Experts Weigh in on Indonesia’s Infrastructure Needs

Dion Bisara & Agustiyanti

The absence of sound infrastructure has been the main hurdle for Indonesia to implement its key economic policies, and the government’s proposal to ban private cars from using subsidized fuel only compounds the difficulties, former Vice President Jusuf Kalla has said.

“We must first have the complete infrastructure to make that happen. If we do that halfheartedly, it won’t work for sure,” he said earlier this week. “What if the vehicle runs out of gas in places where there is no facility for natural gas refueling?”

There is always a gap between the implementation and the design of such plans, he said.

Also exemplifying the dysfunction, factories cannot be built in many parts of the country’s resource-rich provinces because no electricity and roads are located nearby. And worse, some people die of common diseases because of the lack of medical facilities in their neighborhoods.

An infrastructure financier said that the main problem in the country’s infrastructure development was insufficient preparation for project development.

The government has been pushing a public-private partnership scheme since 2005 to compensate for the lack of government funding for infrastructure projects. Of hundreds of projects prepared for the scheme, the government last year picked only five to showcase. And construction has not started on any of them.

“We need three things to boost infrastructure. First thing, we have to improve project preparation; second, project preparation; and third, project preparation,” Emma Sri Martini, president director of Sarana Multi Infrastruktur (SMI), which works to accelerate infrastructure development, told a press conference on Thursday.

Emma said preparation was crucial before presenting a project to investors. She said that with two rating agencies putting Indonesia’s sovereign debt back to investment grade, financing should no longer be a problem.

“Infrastructure in China is deemed saturated, so foreign investors have turned their eyes to Indonesia: the beautiful girl is waiting to be proposed to,” she said, likening Indonesia to a lady in waiting.

However, sluggish bureaucracy and a lack of competency among officials still pose a major problem, putting Indonesia behind in terms of competitiveness.

“When it comes down to projects, state enterprises are more advanced,” she said, without elaborating.

Since its inception two years ago, SMI’s financing for infrastructure has been focused on the energy sector, which is dominated by Indonesian state-owned enterprises and private foreign companies. Only around 7 percent of its funds have been allocated for roads and other transportation projects, which are the government’s domain.

SMI had financing commitments of Rp 1.16 trillion ($128 million) as of December last year.

The electricity sector accounts for about half of the funds, or 49.6 percent, while the rest is for telecommunications, water management, oil and gas, roads, irrigation and transportation.

Emma noted that the lack of commitment in the bureaucracy was apparent when it came to preparation for projects.

“They think that PPP projects have little rate of return. Of course, no one is interested,” she said.

Competency in regional governments is also worrisome, Emma said, giving an example that tenders in regional government are conducted in Indonesian language, regardless of foreign bidders’ involvement.

In addition, Emma said this kind of attitude, without considering foreign participation, was still present among government institutions to the extent that the planning, permitting and project implementation stages were are often out of synchronicity.

Conflicting laws and regulation, she said, are also hurdles for infrastructure.

“When two laws conflict with each other, there is no mechanism to resolve it fast,” Emma said. She gave an example of geothermal exploration, in which all resource companies face years-long delays to secure Forestry Ministry approval to drill in “protected forest” areas.

Despite an increase in infrastructure spending, Indonesia’s ratio of infrastructure spending to gross domestic product remains insignificant, at less than 5 percent of GDP, Latif Adam, an economist from the Indonesia Institute of Sciences, said on Thursday.

Infrastructure spending is inefficient because it mostly goes to additional costs such as “consultant fees, planning, monitoring, supervision and project fees, raising the cost of doing business in Indonesia,” he said.

By average, companies operating in Indonesia must spend 30 percent of their total production costs on transportation, he said. In China, such costs account for just 12 percent of total spending, he said.

President Susilo Bambang Yudhoyono has called on regional governments to eliminate bureaucratic red tape and streamline procedures for infrastructure development.

“I ask regional governments to facilitate and ease procedures for licenses. And the private sector, which is being given a chance, they should not miss the target, too,” he said.

National Economic Board (KEN) chairman Chairul Tanjung said that the president has agreed to establish an “infrastructure bank” to finance major projects by 2013. “Although the president has accepted recommendation for the establishment of the infrastructure bank, many things need to be done,” he said.

The specialized bank will finance special projects organized under the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI).

With additional reporting by Arientha Primanita, Robertus Wardi & Ismira Lutfia