Finding New Ways to Meet Indonesia’s Growing Appetite for Infrastructure

A panel discussion on Indonesia’s infrastructure program at the 3rd annual meeting of the Indonesia Economic Forum (IEF) at the Shangri-La Hotel Jakarta on November 15, 2016. (Photo by Jurnasyanto Sukarno/IEF)

There is a new paradigm to respond to Indonesia’s growing appetite for infrastructure, which is estimated to require about $370 billion within five years, a government official said at the 3rd annual meeting of the Indonesia Economic Forum (IEF) at the Shangri-La Hotel Jakarta on November 15, 2016.

Under this new paradigm, according to Wismana Adi Suryabrata, deputy minister for development financing at the National Development Planning Agency (Bappenas), if the private sector can do an infrastructure project, the government would leave it to them.

If not, the government will try to get it done under a public private partnership (PPP) scheme.

Only if those two are not available would the government resort to using its own budget.

“We cannot rely only on the state budget, although the government has already set aside some money for infrastructure by cutting the oil subsidy,” Wismana said during a panel discussion on Indonesia’s infrastructure program and its key opportunities, moderated by Tusk Advisory managing director Raj Kannan. 

PPP has proven successful in Indonesia, he said, citing as examples the Central Java power plant and a fresh water project in East Java.

Another possibility is financing through a debt and equity scheme, which is being prepared to develop the toll road connecting Java by 2017, using pension funds and fees paid to the National Health and Security Agency (BPJS), Wismana said.

A third option is the limited concession scheme (LCS), an innovation for increased efficiency in infrastructure development proposed by Tusk Advisory.

Tusk Advisory managing director Raj Kannan moderating the panel discussion on Indonesia’s infrastructure program at the 3rd annual meeting of the Indonesia Economic Forum (IEF) at the Shangri-La Hotel Jakarta on November 15, 2016. (Photo by Jurnasyanto Sukarno/IEF)

Kannan said one of this scheme’s key advantages is that the government receives an upfront payment, which can be used immediately to fund other development projects around the country or be set aside as an endowment to fund future growth from its proceeds.

“We think this idea (of LCS) is quite applicable for Indonesia,” said Wahyu Utomo, deputy minister for infrastructure acceleration and regional development at the Coordinating Ministry for Economic Affairs.

He added that he has already advised related government agencies, including the president’s chief of staff, that this scheme would work for the country.

Roadblocks

But financing is just one of the challenges Indonesia needs to overcome on the road to meeting its infrastructure needs, with problems related to land acquisition and capability also serving as roadblocks.

To address other problems that could stall key infrastructure projects, the Indonesian government formed the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) in 2014.

Wahyu said the KPPIP is working on improving its coordination with the land ministry to identify all the problems it is facing and provide them with the right solutions.

“The function of KPPIP is very clear. We identify the problem, we try to give solutions and monitor or check whether the solutions are acceptable or give other solutions,” Wahyu said.

A smooth and sound infrastructure development project, according to Nick Prior, Deloitte’s global head on infrastructure and capital projects, should have at least three elements beforehand: upfront diligence, capability and use of data.

Upfront diligence, he said, is about doing a lot of preparation before you start, while capability refers to the organization, control, governance, process, and use of technology. 

But unfortunately Indonesia lacks capability, according to Danang Parikesit, a professor of transportation studies at the Gadjah Mada University (UGM). 

When it comes to capabilities for infrastructure development, Indonesia is short of about 15,000 engineers, he said.

“With the massive infrastructure needs, I think we should engage as many young engineers as possible in dialogue about infrastructure and get them interested in infrastructure development,” Danang said. 

During the recent Indonesia Infrastructure Week, where a thousand engineering students from all over Indonesia gathered, he said he was surprised to find them underexposed to new ideas such as infrastructure financing, with almost no one having even heard of PPP. 

“In this country only a certain privileged few are aware of the new paradigm that we are talking about now,” he said.

Finding solutions

This situation, Danang continued, served as an impetus for a movement called “Time to be Heard” or ‘Saatnya Didengar’, which tries to engage as many young Indonesians as possible in talks about infrastructure development.

On the part of the government, Wahyu said the KPPIP team recognizes that the infrastructure delivery process can be substantially enriched by involving private experts with international experience.

“The collaboration between civil servants and local or international experts is very important in this case,” Wahyu said.

Dr. Atif Ansar from the University of Oxford also suggested that Indonesia “think big but start relatively small”.

“You don’t have to implement the entire project in one go,” he said

Danang added that there is a need to build capacity for officials involved.

“Most local governments don’t have the capacity to do big projects, I think a small or medium sized projects with a PPP scheme would be a good learning instrument to move forward to do bigger projects,” he said.

These steps are what Indonesia is already doing right now, starting with industrial and tourism zones, said Wismana from Bappenas.

But for Indonesia to attract more foreign investors to participate in its infrastructure development projects, Deloitte’s Prior emphasized the need for political and regulatory stability.

Dr. Atif added that accountability is also important, citing the ports of Singapore and Rotterdam became the most important in the world because they are very well managed.