June 9, 2016 12:00 pm JST

Jokowi's reform efforts are beginning to pay off

KEN KOYANAGI, Editor-at-large, Nikkei Asian Review and WATARU SUZUKI, Nikkei staff writer

Soekarno-Hatta International Airport's new Terminal 3 is nearly complete and will be partially operational in June. (Photo by Keiichiro Asahara)

JAKARTA -- It has been a quarter century since a new international airport terminal was built in Indonesia's capital; the need for better facilities is badly straining the city's air transport. Now that bottleneck is about to be eased.

Construction of Soekarno-Hatta International Airport's Terminal 3, dubbed "the Ultimate," is nearly complete, with the new facility scheduled to begin handling flights later in June. In both style and function, the terminal is designed to be the equal of its state-of-the-art counterparts around the world.

"We will certainly start commercial operation this month, with a small number of daily flights at first. We will increase the number of flights and airlines step by step," Budi Karya Sumadi, president of state-run airport operator Angkasa Pura II, told the Nikkei Asian Review inside the nearly complete terminal building on June 3.

About 19 months into President Joko Widodo's term, improvements to the country's creaking infrastructure and other structural reforms are finally beginning to bear fruit. Jakarta airport's Terminal 3 is one sign of the progress.

Back in August 2012, Widodo's predecessor, Susilo Bambang Yudhoyono, broke ground on the new terminal. But construction did not really get rolling during his presidency due to delays in land acquisition and red tape. At the end of Yudhoyono's term, many expected Terminal 3 to be completed no sooner than early 2017, more than one year behind schedule.

Widodo wanted to pick up the pace. Soon after his inauguration, he appointed Sumadi, whom he had worked with in his previous post as Jakarta governor, to head AP II. Sumadi is a man with a track record of speedy project management and was able to reignite the Terminal 3 project. Now he is about to fulfill Widodo's wish to move the opening up from 2017 to mid-2016.

God in the details

The first year of Widodo's presidency highlighted the difficulty of putting reforms into practice in a large and complex country. In his second year, he is delivering visible results.

Epitomizing the new government's early struggles were rules issued last June by the Ministry of Manpower and Transmigration. These required Indonesia-based companies and foreign representative offices to hire at least 10 Indonesians for every foreign national employed, and that nonresident directors of such companies get a work permit.

Foreign businesses protested that the regulations were unrealistic. Widodo had the ministry scrap them by the end of 2015.

Since last September, the Widodo administration has announced 12 separate reform packages covering 203 business regulations, including licensing and administrative procedures, taxation, subsidies, minimum wages and energy pricing.

Euben Paracuelles, an economist at Nomura, sees this bottom-up, God-in-the-details approach as a plus. "The specificity gives better visibility of progress for each item, hence a better chance of actual implementation for the entire reform," he said in late May.

According to the Coordinating Ministry for Economic Affairs, 194 of the 203 regulatory changes had been completed as of May. Among the reforms, the changes to foreign ownership rules are probably the most significant. Soon after taking office, Widodo committed to adding 35,000 megawatts of power generation capacity, 1,000km of toll roads, 24 seaports and other big projects during his first term, which ends in 2019. He has put a price tag of 5,400 trillion rupiah ($397 billion) on the projects, and wants around 80% of the funds to come from the private sector. Overseas investment is crucial to keeping that promise.

The revised foreign ownership rules -- the so-called negative list -- announced in February and signed by Widodo in May reduces the number of restricted sectors from 664 to 515, scraps regional government controls in 18 sectors and raises the foreign ownership cap in dozens of others, including hotels, travel agencies and department stores.

Tip of iceberg

To ensure effective reform of investment rules and procedures, the role of the Investment Coordinating Board, known as BKPM, has been strengthened with one of those 12 packages. The board operates directly under the president and is the go-to authority for permits. The measure has had BKPM start offering a service that grants basic licenses for large investments within just three hours.

For all the progress made so far, the reforms have only scratched the surface. The World Bank estimates there are more than 12,000 national-level regulations affecting business in Indonesia. The reforms cover less than 2% of the total. Even after the reforms, the negative list still restricts foreign investment in more than 500 sectors. "Though things have improved, it is still cumbersome and time-consuming to complete all the procedures required to do something new," a Jakarta-based executive with a foreign carmaker said in late May.

The World Bank also estimates the country's infrastructure capital stock declined from 49% of gross domestic product in 1995 to 38% in 2012, highlighting the backlog of projects that must be cleared simply to maintain the current level of productivity. Another study finds only 10% of Widodo's 35,000MW target for new generating capacity will be reached by the end of this year.

"Reform efforts should be continued," said Tatiana Nenova, an economist at the Bank's Jakarta office, in late March.

The good news is that central government investment rose 42% on the year in 2015, thanks to higher funding disbursements in the second half of the year, particularly in the final quarter. This is one more piece of evidence that Widodo's reforms are producing results. The infrastructure shortfall should begin to shrink. In addition to public investment, however, the World Bank's March report on Indonesia pointed out that more private investment is critical to even just maintain 5% annual GDP growth.

Paracuelles and his colleagues at Nomura predicted in their May report that steady implementation of the reforms could lift the country's potential growth rate well above its 6% average for the five years through 2015. According to the report, the country's total public and private investment was equivalent to 23% of GDP over the last decade, and actual economic growth fell well short of the potential growth rate. If the Widodo administration can raise that ratio to 30%, reform the central and regional governments and streamline regulations, the Nomura report says, Indonesia's potential and actual growth will both rise to 7.0-7.5%, putting them on a par with other big emerging economies like China and India.

Indonesia's "demographic dividend" -- in which the falling birthrate rapidly expands the country's working-age population relative to the number of elderly and children -- is only expected to last another 10 to 15 years. It therefore must accelerate the growth of a diverse business base and raise productivity, both through more public and private investment and further government reforms. Assuming Widodo wins a second term through 2024, the changes he makes over the next eight years will define the nation's well-being for generations.

Nikkei staff writer Bobby Nugroho in Jakarta contributed to this article.

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