Widodo’s infrastructure drive is close to spiralling out of control

Photo: Joko Widodo official Facebook page

Indonesian President Joko Widodo launched ambitious infrastructure projects to create his legacy. Now he may be ruining it.

By Oliver Ward

Construction sites litter the Indonesian landscape as Joko Widodo pushes forward with his ambitious infrastructure drive. Widodo launched an expansive infrastructure campaign in 2014. He aimed to build 1,000 km of roads, 3,000 km of railways, 15 new airports, and 24 new seaports. The projects will cost a total of US$423 billion.

But Widodo may have untaken too much too soon. He is beginning to overstretch Indonesian finances. Limited private funding for the projects has meant the Indonesian government is facing the bulk of the costs.

Widodo built his infrastructure legacy on financial quicksand

Widodo’s government injected equity into the projects through state-owned enterprises (SOEs). For example, Kereta Api Indonesia put IDR27 trillion (US$2 billion) into the construction of a greater Jakarta commuter rail. Public servant pension fund, Taspen invested IDR3.5 trillion (US$258 million) into a subsidy company of contractors, Waskita.

Funding the projects in this way is not sustainable. Debt in Indonesian SOEs is at almost IDR200 trillion (US$14 billion). The government cannot issue more guarantees for lower borrowing costs without risking the national budget. The projects need more public-private funding partnerships. Securing private investment has been a problem.

Private sector funding has been slow to materialise

Widodo’s initial spending plan for the infrastructure projects included at least 30% of funding from the private sector.

Source: PWC

The Indonesian government enjoyed initial success. In 2015, foreign direct investment (FDI) in infrastructure sectors grew by 9.6% to US$11.3 billion. But it dropped off in 2016. In the first half of 2016, infrastructure-related FDI fell by 67%. The private sector currently accounts for around 20% of infrastructure investment. There is still an estimated funding gap of US$37 billion for the infrastructure projects.

The government is listing several SOEs as a public offering. It hopes to spark interest from foreign investors. The first SOE IPO (Initial Public Offering) was at the end of November. The state-owned company PP Presisi listed on the Indonesian Stock Exchange. Within seconds of listing, the offering price dropped 8%. This is a clear signal of the lack of investor appetite for the Indonesian infrastructure sector.

Why are private investors reluctant to invest?

There are several barriers which continue to put investors off. The pipeline of infrastructure projects and their completion dates are still unconfirmed. Land acquisition disputes have also delayed big projects. As of January 2017, 35 projects faced delays.

The legal framework for projects is also often uncertain. In the case of the Greater Jakarta commuter rail, the government rewrote the contract while construction was underway.

Procurement processes have not always been transparent. High regulatory burden and red tape have also slowed the construction process. Businesses need a large number of permits to carry out construction projects in Indonesia. These combine to create a negative environment for private investors.

Widodo is making attempts to improve conditions for investors

In 2015, Widodo amended the Land Acquisition Law. The amendment allowed the government to force the sale of privately owned land for the construction of projects in the public interest. It was because of this amendment that construction could begin on the Batang Power Plant in 2016. The project had been delayed since 2012.

The government also repealed 3,000 regulations that obstructed foreign investment. Widodo unrolled 13 packages for key industries aimed at easing investors fears. The packages included tax incentives for businesses and reduced the number of procedures required to start a business from 94 to 49. Widodo also reduced the number of construction permits required from nine to six.

Progress is too slow

There needs to be a marked improvement in ministerial bureaucracy. Widodo set the target of reaching 40th place in the World Bank’s Ease of Doing Business index by 2017. He only managed to reach 72nd position, up from 109th position in 2016.

To make more progress, Indonesia would benefit from a clear timeline for all upcoming infrastructure projects. The current approach has a list of priority projects, implemented sporadically through top-down decision-making. This can only happen with increased coordination between government departments.Each department must have their role in each infrastructure project clearly defined and work towards a firm deadline. Better communication would lead to better project management and more trust and investment from the private sector.

The government is reducing subsidies to fuel infrastructure investment

To close the funding gap left by the private sector, Widodo has reduced fuel and power subsidies and reinvested the money in infrastructure development projects. The scrapped subsidies saved Widodo’s government an extra US$19.1 billion.

Source: Indonesia Investments, PWC

There is turmoil on the horizon

The government cannot rely on cutting subsidies to plug the private investment deficit. With the 2019 elections fast approaching, Widodo must do everything in his power to prevent fuel prices rising. If fuel prices rise, he will quickly lose popularity. Widodo will need to reinstate subsidies before the 2019 election to guarantee public support.

Widodo must increase private investment by then. The upcoming IPOs of SOEs, Wijaya Karya Gedung and Jasa Armada Indonesia, will show if Widodo’s efforts to ignite investor interest have succeeded. He needs these listings to bear fruit. If not, the very infrastructure projects that were supposed to guarantee him the 2019 election victory, will lose it for him.