Distance matters little in determining how long it takes to get somewhere in Jakarta. What matters is the traffic.
Anecdotes about drivers setting up mobile lavatories in their cars are not sufficient to prepare the visitor for the frustration of being stuck in what feels like the world’s biggest parking lot: the Indonesian capital’s roads.
Jakarta’s congested arteries are one of the most obvious indicators of the country’s infrastructure deficiencies, but many others abound. More far-flung provinces such as Kalimantan, Papua and Sumatra lack roads altogether, and the disparate archipelago badly lacks enough seaports and airports. This can make transporting goods domestically extremely expensive.
It costs more to transport an orange from Java to Kalimantan than it would to import the same orange from Shanghai, for example. A sack of cement costs 20 times more in the eastern province of Papua than it would in Jakarta.
Even though Java, the island on which Jakarta is based, is no longer hit with rolling blackouts, power production cannot keep up with the demand generated by a surging economy.
These physical limitations are worrying for an economy that should otherwise be flying high. It has maintained growth at an annual average of 6% since 2008, despite the financial crisis. It grew 6.5% during the year to September 2011.
Infrastructure development has been hindered in the past by the difficulty of acquiring land in a timely and cost-effective manner. A bill passed through parliament in December is expected to change that.
The land acquisition bill, which will streamline the process of securing land for infrastructure projects, has generated a great deal of optimism. That, combined with Indonesia being awarded investment-grade status by ratings agencies Moody’s and Fitch, has created a golden opportunity for the country to turn things around infrastructure-wise.
The Indonesian government has declared an investment target of more than IDR450 trillion (US$50.4 billion) to be committed by this year and has finalised 10 pilot projects that will serve as models for other infrastructure projects in the future, according to private infrastructure financing company Indonesia Infrastructure Finance.
But a lot more is required. The government itself predicts that around US$145 billion is needed to repair and expand Indonesia’s roads, railways, water systems, power networks and all other facets of its infrastructure needs.
Jakarta bullishly expects that US$93 billion of this sum can be sourced from the private sector. Raising that much money is going to be a tall order. Private companies will only put their hard-earned money to work into projects that typically take years to reach fruition if they are ensured good profits, can be reasonably certain of avoiding unwarranted government interference, and can gain access to good funding themselves.
Meeting those three needs in Indonesia will be no easy process.
An urgent need
The good news for Indonesia is that its appeal as an investment destination has never been higher.
On January 18, Moody’s became the second of the three major international credit rating agencies – the first was Fitch – to return Indonesia to investment-grade status, after an absence of almost 15 years.
Both agencies cited prudent fiscal management, low budget deficits and economic growth as reasons for the upgrade.
Graft is still widespread, it’s true. But government efforts to combat it have ensured that it no longer cripples foreign investment flows into the country. Foreign direct investment (FDI) stood at a record US$19.3 billion last year, according to the country’s Investment Coordinating Board (BKPM).
Yet one consequence of the country’s economic renaissance is that its ramshackle infrastructure is being stretched as never before. Government infrastructure spending was less than 1.6% of GDP for the fiscal year 2011, according to the Ministry of Finance.
That is simply not enough, considering that the country has underinvested in infrastructure for more than a decade and is experiencing GDP growth of 6.5%. As things stand, Indonesia’s infrastructure investment is declining relative to its economic growth. Standard Chartered believes that infrastructure development is crucial if Indonesia is to exceed 8% annual GDP growth.
Poor infrastructure weighs on all businesses. One company to have been affected is AKR Corporindo, a distributor of energy products. Transport infrastructure is crucial to bring the products of Indonesia’s resource-rich archipelago to market and convert them to energy that can serve the needs of the country’s people – and those of its export markets.
“AKR operates over 20 ports,” says Suresh Vembu, the company’s chief financial officer. “Yes, there are issues [related to] infrastructure in these ports, the development of these ports, the expansion of these ports.”
He notes that the lack of reliable transportation links is particularly worrying in the eastern part of Indonesia, where there is a great deal of economic activity in the commodities space in particular. “Development of infrastructure like roads or rail could really help to get commodities like coal from the central part of Kalimantan to the seaports for shipment to other parts of the region, country or as exports,” says Vembu.
Other companies are quick to agree about the lost opportunities created by the country’s poor infrastructure.
“If you look at our businesses, in coal logistics [lack of] infrastructure is making life more difficult because most of our clients are in the heavily populated areas like Sumatra and Java,” adds Andi Djajanegara, president director of ABM Investama, an integrated energy company with coal interests in Kalimantan.
“Take the lack of transportation in South Kalimantan for example: we have to develop our own port because we can’t rely on the government to do it,” he says.
The government needs to promote private-sector funding. But years of underinvestment and chronic project delays have led to cynicism among foreign investors that anything can be delivered in the country on time and on budget.
As Morgan Stanley said in a research note released on December 16: “Investor scepticism about Indonesia’s execution capabilities is huge and expectations are low.”
Land acquisition bill
One of the reasons for this poor execution is the difficulty of acquiring land.
The government, companies and even local communities may agree upon the need for a new road, railway or power station but the whole process is brought to a halt by protracted negotiation over the compensation and resettlement of the owners of the land needed to build the projects.
While AKR’s Vembu says his firm has never had major difficulties with land acquisition, he admits that it has been problematic for prominent seaports in the past.
“Take Jakarta’s main seaport in Tanjung Priok: we have a petroleum terminal there. There are issues there regarding expansion of that port as it is surrounded by settlements of people, if the port authority would like to clear even five hectares of land it faces a lot of issues with local communities.”
It’s a thorny issue that can break worthy projects. Much-needed toll roads, for example, have regularly had the entire road delayed due to land acquisition problems in one or two sections. By mid-September of last year, land acquisition for the Trans-Java toll-road project was only at 44.43%, according to Indonesia Finance Today.
A senior infrastructure adviser who works with the government says some toll-road builders would even use the issue of land acquisition as an excuse for not completing projects that have encountered operational difficulties.
But all that looks set to change with the passing through Indonesia’s House of Representatives of a land acquisition bill on December 16.
The intent of the legislation is to ease the government’s acquisition of land necessary for the completion of major infrastructure projects in the public interest. It’s an important piece of legislation, with major ramifications. The House of Representatives debated the bill for a year before passing it.
The final product sets the process of deciding on a project location at two years, with a potential extension of one year, according to Reuters. It also gives local governments the authority to decide on the location of a project and includes an appeals phase with compensation to be decided by a court within 30 days.
But the most important effect of the land bill is the clarity it will add to negotiations over land acquisition and the streamlined process it will create for a government looking to acquire land.
Investors, bankers and corporates alike have welcomed the new bill. In its research piece, Morgan Stanley said it believes the bill will be effective and contribute to a rise in infrastructure spending. Local investors are also bullish.
“We’re glad that this land bill has been approved by the House of Representatives and we really expect that it will get infrastructure projects running again and also improve the local economy,” says Abiprayadi Riyanto, president director of Mandiri Investasi.
The bill will become law once President Susilo Bambang Yudhoyono approves it, a process that is likely to take six to 12 months, according to Asiamoney sources. But Verdi Budiman, head of equity research for Mandiri Sekuritas, thinks it could happen as soon as April, citing recent discussions with senior government officials.
The hope is that if the government can get its incentives right together with the land bill, infrastructure development will flourish, spurring more economic growth. Spending money on big projects in and of itself drives a lot of economic development, while the outcome usually increases productivity and business efficiency.
Too many cooks
Yet while the land bill will hopefully limit the ability of recalcitrant land owners to delay needed projects, Jakarta still needs to improve other aspects of its execution.
Most types of infrastructure projects end up requiring approvals from multiple parties. This greatly slows down the ability of companies to get to work and raises the likelihood of necessary approvals being delayed by graft.
For example, a company seeking to build a new port requires involvement from central and provincial government, plus discussions with one of the four state-owned port corporations – collectively known as Pelabuhan Indonesia (Pelindo) – spread out across the archipelago. Pelindo is responsible for governance, regulation, maintenance and operations of the country’s ports.
An airport-focused project would probably involve the state-owned airport authority Angkasa Pura, responsible for the management of airports and air traffic. Discussions to build a power plant will probably involve electricity distribution monopolist Perusahaan Listrik Negara (PLN) whereas railways include Kereta Api (KAI), and so on.
Countries where infrastructure is more developed can afford to delegate such responsibilities to well-managed and well-staffed authorities such as these, but the process needs a rethink in Indonesia’s case.
Four independent people approached by Asiamoney to discuss infrastructure development – including corporates and financiers – all point to the decentralisation of infrastructure decision-making to state-owned monoliths of sometimes questionable competence as a major impediment.
“It’s getting completely out of hand; the regional and local governments have their own agendas which are sometimes politically motivated,” says Sandiaga Uno, founder of private equity firm Saratoga Capital. “It makes it difficult for central government to push the concept of connectivity across Indonesia and to improve transportation and logistics.”
“When the public sector becomes involved there are a number of constituencies who at times have their own agendas and are playing to different audiences,” adds C. Christopher Holm, CEO of Yawadwipa, a private equity firm. “When you bring those into the equation it takes significantly more time to get done what would ordinarily take a very short amount of time in the private sector.”
Jakarta’s failed bid to build a monorail system is a good example of a good idea that failed due to administrative inertia.
The project was launched in 2004 by Jakarta Monorail, a consortium of Indonesian and foreign firms, and a number of pillars were built as part of the project. However the project collapsed due to an inability to secure funding following disagreements between the consortium and prospective financiers over passenger number projections.
Tellingly, the consortium and the administration of Jakarta Governor Fauzi Bowo were ultimately unable to convince investors that their money would be safe.
The project was formally scrapped in September 2011, seven years after its launch. The Jakarta Monorail consortium is now looking for IDR600 billion from Yudhoyono’s administration for the work it had already completed. For its part the government says it will only pay IDR204 million.
And this was a project that everybody believed to be vital to improve transportation in the capital. It’s hardly an advertisement for other companies to try their luck at infrastructure projects in the country.
Many other important projects have encountered similar difficulties.
The Jakarta airport rail link was abandoned in 2005 due to financing and land acquisition complications. KAI said in December last year that it expects the project to be completed by 2013. But construction has not yet begun and Governor Bowo told reporters in November that work may not begin until 2014.
The best way to combat such inefficiencies would be to centralise infrastructure development in the hands of the central government and create a department devoted to such projects.
This department could then be properly staffed, surrounded by competent advisers and given the requisite power to get things done.
But Yudhoyono is a famously cautious politician, and thus unlikely to be willing to make the necessary political sacrifices to bring such a powerful new agency to fruition – especially with the country looking to its next election in 2014.
That is a pity. It is an opportunity for the president to have a real impact. What better legacy for a president to leave than a lasting foundation for the development of his country’s infrastructure?
Public-private problems
In the absence of major political reformation, another means to encourage private investment would be to encourage public private partnerships (PPPs).
Government services funded and operated through tie-ups between government and private companies, PPPs have been utilised globally for years to encourage private-sector involvement in infrastructure development. They offer companies the confidence and financial reassurance that the state is putting its money to work too while providing necessary funding and expertise to complete projects more effectively.
Yet PPPs have never really gotten off the ground in Indonesia.
There are several reasons for this. The first is a hangover from the administration of former president Suharto. Cronies of the country’s administration back then would line their pockets with the proceeds of the projects, having the government overpay for them in what became perceived as a gross misuse of public funds.
It may be 13 years since Suharto, but the mere association of PPPs in Indonesia with corruption has seen them fall partly out of favour as politicians heavily concerned with projecting a graft-free appearance have sought to avoid them.
And even when negotiating non-PPP style concessions – such as independent power producer (IPP) appointments – the pendulum has also swung in the other direction when the government negotiates a contract.
Instead, public officials often zealously pursue the cheapest option presented in a tender to underline their lack of bias. But the cheapest option is not always the best, and the companies chosen often fail to complete the projects they have been tasked with.
“Officials negotiating have to take care to negotiate in a balanced way,” says the infrastructure adviser. “But these people want to make sure no one is cheating the government. Sponsors end up not being able to deliver the project [because the wrong one is chosen] or the tender is given to the cheapest bidder.”
Part of the problem is a dearth of human capital. The government lacks people who are experienced and competent enough to successfully conclude mutually beneficial negotiations with multiple parties.
“People need to project risks and assign tariffs, but they are trying to protect the government’s interests without a sense of what they’re putting on the table,” says the adviser. “Risk allocation needs to be more equal; right now mostly it’s the banks taking on more risks.”
In order to get PPPs going, the central government needs to take the structure seriously and educate the infrastructure authorities, local and provincial public officials on how to make proper use of them. Or it needs to centralise responsibility for their execution at the highest level.
Jakarta could also privatise or corporatise the companies failing to pull their weight in infrastructure development.
Here at least some success stories exist. Bank Mandiri, which was previously run by Indonesia’s current finance minister, Agus Martowardojo, is a prime example of how a state company can operate far more efficiently and profitably if it is modelled on the running of a private business.
The government should consider doing the same with the Pelindo ports companies and toll-road company Jasa Marga, to name just two examples.
Next steps
The obstacles preventing quicker infrastructure development in Indonesia are numerous but its corporates are at least glad that the country is talking seriously about its need to invest more into the sector.
“At least everybody is seeing the same thing,” says M. Arsjad Rasjid, president director and group CEO of Indika Energy. “There’s still a lot of negotiation politically and pulling of strings among all the parties but any president of any political party in Indonesia has to talk about infrastructure and that at least is a good sign.”
If Yudhoyono’s administration can take some of this discussion and convert it into action it will help the country, its businesses, and its markets.
Conduct enough fundamental changes – creating more PPPs and driving through successful land acquisition for new projects would be a good start – and Indonesia could well attract at least some of the money it needs.
But if Yudhoyono’s administration fails to address these problems, Indonesia could find its growth potential choked by broken roads, lack of power, faulty water and sewerage systems – and gridlocked streets in the capital.
