Infrastructure Development under the Jokowi Administration: Progress, Challenges and Policies.

• Author: Salim, Wilmar
• Position: President Joko Widodo of Indonesia

In many ways, the policy and management bottlenecks in the infrastructure sector are a microcosm of the problems of the overall management of government in Indonesia. Peter McCawley (2016) 1. Introduction

Infrastructure investment has been identified as one of the key catalysts for unlocking a country's overall economic potential, promoting growth, creating jobs and reducing poverty. Efficient infrastructure is also needed to lower distribution costs, make prices of goods and services more affordable, and improve living standards (ADB 2017). Good infrastructure brings better social and economic mobility, leading to better living conditions. For Indonesia, a country with a large population and an archipelagic territory, developing efficient infrastructure is important for ensuring sustainable and inclusive growth.

Infrastructure investments have been traditionally financed by public funds (OECD 2014). After the 1997-98 Asian Financial Crisis, Indonesia's infrastructure spending fell from around 9 per cent of GDP in the mid-1990s to around 2 per cent in 2001 (OECD 2015). By 2014, infrastructure spending had increased to 3.6 per cent of GDP. This level, however, was relatively low compared to Asia's other high growth economies, which spent around 6 per cent of GDP on this rubric (OECD 2015). The political decision to maintain fuel subsidies in the wake of rising world oil prices had shrunk Indonesia's limited fiscal space, thus preventing the country from adequately funding infrastructure investment. As a result, Indonesia's infrastructure crumbled, leaving much of the population with insufficient access to basic facilities, including electricity, water and sanitation. Lack of quality transport and logistics infrastructure has, in turn, constrained local businesses from competing globally.

Under President Joko "Jokowi" Widodo, Indonesia aims to boost its infrastructure development. Specifically, Jokowi's Nawacita (nine priority programmes) prioritizes accelerating infrastructure development to connect the peripheries with growth centres and, promoting connectivity between islands in the archipelago (KSP 2016). Moreover, President Jokowi has created the Committee for the Acceleration of Priority Infrastructure Delivery (KPPIP), a special task force that has a mandate to coordinate policies among various stakeholders and to unblock stalled national strategic projects and priority projects. Arguably, Jokowi's development strategy has narrowly focused on building infrastructure and attracting infrastructure investment to address inequality, reduce poverty and promote growth (Warburton 2016).

This paper discusses the progress and challenges facing infrastructure development in Indonesia from the era of Susilo Bambang Yudhoyono until the current administration. (1) The study focuses on this period because there is, in fact, a continuity in the leaders' vision and political commitment to infrastructure investment for accelerating growth. At the same time, there is a continuity of policy and management bottlenecks that make the progress of infrastructure development not as smooth as expected. As McCawley (2015) argues, many of these problems are not new and the central issues are related to a lack of clear strategy, consistent implementation, and strong law enforcement.

This article is organized as follows. The next section discusses the state of infrastructure under President Susilo Bambang Yudhoyono. The third section compares and contrasts Jokowi's infrastructure agenda with that of his predecessor. The fourth section focuses on the structural problems facing the infrastructure sector, including issues related to land acquisition, planning, and financing. This paper also discusses some concerns regarding national priority projects and the state-led approach to promote infrastructure development, and also whether Indonesia should borrow more for its infrastructure investment. The final section provides concluding remarks and some policy recommendations.

2. State of Infrastructure under the Yudhoyono Administration (2004-14)

When Susilo Bambang Yudhoyono became the sixth Indonesian president, the state of the country's infrastructure ranked among the lowest in the region. According to the World Bank (2014), the lack of infrastructure investment had deterred investors, hence preventing Indonesia's economic growth from reaching its potential. In fact, the World Bank estimated that Indonesia's dilapidated infrastructure contributed to a 1 per cent loss of economic growth each year since 2004 (World Bank 2014).

The Yudhoyono administration had big ambitions to improve the state of infrastructure to boost growth. During Yudhoyono's first term, Indonesia hosted several infrastructure summits to attract investors, both foreign and domestic. In January 2005, the first infrastructure summit was held in Jakarta, and was attended by more than 500 investors from all around the world. The government offered a total of ninety-one public-private partnership (PPP) projects worth US$22 billion to the private sector. The reaction to these offerings, however, was disappointing (World Bank 2007). This was because there were many policy obstacles to prepare bankable projects, and many projects were not well prepared. A second Infrastructure Summit was held in December 2006, where ten PPP projects valued at US$14.7 billion were identified to be the focus of efforts to improve the quality of project preparation. But like the first summit, although investors generally showed cautious optimism, most opted for a wait-and-see approach (McCawley 2015).

McCawley (2015) explains the key issues why the summit failed to attract private investors, including: shortage of well-prepared and well-documented projects available for investors to examine; lack of clear regulations that set guidelines for activities within the infrastructure sector; and economic nationalism hindering market access to the sector. Moreover, Article 33 of the Indonesian Constitution stipulates that economic sectors which are important to the state and crucial for public welfare are controlled by the state and must be developed to give the maximum benefit to the people. This article is always used by special interest groups to oppose privatization, liberalization or any reforms that might reduce the state's control in any particular sector (McCawley 2015).

After the failure of the first Infrastructure Summit, the government took some important remedial steps. In 2005, new regulations were put in place requiring competitive bidding of PPPs and appropriate risk management of guarantees for PPPs (World Bank 2007). In 2006, the government prepared a wide-ranging "Infrastructure Policy Package" aimed at: encouraging competition; eliminating discriminatory practices that obstruct the private sector's participation in infrastructure provision; and redefining the government's role (including separating policy-making, regulatory and operational responsibilities) (World Bank 2007). In 2007, the PPP initiatives to boost infrastructure investment were complemented with major increase in budgeted public spending. This was made possible by the government's improved fiscal situation driven by revenue from the commodity boom.

In addition to introducing the new law and regulations, the Yudhoyono administration also set up new institutions to support project preparation. One of the key institutions is the state-owned infrastructure financing company, PT Sarana Multi Infrastruktur (PT SMI), established in early 2009 with 100 per cent shares owned by the government through the Minister of Finance (SMI 2017). The company is assigned to provide financing, advisory services and project preparation plans for various infrastructure projects in conjunction with private and/or multilateral financial institutions within the PPP scheme. The longer term goal is to transform this state-owned company into an Indonesian Development Financing Institution. Through PT SMI, the government can provide Viability Gap Funding support to make returns on investment for the private sector investment become adequately attractive. PT SMI holds 34 per cent of the share of PT Indonesia Infrastructure Finance (PT IIF). The latter is a private non-bank financial institution established under the Ministry of Finance regulation to focus on investing in commercially feasible infrastructure projects. Other shareholders of PT IIF include the Asian Development Bank (ADB), the International Financial Corporation (IFC), the German Development Bank (DEG), and Sumitomo Mitsui Banking Corporation (SMBC).

To provide a stronger legal foundation for private sector participation in infrastructure investment, the Yudhoyono administration passed the Presidential Regulation No. 13/2010 (amended to Presidential Regulation No. 56/2011) on Public-Private Partnerships (PPP). Then, in 2011, President Yudhoyono launched The Masterplan for the Acceleration and Expansion of Indonesia's Economic Development Plan (MP3EI 2011-2025). It emphasizes the need for heavy investments in infrastructure and improvement in the investment climate to boost average annual growth to 8-9 per cent between 2015 and 2025. This document was endorsed by the government as a legal document through the Presidential Regulation No. 32/2011 to provide directions on key infrastructure targets, including the estimated financial needs for key infrastructure projects. The document also indicates the government's intention to encourage more private sector participation in infrastructure development. The MP3EI projected that more than 70 per cent of the US$468 billion infrastructure investment needs would be contributed by the private sector through public-private partnerships. Considerable time and effort were dedicated to develop and disseminate the MP3EI, but it lacked a coherent strategy for planning and delivery. The MP3EI, however, has been largely forgotten and is...