Infrastructure emergency

By webadmin on 01:55 pm Jun 01, 2012
Category Archive

Albertus Weldison Nonto

To retain its investment grade rating, the next two years will be crucial for Indonesia to move forward on its infrastructure efforts.  Nearly every year since 2005, there have been a slew of conferences, seminars and business summits organized to discuss infrastructure in this country, but only a handful have yielded positive results.

Meanwhile the government has been lamenting the fact that there isn’t enough money in its coffers while at the same time failing to make headway on land procurement. Less than 1% of new projects offered since 2005 are making any progress at all, making it likely that only the organizers of the infrastructure events have benefited from the dialogues.

Poor infrastructure has created a myriad of problems for Indonesia. Logistics costs clock in higher than the international average of about 10% of the total cost of production, making our economy one of the most expensive in the world. This has led to a high-cost economy and lowered Indonesia’s business competitiveness; the archipelago currently rates lower than Asian counterparts such as China, Thailand and Vietnam.

A top executive at an infrastructure company here expressed his concern and disappointment on the delays. His company once put in a tender for drinking-water projects in Umbulan, East Java, and in Lampung. After spending a significant amount on pre-qualification studies and appearing to successfully pass the first phase of the project, there was no clear direction thereafter. To this day, no significant progress has been made.

Things seem to go well, he observed, in the planning stages, but then break down at the implementation stage. Unfortunately, many projects fall prey not to legal and factual issues, but to grey areas which sometimes cannot be explained.

Despite the pessimism, some parties – mainly from the government – are hopeful as some key projects kick off this year. Deputy Minister for Transportation Bambang Susantono is optimistic that in the near future some of the deadlock will be resolved in a national logistics system where toll roads and ports constitute the key factors.

From a legal perspective, Bambang mentions Law No 2/2012 on Land Procurement, which has just been completed and is awaiting implementation regulations that need to be issued by the president. Some key projects, such as the expansion of Tanjung Priok Port in Kalibaru, will start this year. In Jakarta, the construction of a mass rapid transport (MRT) system will be inaugurated in July.

In city toll roads, the short W2 section of the Jakarta Outer Ring Road connecting Kebun Jeruk to Ulujami is now under construction, although there are still outstanding land issues. Completion of this section will help to ease congestion in Jakarta. The end of last year also saw the beginning of work on a 125-km toll road from Cikampek to Palimanan.

Additionally, water and power supply schemes in some regions have also started. Bambang adds that the extension of Jakarta’s Soekarno-Hatta International Airport at Cengkareng in Banten will kick off by the end of this year.

“The planned new airport in Karawang, West Java, needs to be postponed since good land transport links need to be in place before the airport is completed,” adds another infrastructure company executive.

Toll roads are the key

Many believe that toll roads are one key to solving deadlock and avoiding congestion, particularly for land transportation on Java. Some crucial projects have been initiated this year (see table).  In the meantime, Indonesia’s toll roads measure a total of 670 km; this will increase to 800 km once the current projects underway are completed in 2014. In comparison, Malaysia, an eighth the size of Indonesia, operated more than 800 km of toll roads in 2011.

Clearly, Indonesia needs radical change to solve the structural problems in this sector that are causing project delays. Aside from bureaucratic speed bumps, issues such as conflicts of interest often crop up on the ground and hinder progress. In the case of the Cikampek-Palimanan toll road, for instance, rice fields in the heart of Indonesia’s rice production center will be sacrificed. This does not take into consideration the residential, city and forested areas which will also be affected.

Overlaps in policy and regulations, as well as local politics, are other factors that often lead to project delays. From a budget perspective, observes economist Jan Diandra, the national budget has to allocate a certain percentage for infrastructure. He adds that in the New Order era, 5% of national domestic product was allocated to support infrastructure projects.

Many experts and practitioners in the sector believe that Indonesia needs at least some $30 billion for infrastructure every year, with $18-20 billion of that figure coming from the private sector. It is widely known that much of the government budget for countrywide infrastructure is spent on maintaining existing assets; only a small amount last year was dedicated to new construction.

As has been raised by many parties, Indonesia’s business edge will quickly disappear if it cannot provide adequate infrastructure. The government has tried to respond to the concern: After issuing Law No 2/2012, it is hoped that the presidential decree that will guide parties through the land clearing process will represent a breakthrough.

Joyo Winoto, head of the National Land Agency (BPN), indicates that the new decree will stipulate that land procurement should be settled in 248 days. Indonesia’s toll road association head, Fathur Rohman, welcomes the government’s intention to give clear guidance on the land clearance process, but warns that the decree should also provide guarantees on on-going land clearing projects.
Economist Jan believes that three fundamental principles should be considered in the land clearing process. First, if the procurement is for public interest, it should be clear that the land is ready and available. Second, peoples’ rights should be safeguarded and guaranteed. Third, and most importantly, the process should be free of speculation and corruption.

Public-private partnerships

Time and again, the government has made it clear that it is not able to provide all the financial resources to support every project, and has called on the private sector to take part in public-private partnership schemes (PPP). So far, from some 79 projects offered under this scheme since 2006, only one has been put in place.

“If there were 79 projects and only one has been executed, that means there was no progress at all,” Nusantara Infrastructure’s managing director Bernardus Djonoputro recently told the press after a series of discussions on infrastructure in Bandung. The company, reinforced by the entry of Peter Sondakh’s Rajawali group as a shareholder, had ambitions to become a major infrastructure player in Asia over the next decade.

According to national planning agency Bappenas, from the proposed projects valued at a total of $53 billion, only a power project in Central Java is underway and is currently in its early stages.

Professor of economics at Brawijawa University in Malang, Ahmad Erani Yustika, notes that despite a number of completed projects – such as toll roads from Surabaya to Malang and Mojokerto – in the past two years, the rate of completion has been very slow and well behind expectations. “Our main problems have been in the implementation process, which requires a capable staff, strong coordination, and control over corruption.”

He also observes that PPP schemes have not been interesting enough for investors. In his view, the government needs to provide a full guarantee in terms of financing, as well as start to think about establishing a new holding company for infrastructure. Bank Indonesia Governor Darmin Nasution said in January that discussion on such a body was continuing, but a decision to act would take time. 

Aksa Mahmud, chairman of the Bosowa Group, points out that investing in infrastructure, especially in toll roads outside Jakarta, provides a lower return on investment than other businesses. On many occasions, he has urged government to come up with innovative solutions for land clearing because it has traditionally bottlenecked the completion of a project. He suggests, for example, that the land clearing process – currently the government’s responsibility – be entrusted to the private sector. A lack of capabilities and rampant corruption among government officers have posed as roadblocks in the current program, he notes.

Despite the difficulties, several private sector companies including Saratoga Capital, driven by tycoons Edwin Soeryadjaja and Sandiaga Uno, are up for the challenge with a new 116-km toll road project with Malaysia’s Plus Express Bhd. Astra International also acquired the Kertosono Mojokerto toll road in East Java last year to add to its existing 79-km project linking Tangerang, Merak and Kunciran.