Indonesia's Infrastructure Bottlenecks

CORRECTION: The Tanjung Priok Dua Port upgrade has not been delayed. We regret the error -- eds.

In January of 2012, the Indonesian government abruptly cancelled tenders for the badly needed US$1.3 billion new container terminal in North Jakarta, angering international construction bidders seeking the project, ostensibly because the government decided that Indonesia could build the port without foreign help.

It was the first major public manifestation of the economic nationalism that has resulted in a wide range of attempts to cut the power and presence of multinational firms in the Indonesian economy, ranging from construction to food imports to restrictions on the mining companies that have done business in Indonesia for several decades.

Today, however, the Tanjung Priok port project, known as Priok Dua, remains stalled, apparently encoiled in red tape and inefficiency, along with a series of other projects in apparent defiance of ambitions on the part of President Susilo Bambang Yudhoyono, who said during his 2013 budget speech that the country needs to boost its infrastructure spending by 15 percent this year in order to keep up with the country's needs and maintain its gross domestic product growth, which has averaged 5.4 percent from 2000 to 2012, climbing to above 6.5 percent for the past two years.

The industry magazine Dredging Today quoted an executive with the state port operator Pelindo II saying the transportation ministry has failed so far to issue concession permits for the New Priok project, expected to include three container terminals, an oil and gas terminal and a seven-kilometer toll road linking it to the original Tanjung Priok.

Although the money apparently has been allocated and the project could move forward fairly rapidly once the permits are issuef, the delay encapsulates Indonesia's perennial problems with construction of badly needed infrastructure projects. Spending was expected to total US$20 billion for the current fiscal year as the country attempts to solve the problem of bulging ports, backed-up highways, jammed airports and a host of other problems brought about by the country's fast-growing economy and rising population.

"They are building so many huge buildings in the business district area of Jakarta that I can't believe traffic will be able to move once they open," said a western consultant. "Not a single new road except a flyover that has been under construction for two years. It would seem that they pay no attention at all to the infrastructure capacity of the city. They are going to pay a heavy price for this eventually."

Jakarta's new governor, Joko Widodo, took office last September with a vow to clean up the sprawling city's massive traffic and environmental problems. He has shaken up the board of directors, replacing the president director of the organization, which is seeking to build a long-stalled rail-based rapid transit system in an effort to get the plan moving. The first phase of the line is expected to run 15.2 kilometers and is expected to be in operation by November 2016. A second phase 8.1 km phase is expected to be complete by 2018 if the government can get its act together.

The 100-year-old Tanjung Priok port, Indonesia's biggest, "does not have efficient facilities to handle the volume of the trade Indonesia deals with now," according to a report by the Japan Development Institute. "Especially, the port is facing the problem of limited land unable to hold containers and shallow depth for the berthing of larger size ships now commonly used. This situation piles up the transportation costs in terms of extra time and expenses which not only prevents new investments but also induces the withdrawal from existing business. Therefore, the solution has to be made immediately to attract investments once more to this region."

How long the port enlargement will be delayed is uncertain. But the problems of bureaucratic delays and other bottlenecks have meant, for instance, that cement sales, which rose by 8.8 percent to 13.6 million tonnes in the first quarter of 2012, have only grown by 4.5 million tonnes in the first quarter of this year - the slowest pace for seven months. Analysts attributed the slowing sales to delays in the government's infrastructure projects. In the first three months of this year, the government disbursed only Rp 10.4 trillion of the Rp 184.4 trillion it earmarked for infrastructure spending, according to Finance Ministry data.

It appears that 10 infrastructure projects worth US$9 billion to build airports, ports, railways and water supply facilities - all private public partnerships -- remain stuck in limbo. An Indian investor has withdrawn from the Kulonprogo International Airport and Bali Baru Airport schemes, while other projects, including the Pelaihari Port in South Kalimantan and a railway from Rantau Prapat to Muaro in Sumatra as well as a railway track in Gede Bage, West Java, have attracted no concrete interest from investors, according to the Indonesian-language business magazine Kontan, which cited delays in project management and the switching of financing from private to government to business to business schemes.

Project Location Value Kulonprogo Int?l Airport Jogjakarta $500 million Bandara Ngurah Rai Bali $510 million Railway tracks Rantau Parapat-Duri-Dumai-Tl. Kuantan-Muaro North Sumatra $3.78 billion Gede Bage railway track West Java $133 million PLTP Batang Toru 510 MW (steam power plant) North Sumatra $1.2 billion PLTA Merangin 350MW Bengkulu $562 million Palangkaraya Water Supply Central Kalimantan $900 million Karian Water Supply Banten $690 million Lombok Water Supply West Nusa Tenggara $700 million Ungaran Water Supply Central Java $10.22 million

Source: Amcham Indonesia

"I wouldn't disagree with the US$9bn contention; something needs to be done to speed up bureaucratic ineptitude," said an environmental consultant based in Indonesia. "I'm sure that Priok Dua permits will be issued - nothing happens on time."

The question is how long it will be before the country's overtaxed infrastructure problems start to seriously cut into economic growth. Inadequate power production, combined with government delays in authorizing construction, are restricting capital investment. The largest economy in Southeast Asia, Indonesia is heavily export-oriented, with manufacturing comprising 26 percent of gross domestic product, mining and quarrying 7.8 percent and agriculture - Indonesia is the world's biggest producer of palm oil - at 13 percent. Delays at airports and ports are beginning to slow the flow of exports and imports.

The 2013 budget allocates Rp193.8 trillion (US19.94 billion at current exchange rates), 11.76 percent of the entire budget and an increase of nearly 15 percent over last year's budget. Capex, which includes spending for roads, bridges, airports and seaports, is projected to be up 28 percent over 2012 to Rp216 trillion (US$23 billion, although US$2.47 billion remains unspent from last year.

"The expenditure funds set aside in the 2013 Budget could be a determinant factor whether Indonesia can go through the troubled period safely and post higher economic growth with targeting an increase in foreign investment inflows to the country," according to a report on the situation by Malaysia's External Trade Corporation. "The expenditure funds set aside in the 2013 Budget could be a determinant factor whether Indonesia can go through the troubled period safely and post higher economic growth with targeting an increase in foreign investment inflows to the country."

The government's plans are nothing if not grandiose, launching a US$150 billion "Master Plan for the Acceleration and Expansion of Indonesia's Economic Development" in May of 2011, seeking to catapult the country into the 10 biggest economies by 2025, tripling per capita gross domestic product to US$15,000 by 2025 - 12 years from now ?which would make it the fastest growing economy not only in Asia but on the planet. China doubled its GDP per capita in just 12 years, while India, starting a little later, did it in 16. It seems a far reach.