If Indonesia’s to become the ‘New Industrial Developed Country’ it aspires to be, it needs to attract foreign investors to finance its structural development. Here’s where that money will go.
If there is one thing that’s almost certain to prevent Indonesia achieving its ambitious plans to become one of the world’s top 10 economies by 2025, it is the inadequacy of its infrastructure.
To understand how these structural inefficiencies could be a major impediment to future growth, there’s no need to look further than the inordinately congested and gridlocked road network of Indonesia’s capital (something that is singlehandedly estimated to cost the economy $1.5 billion USD annually). The fact that it is cheaper to import oranges from China than transport them from Borneo to Jakarta is an indicator of just how uncoordinated Indonesia’s transport links are.
So while Indonesia’s 240 million-strong population makes for an exceptionally dynamic marketplace, the country’s inadequate and crumbling roads and erratic power grid ensure the country’s true potential is not yet being truly exploited. For that to happen, over each of the next five years an additional $70 billion USD is needed to augment the $115 billion USD worth of infrastructure projects already scheduled or in progress.
Understandably, President Susilo Bambang Yudhoyono and the Indonesian government have concluded that elevating today’s transport, aviation, communications and energy infrastructures to true 21st Century standards is fundamental for tomorrow’s prosperity. It has encapsulated this thinking into a ‘Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development’ (MP3EI), a blueprint for growth that concentrates on four particular elements of infrastructure improvement.
First, there is energy. While raw materials, inexpensive labour and an abundance of land should encourage a vibrant manufacturing sector, the country’s industrialists are all too often hamstrung by unreliable and geographically-limited power generation and transmission systems.
On the plus side, Indonesia benefits from having some of the world’s most widely available geothermal power. This, together with the potential offered by energy production using biomass from the region’s palm oil plantations, creates an opportunity to develop compact, distributed generation plants serving local communities.
Secondly, aviation. The exceptional nature of Indonesia’s island geography is the perfect catalyst for the development of an exciting domestic aviation marketplace for short-haul flights. However, more effective traffic control systems and on ground support networks are essential if the expectations of a rapidly expanding population of air passengers are to be properly met.
Thirdly, resolving environmental issues is seen as increasingly important. Economic growth inevitably produces environmental problems that necessitate the upgrading of infrastructure to deal with them. For instance, the obligation to provide safe and adequate water supplies for drinking, as well as sanitation. This is particularly important in burgeoning cities and towns where the arrival of rural newcomers imposes excessive pressure on the existing below-capacity drainage and sewer systems. There will also be waste management issues to deal with, which will demand improved methods of treatment, disposal and handling.
The final infrastructure component of the Master Plan is architecture, construction and engineering, with the building of modern roads, the improvement of ports, and completion of other major civil engineering projects, all identified as important drivers for growth. The development of such projects will allow the faster, cheaper delivery of goods and produce to domestic and international markets.
The ability to improve infrastructure quickly will be the major determinant of Indonesia’s future growth.
However, given their sheer number, the government fundamentally lacks the capabilities to implement all the infrastructure projects that it deems essential. So while it has plans for revitalising the country’s most heavily congested containerports, and the constructionof three more in Jakarta, Batam and Papua, this can only be done with construction and engineering expertise and muscle from outside the country.
So the government will require foreign companies to contribute to the $468.5 billion USD necessary to make its plans a reality. To achieve this, it is looking to establish collaborative projects through public-private partnerships (PPPs) with interested outside investors.
One example is the joint venture between Indonesian coal company Adaro Energy and two Japanese construction firms in the building of a $3.2 billion USD coal-fired power plant in central Java.
Aware that without a long or extensive track record in similar ventures some potential funders might be reluctant to commit, the government is prepared to inject finance to bridge the ‘viability gap’ in schemes where profit margins are too commercially slender for comfort.
Should everything go to plan, with foreign investment forthcoming, then Indonesia’s GDP will rise to $4.5 trillion USD by 2025 and its per capita income quintuple from $3,000 USD a year currently to $15,000 USD. This will require Indonesia to consistently post growth rates of 7% to 8% year on year, something that it can only do by throwing off infrastructure constraints. If it manages to achieve that, the country will find itself moving from 17th position in the world to well and truly sitting at the economic top table.