November 7, 2011 1:26 pm

Indonesian boom highlights infrastructure crisis

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Rows of cargo containers clutter the tarmac outside an overflowing warehouse at Jakarta’s airport where there are not enough landing slots for all the planes. The chaotic scene offers the most graphic illustration of how strong economic expansion is straining Indonesia’s worn out infrastructure just as it emerges, once again, as a regional power.

The young democracy of 240m may be booming, but the situation at the capital’s airport epitomises one of the biggest problems holding back south-east Asia’s largest economy: its roads, ports, power plants and bridges have fallen far behind its needs because of years of government underspending.

So while the economy has grown at 6 per cent a year over the past five years – data on Monday revealed 6.5 per cent growth in the third quarter – investment has significantly lagged behind. Infrastructure bottlenecks are now hitting crisis levels and threatening to undermine foreign investment and growth potential.

“Our international airport has reached nearly twice the capacity it was built for. It has become unworkable,” said Bayu Sutanto, chairman of the association for charter airlines.

In the decade after the Asian financial crisis, Indonesian spending on infrastructure dropped from eight per cent of gross domestic product to just two per cent. It rose to three per cent in 2010, but still fares poorly compared with regional neighbours, and also lags behind India and China, which invested a respective five and nine per cent. Two-fifths of Indonesians live without electricity, even fewer have access to clean water, and about half the country’s roads are unpaved.

“Since the financial crisis of 1997-1998 we have really underspent on infrastructure and to gain competitiveness regarding our regional peers we need to start investing more,” vice-president Boediono, who goes by just one name, said. “The natural consequence of this prolonged under-investment is a lack of competitiveness that Indonesia now faces as it reintegrates into the global economy.”

In recognition of the problem, Susilo Bambang Yudhoyono, Indonesia’s president, in May launched an economic “master plan” largely aimed at improving the nation’s infrastructure. Under the blueprint, the government hopes over the next three years to add tens of thousands of megawatts of power and thousands of kilometres of motorways, while upgrading hundreds of ports, airports and waterways.

Analysts caution, however, that Indonesia will need both strong political leadership and hundreds of billions of dollars in private financing – neither of which is guaranteed – to achieve a target of GDP growth of at least 7 per cent by 2014.

Chart: Indonesian economy

During his seven years in office, Mr Yudhoyono has been unable to significantly improve infrastructure because of insufficient state funding, poor enforcement of contracts, red tape, government corruption and land disputes – all of which have scared off investors.

As a result the government has been unable to find the bulk of the capital needed to fill a 49 per cent infrastructure budget shortfall, or more than $200bn, from private investors needed to meet targets set for 2014. The government has allocated just $12bn for infrastructure in 2011.

A leading Indonesian private equity fund manager said there is not enough commercial incentive to invest in infrastructure projects, weighed down by bureaucracy and legal uncertainties. Profit is higher and returns come faster in sectors such as resources. In infrastructure, “the return and the risk profile simply haven’t matched yet,” said the manager, who asked not to be named.

Business leaders say the biggest impediment to better infrastructure is legal uncertainty, in the form of thousands of overlapping land claims. That was supposed to change under a land acquisition bill stranded in parliament. The measure would set levels of compensation for land owners and give authorities the right to evict people living in areas needed for public infrastructure projects.

“There should be certainty in this by now. It is a matter of national interest” said Suryo Sulisto, chairman of the Indonesian Chamber of Commerce, whose members include parliamentarians and business leaders. “Without improved infrastructure, sustained growth cannot be realised in Indonesia.”

Mr Sulisto has promoted the creation of an infrastructure development bank to bridge the gap of more than $200bn between public and private financing, but the government has not yet responded to the suggestion.

“We hope the government will take the steps to make infrastructure spending happen. That means passing the land acquisition bill and finding a solution for the lack of long-term funding,” Mr Sulisto said.

The task ahead is daunting, admits new trade minister Gita Wirjawan, but not impossible. “All it will take to turn things around is the successful implementation of one major government infrastructure project. If we can get the land law out and show real progress on infrastructure, billions in investment will start flowing,” he said.

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