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Economy

New Indonesian airport to test limits of regional development

Private-sector role unclear despite $23bn funding gap

The Kertajati airport in West Java, slated to open in mid-June, was "90% done" as of late February. (Photo by Takaki Kashiwabara)

MAJALENGKA, Indonesia -- Rice fields and a large population of sheep used to be the main features of this remote part of West Java, about 180km east of central Jakarta. Now, a large international airport is seeking to turn the region into an economic hub by luring businesses from the industrial areas near the capital.

The Kertajati International Airport is racing to open its doors before the Idul Fitri holiday mid-June, when millions of Indonesians return to their hometowns to mark the end of Ramadan. The deadline appears extremely tight -- when the Nikkei Asian Review reporters visited the site on Feb. 28, the exteriors of the terminal, with designs resembling feathers of a peacock, as well as a nearby access road, were still being built.

"It is 90% done ... I am optimistic" of hitting the June target, said Virda Dimas Ekaputra, president of the operator Bandaraudara Internasional Jawa Barat.

The project is more than just another airport. Majority of BIJB is owned by the West Java provincial administration, marking the first time that a local government is taking the lead in an airport project. Investors are watching closely to see if this is a baby step toward a broader deregulation of the airport sector, currently under a virtual monopoly by the central government.

That will unlock opportunities in the country's fast-growing aviation industry where $22.9 billion in airport infrastructure investment is needed until 2036, according to Nomura. 

The Kertajati airport will have a capacity to accommodate up to 2.7 million passengers per year. It is being built on 1,800 hectares of land, an area slightly larger than the Soekarno-Hatta International Airport, Indonesia's main entryway. The first phase of development, which costs 2.6 trillion rupiah ($190 million), will feature a single 3,500-meter runway that can handle at least 14 routes. The 96,000 sq. meter terminal will feature a peacock garden and other small attractions. 

The project had faced years of delays since it first kicked off in 2009 due to funding issues. Ekaputra said the West Java-lead program enabled the company to revive the project in late 2015 using bank loans and the West Java budget. If executed well, the program has the potential to provide a new source of income to local governments, helping spur employment and investment.

"We hope that this will become a new economic driver for West Java," Ekaputra said.

Indonesia's slow pace of development has increasingly clogged airports amid a rapid growth in air travel. Soekarno-Hatta handled 63 million passengers last year, exceeding its capacity of 43 million passengers despite a new terminal being opened in 2016.

"Soekarno-Hatta is too crowded, so we hope Kertajati can ease congestion especially during the holiday season," said Benny Butarbutar, a spokesperson for Citilink, the budget airline arm of flag carrier Garuda Indonesia.

The government has indicated that it is considering calling for private-sector involvement for the expansion of a few airports, such as the Kualanamu International Airport in North Sumatra. But so far, investors are unconvinced.

Foreign ownership of airports is capped at 49%. Plans to invite private-sector companies to invest directly in the Kertajati airport were scrapped after the Ministry of Transportation decided to resolve a last-minute funding crunch with an injection from Angkasa Pura II, one of two state airport operators, and a mutual fund managed by a state-owned securities company.

"The government was concerned over what private investors will do if they take control," said one senior manager at a large Indonesian conglomerate interested in entering the sector.

Development of regional airports like Kertajati is key if Indonesia wants to spread growth to regions and plug income inequality.

Manufacturing companies in Jakarta's nearby industrial areas are already feeling the pinch of rising wages and worsening congestion from the capital. While this is good news for regional development, alternatives are scarce due to a lack of supporting infrastructure.

Unilever's Indonesian unit, for example, set up a palm oil processing factory on the island of Sumatra in 2015 after the government gave the company a tax holiday. But "it's been years, and it's been only us that operates there," Tevilyan Yudhistira Rusli, finance director at Unilever Indonesia, said at a recent business conference in Jakarta. He blamed the lack of nearby ports, roads and industrial gas as major hurdles to business. Given the situation, he said: "The policy, strategy of the tax holiday can be improved."

President Joko Widodo has made infrastructure development a top priority but in Java, progress is slow. A new 116km section of a toll road stretching across Java opened in 2015, and state-owned contractors are expected to finish most of the network by the end of this year. The Japanese government agreed to lend 118.9 billion yen ($1 billion) for a sea port north of Majalengka and is in talks to back an upgrade of the Jakarta-Surabaya railway.

"Companies should slowly be moving to the eastern side [of Java] because of labor and logistic costs," said one executive in the airport industry. The monthly minimum wage of Majalengka is 1.66 million rupiah, less than half of that in Jakarta.

Eventually, BIJB wants to expand the airport so that it can handle up to 26 million passengers, making it the country's second largest airport after Soekarno-Hatta. It is also planning to develop a 3,480 hectare township nearby, dubbed Aerocity, as an industrial hub. The entire project is estimated to cost some $2 billion, meaning that financing by the local government will likely not be enough.

Ekaputra admits that the airport operator currently shuts out private sector investment, but assures that foreign companies are invited to develop surrounding infrastructure as well as Aerocity. He said he had already pitched to Japanese investors a rail line project connecting the airport to an existing railway in the north. 

Merely building infrastructure in low-wage areas will not be enough to attract companies. Whether West Java can roll out favorable policies for investors will depend on a new governor who will be chosen in West Java's election in June. Polls show that Bandung mayor Ridwan Kamil is the favorite to win. The former architect is known for his investor-friendly approach, telling a business forum in 2016 that private sector-led development is a "very common thing" in developed markets.

But Bandung has been a manufacturing hub for textiles and other goods for decades. Developing lesser-known regions of West Java will be a greater uphill challenge.

Erwida Maulia in Jakarta contributed to this story

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