Indonesia’s finance minister believes a crucial new law, one he hopes will galvanize the country’s flagging infrastructure sector, will be passed in the third quarter of this year.
The development of infrastructure is widely seen as the biggest impediment to Indonesia advancing from its solid GDP growth – at an annual rate of 6.1% in 2010, and 5.7% on average since 2006 – to being a true leader in global growth.
Bambang Brodjonegoro, head of the Fiscal Policy Office at the Ministry of Finance, said at a seminar in Hanoi: “To be frank, the bottleneck [stopping] our economic growth achieving 7% or higher is infrastructure, so it is a national priority.”
One of the biggest problems, particularly for highways, is disputes over the rights to the land the highways will pass through. This has stopped development and impeded a public-private partnership (PPP) infrastructure program taking root.
“If we review PPP projects in Indonesia for the last eight years, we have to admit that not one can be executed,” Agus Martowardojo, Indonesian finance minister, said. “One of the main obstacles is land acquisition.”
A Land Acquisition Bill was introduced in parliament earlier this year, providing for land rights in public infrastructure sites to be cancelled and owners compensated. Vitally, where disputes arise, a court must rule on them within 30 days. Currently, disputes often take two years or more, sometimes longer than building the road itself.
The bill is controversial among landowners. Asked about its progress by Emerging Markets, Agus said: “The government has already reached consensus with parliament [on the law].” He expected it to be passed by the third quarter of this year; with it, “we are confident that infrastructure projects can be executed faster”.
Analysts say progress on infrastructure is vital for the broader economy. “The only major drawback for Indonesia is still the infrastructure,” said Ferry Wong at Macquarie bank in Jakarta.
“Inflation and the fuel subsidy are challenges, but not so much of an issue, as the government can absorb high oil prices. Infrastructure is the main problem.” Wong said infrastructure development would have spillover effects into the economy, encouraging greater foreign direct investment.
In every other respect, the Indonesian economy is humming: a commodity-rich economy in a demographic sweet spot; a stable democracy with vibrant domestic consumption and record high foreign currency reserves that passed US$100 billion earlier this year.
“The vital signs for the Indonesian economy are at their strongest in the last decade, and the fundamentals are improving,” Agus said. He is targeting growth rates of as much as 7.7% annually by 2014.
The international rating agencies, most recently Standard & Poor’s in March, have been upgrading Indonesia, and all three of them now have it just one notch below investment grade. There are only two outstanding concerns: inflation and the danger of a sudden outflows of foreign capital.