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Economy

Momentum for Indonesia building program wavers

Construction workers build a new apartment complex in West Jakarta. Due to poor local drainage, the area suffers from flooding during Indonesia's rainy season. (Photo by Leighton Cosseboom)

JAKARTA -- Risky Wijaya spends more than two hours each day riding his motorcycle to his menswear shop in central Jakarta from his home on the city's north side.

     "It's a very long time, and I spend a long time fighting through other riders," he said. "It's really not nice, and sometimes I want to sleep at my shop."

Badly needed infrastructure

Jakarta and the rest of the vast Indonesian archipelago badly need better infrastructure to facilitate business activity and support new jobs. According to Nicholas Morris and Irene Tsjin of Asian infrastructure consultancy Tusk Advisory, one in five Indonesian households lacks modern electricity connections, two in five lack sewage connections, and close to one-third lack clean water.

     The Ministry of National Development Planning projects the country needs an additional 2,650 kilometers of roads, 3,258km of railways, 15 airports, 24 sea ports and 35,000 megawatts of power production capacity. The Indonesia Investment Coordination Board puts the price tag for all that and other projects for the next five years at 5,519.4 trillion rupiah ($408.4 billion).

Cars, motorbikes and buses struggle to make their morning commute. (Photo by Leighton Cosseboom)

     Despite the clarity of this vision, the outlook for President Joko Widodo's infrastructure program appears mixed. Following his inauguration in October, his team moved quickly to implement a new "one stop" system to enable prospective investors to acquire many needed licenses and approvals through a unified process. The timing meshed well with a new law that took effect in January that strengthened the government's hand in forcibly acquiring land for public projects. Widodo also freed up billions of dollars in potential infrastructure funding by slashing subsidies for fuel users.

     But actual progress on new projects has slowed, with weak government spending blamed for the country reporting its slowest economic growth in six years during the first quarter. A lack of coordination between different government agencies has held up some projects while others have stalled on the familiar issues of regulatory uncertainty, financing and land acquisition despite the new land law and enthusiasm for the ambitions of the president, known popularly as Jokowi.

     "At least half of the 10 infrastructure projects prioritized, including the $2 billion airport railway line in Jakarta, are behind schedule," said Alicia Garcia Herrero and Kohei Iwahara, economists with French bank Natixis, in a recent report. "More generally Jokowi's government has been really disappointing on this front."

     Transport ministry officials said in July that design revisions necessitated by changes to the planned route of the express train to the city's international airport would delay the start of construction by at least a year, following delays caused by previous routing changes. On a visit to Japan in March, Widodo had said that construction of a 2,000MW coal-fired power plant in Batang, Central Java, backed by Japan's Itochu and Electric Power Development, would begin by June; instead, work has yet to begin on the $4 billion plan amid hold ups in acquiring needed land.

Legal uncertainty

Luke Devine, the Jakarta-based head of the Asian infrastructure practice of law firm Baker & McKenzie, said the new land law did make acquiring land for projects somewhat easier. "The challenge is that it remains a very long process," he said, with potential appeals by landowners reluctant to sell taking up to two years to be heard fully. "The government should look at trying to condense the process down."

     He said that regulatory reforms appeared to be giving a boost to power projects, but "other sectors are dragging," with government procurement processes particularly in need of streamlining.

     Legal uncertainty remains a big issue. In March, the South Jakarta District Court overturned the privatization -- dating back to the early 1990s -- of water services in Jakarta to two private companies, one part-owned by France's Engie, in response to a lawsuit filed by a citizen's group.

     The companies are appealing the decision, but the continuing occurrence of such cases will test the mettle of investors who might have been tempted by Widodo's infrastructure plans, said Devine, who has been working in Indonesia for 16 years.

     The president can hardly afford to spook them. "The government cannot work alone due to budget constraints, hence we encourage the private sector to take part in developing Indonesia's infrastructure," Rudy Salahuddin, director for infrastructure planning at the Indonesia Investment Coordination Board, told the Nikkei Asian Review. His agency aims to draw 30.7% of the funding for the president's five-year infrastructure development plan from private investors and he said reforms are being planned to further ease and accelerate land acquisition for projects.

Courting foreign governments

Speaking to potential investors in Hong Kong, Finance Minister Bambang Brodjonegoro said airports, seaports, power plants, and toll roads could be offered as full private concession or public-private partnerships.

     So far, Widodo has met with his greatest success in courting infrastructure support from foreign governments. British Prime Minister David Cameron pledged 1 billion pounds ($1.56 billion) of financing for sewage treatment plants, geothermal power generation and other projects during a visit to Jakarta on July 27. On his visit to Tokyo in March, Widodo won a similar pledge from Japanese Prime Minister Shinzo Abe to back urban rail development, power transmission lines and other projects. Chinese officials have also talked of billions of dollars in financing.

     In fact, the political rivalry between Japan and China is playing into competing proposals to build infrastructure in Indonesia, which may temporarily hold up projects as officials sort through rival offers, especially regarding a planned high-speed rail line between Jakarta and Bandung, the capital of West Java.

     Widodo is also expecting support from the Asian Infrastructure Investment Bank, the new China-led regional development bank. The government in May signed on as a founding member of the Islamic Investment Infrastructure Bank in pursuit of additional funding. A domestic infrastructure bank is also to launch later this year.

     The key to progress though lies with project execution by the government. Corruption has often been an issue in the past, but Devine and others say crackdowns, reforms and the efforts of the state auditor and outside activist groups appear to be having an impact. The new one-stop investor service also cuts down on opportunities for graft, according to Sarvesh Suri, country manager for the World Bank's International Finance Corp.

     He sees considerable optimism still behind Widodo's infrastructure program and renewed momentum at the investment board and the Ministry of National Development Planning.

     "I haven't been this excited about my job in the past three years," he said. "I'm quite bullish, and if everyone can work together, then I think it can [all] be done."

 

 

 

 

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