Renaissance in Indonesian infrastructure sector

Yenwy Wongso, Research Analyst

Post crisis Indonesian infrastructure development has so far seen little growth, especially in projects relating to public and toll road infrastructure, power generation and other infrastructure facilities.

This has resulted in Indonesia losing competitiveness and it now ranks near the bottom among its neighbors in terms of infrastructure development. In 1996 Indonesia outranked Thailand, Taiwan, China, and Sri Lanka. By 2002, they had all surpassed Indonesia, according to a survey conducted by the World Economic Forum.

Indonesia will celebrate its 62nd Independence Day this week. Sixty-two years is a lot of time to develop the country's public and private infrastructure. Indeed, development of both public and private infrastructure is still lagging as infrastructure financing is still inadequate. Will it stay that way going forward?

Up until recently, the development of both public and private infrastructure in Indonesia was mainly centralized on Java Island including the Greater Jakarta area, leaving the primary urban areas to suffer from a lack of clean water, sanitation, electricity, telecommunication, adequate road and urban transportation facilities.

Yet according to a World Bank report titled Averting an Infrastructure Crisis, urban areas are the key drivers of the Indonesian economy, contributing to more than 70 percent of the non-oil GDP.

Statistics show that whenever vital public infrastructure in certain districts have been established, e.g. toll road infrastructure and water sanitation facilities, the development of private or non-government infrastructure development will follow accordingly. For instance, the construction of the Cipularang toll road has enhanced economic activities in the surrounding cities.

The central government's ambitious decentralization program, which transferred many responsibilities relating to infrastructure provision to provincial entities, would be a catalyst for infrastructure development in local districts.

This is shown in the increasing trend of infrastructure development activities expanding outside Java in the past couple of years, although it remains fairly limited to big cities such as Medan, Banjarmasin, and Makassar.

Statistics also show that public and toll road development has been sluggish since the 1997 financial crisis. Post crisis average yearly growth rate of car sales (+21 percent compound annual growth rate or CAGR) and motorcycle sales (+42 percent CAGR) have overshadowed the rate of increase in road length (+2 percent CAGR) during the same period. Hence we see an urgent need for major road infrastructure in the country. The government has announced a national plan to build 1,600km of toll roads by 2009, including the 763 km Trans Java toll road.

Further studies also show that public road infrastructure is poorly maintained as only 25 percent of national roads are considered to be in "good" condition. Accordingly, the country needs between Rp 6 and Rp 8 trillion a year for road repair and maintenance. (The government's 2007 budget only allocates about Rp 2.6 trillion).

With electricity demand growing stronger than capacity, the country could face an energy crisis. To recuperate from this condition, the government proposed a Fast-Track Program that mandates PLN to build 10,000 MW coal-fired plants at 40 locations in Indonesia by 2009.

With current total installed capacity around 28,000 MW, there has been no significant growth in Indonesia's electricity supply for the last 5 years. Electricity development is still centered in Java, Madura, Bali, and Sumatra, leaving other provinces with a lack of electricity.

Foreign investor participation is needed. Hence there is still a vast opportunity for growth in the public and toll road infrastructure as well as the electricity sector in Indonesia. On a regional comparison basis, Indonesia's toll road penetration (km per 1,000 populations) remains in the mid-low end of the region. Furthermore, Indonesia's electricity consumption per capita and generation capacity per capita are still significantly lower compared to other Asian emerging economies, with the electrification ratio approximately at 55.3 percent at the end of 2006.

So, how much investment is required? The government announced that Indonesia needs around US$145 billion in investment for infrastructure development in 2005-2009, leaving a financing gap of US$90 billion.

After 62 years of independence, Indonesian must open its mind and understand that the realization of these national programs cannot rely solely on the government and local private investors as their budget for infrastructure financing is limited. Therefore, resolving impediments in infrastructure financing is crucial.

Action must be taken quickly. Indonesia must widen the door it has opened for foreign investors to invest in Indonesian infrastructure, otherwise infrastructure development will become nothing more than an unrealistic target.
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