the past coordination problems between different ministries or institutions. Further steps are being taken to eliminate overlaps, thus shortening the application timeline.

These initiatives are crucial steps towards solving Indonesia’s infrastructure crisis, but there is still a long way to go. The sheer magnitude of the problem requires that all levels of government work together effectively, which is very difficult given Indonesia’s level of decentralisation. Finding the necessary funding will require greater active involvement from bilateral and multilateral funding agencies, as well as from domestic and international private investors. Improved communication processes are necessary to facilitate community acceptance of the need for major projects. But the initiatives taken over the past three years are definitely steps in the right direction.

Dr Nicholas Morris is Senior Research Associate and Academic Visitor at Balliol College, Oxford, and Guest Professor at the China Executive Leadership Academy, Pudong, China. He is a Director of Tusk Advisory, which supports the Indonesian government in implementation of its infrastructure masterplan, and has recently assisted the government in developing its five-year plan, RPJMN 2015-2019.

Irene Tsjin is an Engagement Manager at Tusk Advisory. She advised the Indonesian Coordinating Ministry of Economic Affairs (CMEA) on the implementation of the 15-Year Economic Masterplan. She also advised the Indonesian National Land Agency in developing guidelines and tools for implementing Law No. 2/2012 on Land Acquisition for Development in Public Interest.

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