Indonesia's bold infrastructure plan

Dr. Wahyu Utomo, Deputy Minister of Infrastructure and Regional Development Coordinating Ministry of Economic Affairs of the Republic of Indonesia

Where will the investment go and how will international infrastructure players participate?

President Joko Widodo understands the link between infrastructure investment and economic growth. When first elected four years ago, he announced a US$350 billion infrastructure plan that promised to remove existing bottlenecks and improve access to infrastructure outside of the main island of Java.

This year, his government announced an even more ambitious plan for 2020 to 2024. More than US$400 billion will be spent across hundreds of projects. Twenty-five new airports are in the pipeline, as are power plants, waste-to-energy facilities and lots of mass transit projects. The plans also include developing the groundwork for a new capital city.

It's not all big-ticket items. In fact, much of the infrastructure plan focuses on enhancing the value of the assets created in that first round of investments.

“Our success in delivering backbone infrastructure projects over the past few years will have a massive economic impact on Indonesia going forward,” said Dr. Wahyu Utomo, Deputy Minister for Infrastructure and Regional Development at Indonesia's Coordinating Ministry of Economic Affairs. “Now we need to start focusing on improving the supporting infrastructure that is needed to unlock the value of those backbone investments.”

Around 60 percent of the planned investment is earmarked for transportation projects.¹ As Dr. Utomo notes, many of Indonesia's urban areas suffer from growing congestion and connectivity challenges. Much of the investment will go towards creating new mass transit options and improving the efficiency of existing services.

Initial plans anticipate that about 40 percent of the funding will come directly from the government while around a quarter will come from various state-owned enterprises. The government is hoping to encourage the private sector to invest the remaining 35 percent.

“The private sector has been very engaged in Indonesia's infrastructure markets and we hope to encourage that participation to continue and grow,” noted Dr. Utomo. “We also hope to expand private sector participation outside of economic infrastructure to include social assets and services like education, health and social services.”

Energy projects are expected to receive the second largest slice of the planned budget. Some will be going towards improving the country's overall energy capacity and diversifying its mix.

“We were able to develop a very robust electricity market in a very short amount of time,” noted Dr. Utomo. “Now we need to do the same for the oil and gas sectors. The government recognizes that investments into energy don’t just drive foreign direct investment and create export potential. They also allow the country to achieve energy security and diversify our energy sources.”

New waste-to-energy projects are also in the plan. “The goal is to both reduce our waste in an environmentally-friendly way and to improve the energy supply,” added Dr. Utomo.

Beyond simply announcing a massive pipeline, the government of Indonesia is also working hard to create the right environment to attract investment. Reducing regulation has been a key priority for this government.

“Speed of service, speed of giving out permits, are the keys to bureaucratic reform,” President Widodo told a recent rally to outline his vision for the country. “When I see there is an inefficiency or lack of effectiveness, I will remove it.”²

Earlier this year, the President noted that his government had reduced the number of permits required to invest into power plants by more than 75 percent (from 259 just a few years ago).³ Major new regulation has also been passed to support private investment into other sectors and to help improve the land acquisition process.

At the same time, the government is also focusing on improving the quality of the projects it is bringing to market. A pool of funds has been set aside for enhancing the quality of project preparation. And a new team has been created to help identify and clear roadblocks in the development and implementation process.

Dr. Utomo also notes that more capacity building will be required at the local and regional level, particularly in key growth markets. For example, some of Indonesia's 12 Special Economic Zones are operated by local government and private companies. These players often require additional support to meet the needs of international investors.

“We need to further enhance our track record for bringing projects to market successfully,” added Dr. Utomo. “That, in turn, will help improve private sector appetite for future infrastructure projects in Indonesia.”

Many of the key indicators suggest that Indonesia is making great progress in delivering on its infrastructure-driven objectives and vision. The country's debt ratings have been upgraded to investment grade. International rankings of national ease of doing business and competitiveness also show remarkable improvements in Indonesia's business and investment environment.

“We still have a lot of work to do, but my conversations with international investors suggest that we are on the right track towards creating a very welcoming investment climate for foreign investors,” added Dr. Utomo. “We're building capacity, we're simplifying our processes, we're passing supportive regulation and we're designing innovative incentives to help draw investors to our pipeline.”

Indonesia's plan may be bold. But the government is taking the right steps to deliver on it.