Impact of Indonesia’s infrastructure delivery

April 2018  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2018 Issue

Infrastructure is widely recognised as one of the key factors affecting economic growth, as well as reductions in inequality and poverty, particularly in developing economies.

The Indonesian government, under the leadership of President Joko Widodo, popularly known as Jokowi, has in the last three years taken steps to arrest two decades of inadequate investment in the country’s infrastructure. These measures include substantially larger budget allocations to infrastructure delivery ministries, increased capital injections to relevant state-owned enterprises, substantial empowerment of infrastructure-related government institutions and establishment of new institutions to enhance infrastructure delivery.

The Jokowi administration’s infrastructure programme, namely the Priority Projects, the National Strategic Projects and the 35 GW electricity programme, with an estimated cost of $342.39bn, were launched following his election in 2014. Unlike previous administrations, which announced equally ambitious infrastructure programmes but failed to deliver them, we are pleased to note that to date 286 projects are under construction or have been completed, with a total combined value of $103.44bn. The projects span energy, roads, railways, ports, airports, water and sewerage and IT. The level of projects under construction is unprecedented and has come on the back of key government reforms.

Among the key reforms that the government has implemented is the establishment of a number of agencies alongside increased budget commitments. For example, the Committee for Acceleration of Priority Infrastructure Delivery has been mandated to oversee delivery of the government’s priority and strategic projects. Overseen by a ministerial committee, it reports directly to the president and is chaired by the coordinating minister of economic affairs, Dr Darmin Nasution, an economist and former head of Indonesia’s central bank, Bank Indonesia. At an operational level, the agency is supervised by the deputy minister for infrastructure and regional planning from the coordinating Ministry of Economic Affairs and is led by a programme director, as well as a number of sector-specific project directors hired from the private sector. This seamless use of public and private sector officers for leading a government agency is unprecedented in Indonesia and, to an extent, the current progress of infrastructure construction is a reflection of the impact the agency has had.

The other key government institution that has positively contributed to the government’s infrastructure delivery is LMAN, a Ministry of Finance-owned state asset management agency. LMAN was capitalised to the tune of $2.8bn to finance the acquisition of land for priority and strategic projects. LMAN effectively acts as the standby guarantor and payer for the developers of the various infrastructure projects, where the costs incurred for land acquisition are refunded by LMAN as soon as the construction commences, thus encouraging infrastructure project developers to commence construction efficiently.

In terms of government budget for infrastructure, the Jokowi administration increased the budget to the Ministry of Public Works and Housing by over 63 percent from 2014 to 2015. In 2015 and 2016, the government also substantially increased the capital injection into some of its key state-owned enterprises (SOEs), enabling these SOEs to commence work on economically important projects. For example, the government’s wholly-owned subsidiary PT Hutama Karya has been mandated to deliver the first eight sections of the Trans Sumatra Highway and has so far received over IDR7 trillion ($520m) in capital injection. In addition, the government also facilitated a long-term debt of 25 years for the Trans Sumatra Highway from the Ministry of Finance-owned infrastructure lender, PT Sarana Multi Infrastruktur. Besides PT Hutama Karya, the government has also allocated over IDR45 trillion ($3.2bn) as capital injection for a number of other infrastructure-related SOEs. Gone are the days when the Indonesian government would plan infrastructure programmes and projects but consistently come up short in delivering them.

This article is a summary of a larger report on the same subject, which for the first time presents empirical evidence that estimates the impact of the Indonesian government’s infrastructure capital expenditure on economic growth, as well as resulting reductions in inequality and poverty. The analysis was based on economic regression of 32 developing and emerging economies, from the World Development Indicators database of The World Bank, for the period 1990 to 2016.

Among the key findings of the report are that, since 2015, the Indonesian government has completed 64 projects with an estimated value of $7.83bn and, as of December 2017, there are over 222 projects under construction with an estimated value of $95.61bn.

Based on the above under-construction and completed projects, the Jokowi administration’s aim of reaching 7 percent growth in the near-term is achievable. In fact, the estimates imply that the completion of current projects would result in the country achieving a 2.16 percent increase in GDP growth starting in 2020, and phased in over five years, thus raising the country’s GDP growth rate to 7.2 percent by 2023. The implementation of half of the remaining priority projects and programmes, another $120bn, during the years 2020 to 2023, would increase the growth rate in 2030 to over 9 percent, even allowing for technical corrections which would generally cause the growth rate to decline.

Using a similar approach to that employed for the relationship between infrastructure and growth, the immediate projects could knock off over one point of the Gini Index for Indonesia, while the full $342.39bn programme might be expected to knock off in excess of three points. This represents about 2.75 percent and 7.82 percent of the current Gini Index respectively, which was estimated to be around 40 points in 2016. It is also estimated that the immediate projects could reduce poverty by over 4.41 percent, while the full $342.39bn programme could reduce poverty by 14.85 percent. If, as we have assumed for the growth rate estimates above, half of the remainder can be completed by 2023, with full impact on growth by 2028, the combined effect would be to knock two points off the Gini Index and reduce poverty to under 10 percent. The time frame for the resulting effect on inequality and poverty is hard to predict, but it is reasonable to expect that this will have occurred by 2030.

While the government’s delivery track record to date has been impressive, these achievements, as stated earlier, have partially been on the strength of the government budget channelled via a number of SOEs, some of which are currently cash constrained. Going forward, it is imperative that the government also considers alternative strategies to fund these SOEs as well as harnessing the financial, management and technological capabilities of the private sector, both to ensure the current build-out continues to its targeted completion date of 2019/2020 and also to complete other portions of the government’s priority and strategic projects on time.

In encouraging the private sector to play an increased role in infrastructure delivery, the government has been proactive in exploring innovative funding schemes that monetise some of the government’s key assets. Similar to the asset recycling initiatives popular in Australia and elsewhere, the Indonesian government has been exploring an asset monetising option called Limited Concession Schemes (LCS) to monetise its key operating assets, such as ports and airports. Under an LCS scheme, the private sector would be invited to operate, maintain and expand existing assets in return for the private sector paying the government an upfront concession fee or instituting ongoing revenue sharing schemes with the government. These additional revenues are aimed at enabling the government to complete its massive infrastructure programme, in particular to fund economically important, but sub-financial projects, such as the Trans Sumatra Highway, as well as social infrastructure projects in less-developed regions of Indonesia.

In conclusion, there is clear evidence of the link between infrastructure delivery and economic growth, and reductions in inequality and poverty. The infrastructure programme already underway will put Indonesia on a higher growth trajectory – with expected growth rates in excess of 7.2 percent by 2023 – and if at least half of the remaining plans for infrastructure are implemented in the early part of the next decade, this growth rate could increase to over 9 percent by 2030. In addition, the government’s current aim to introduce innovative funding schemes such as LCS via the ongoing development of a presidential decree, is indeed a positive sign that that the government is keen to harness the private sector’s involvement in infrastructure delivery in Indonesia.

 

Raj Kannan is the founder and managing director, Nicholas Morris is a director and Aditya Luhut Sibarani is a project manager at Tusk Advisory. Mr Kannan can be contacted on +62 (817) 110 323 or by email: raj.kannan@tusk.sg. Mr Morris can be contacted on +62 (818) 719 567 or by email: n.morris@tusk.sg. Mr Sibarani can be contacted on + 62 (817) 879 002 or by email: luhut.sibarani@tusk.sg.

© Financier Worldwide

BY

Raj Kannan, Nicholas Morris and Aditya Luhut Sibarani

Tusk Advisory

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