Jakarta's plan for economic boom requires more action and less talk

PUBLISHED : Thursday, 28 April, 2011, 12:00am
UPDATED : Thursday, 28 April, 2011, 12:00am


Indonesia is on the cusp of an economic explosion that could bring untold wealth and certain entry into the BRICS club of leading emerging economies. If only Jakarta could get around to lighting the fuse.

According to the Indonesian government's US$388 billion economic development plan, the country should become the world's 12th-largest economy by 2025, boosting gross domestic product to as high as US$4.5 trillion, compared to US$700 billion last year. Per capita income is also projected to rise to US$16,000 by 2025, compared to US$3,000 today.

This growth will occur through the development of six economic corridors across the sprawling Indonesian archipelago and US$200 billion in infrastructure development.

But where is the money going to come from? President Susilo Bambang Yudhoyono's government says it can provide only a third of the US$200 billion shortfall, and is already handicapped because it has not met the minimum conditions needed to get foreign investors in to build roads, ports, airports, rail lines and other desperately needed infrastructure, let alone domestic private sector investors.

'Poor infrastructure conditions are the main factor preventing Indonesia's economy from growing at its potential rate of 8 per cent. Inadequate infrastructure also results in high inflation compared to most of Indonesia's peers in Southeast Asia,' said a February report by Standard Chartered Global Research.

In addition, a comprehensive study last year by Harvard University in the United States concluded that economic oligarchy and political collusion 'has left Indonesia ill-equipped to respond to the challenge of globalisation'.

A case in point is the Yudhoyono administration's continuing hesitation over a much anticipated land bill, considered a key element for rapid infrastructure development by speeding up land acquisition for infrastructure projects. The government said in August last year that the bill would be finalised and submitted to parliament within a week, but it still has not seen the light of day.

It is all part of the government's disturbing pattern of heady talk and little substance. Its 'Master Plan for the Acceleration and Expansion of Indonesia's Economic Development' to 2025, which was the subject of a two-day government summit chaired by Yudhoyono in Bandung, West Java, last week, made impressive predictions about growth - and not much about how to get there.

'There's no details, no policies, nothing,' said Nick Cashmore, country head of securities broker CLSA in Indonesia. 'Build roads - that's all this country has to do. China has built roads, rails and everything else, and taken off.'

Indonesia would do well to emulate China in actually following through on grand infrastructure development plans. China is spending about 9 per cent of GDP per year on infrastructure, while Indonesia is spending only 4 per cent.

In the mid-1990s, infrastructure investment in Indonesia exceeded 6 per cent of GDP but dropped below 3 per cent following the 1997-1998 Asian financial crisis. The World Bank has estimated that Indonesia needs to spend between 7 and 9 per cent of its GDP on infrastructure.

Indonesian state-owned companies have pledged to invest up to US$200 billion in the national economic development master plan. At last week's summit, Yudhoyono challenged Indonesia's private sector to be the 'main players' in developing the economy. However, given that the private sector accounted for only 0.7 per cent of Indonesian GDP in infrastructure development last year, it is hard to imagine them rising up to meet the president's challenge.

So that leaves foreign investors. In November last year, a visiting Chinese government delegation signed an agreement to invest US$6 billion in infrastructure projects.

But other countries, including the US, South Korea, and Japan, see a possible opening. While state-owned Chinese companies have frequently won bids for infrastructure projects with curiously low bids, Indonesian officials have complained that they then demand to renegotiate a higher price after building begins.

Even worse, the Indonesian government has been forced to conduct a review of all Chinese-made power plants built under the fast-track programme because most have load factor problems, said Kuntoro Mangkusubroto, head of a presidential working unit on development.

'We want to know why this is so,' he told the South China Morning Post. 'If they do not reach the 90 per cent load factor, we can say they are not performing well.'

This has not been lost on American companies.

'How good are Chinese-made boilers, turbines, et cetera? Yes they are cheaper -subsidised - but what is their maintenance costs versus General Electrics products?' said Wayne Forrest, president of the American-Indonesian Chamber of Commerce in New York.

In early May, the US Overseas Private Investment Corp will be hosting a regional investment promotion conference in Jakarta. The chamber has urged the Jakarta government to make changes to attract more foreign investment in infrastructure which includes ending the traditional public-private partnership model.

'The Yudhoyono government is trying to remake the model, but after three infrastructure conferences [since 2005], few Western firms are back in Indonesia in power or roads,' he said. 'The reason being it is hard to put non-recourse finance in power and toll roads after what happened during the 1998 Asian financial crisis.

'The model also persists because China will offer Indonesia cheap credit to build infrastructure,' Forrest said. 'It's hard to look a gift horse in the mouth.'

Growth funding

Questions raised about how Indonesia's grand schemes will be paid for

Indonesia's plan forecasts that by 2025 gross domestic product in US dollars could be as high as: $4.5tr