Infrastructure setback in Indonesia

Indonesian President Joko Widodo is facing a major setback after suspending construction of elevated toll roads and railway tracks following a string of recent construction accidents. My personal experience of visiting Indonesia, mainly in traffic-clogged Jakarta, is that Southeast Asia’s largest economy is in dire need of infrastructure development, especially roads. Two years ago, I almost missed a flight home from Jakarta after spending two hours on the roads heading toward the Indonesian capital from the suburbs.

When Mr Widodo won the presidential election and launched an aggressive infrastructure drive in October 2014, with a budget of US$450 billion by 2019, investors and businesses cheered. Transport and logistics are among their major concerns given the nature of Jakarta’s traffic jams and floods, not to mention the broader problems of serving a market of 260 million. With 17,000 islands spanning 5,000 kilometres from east to west, moving goods and people by road, rail, sea and air is not easy.

Logistics costs account for 26% of Indonesia’s $861-billion economy. That’s one of the worst numbers in Asia, far higher than in Singapore (8% of GDP), Malaysia (14%), Japan (9%) or South Korea (13%). With a government pledge to modernise infrastructure and welcome foreign direct investment in logistics, Indonesia is on the right track to reduce its logistics costs to 19% of GDP by 2020, according to the global consulting firm Roland Berger. The figure could fall to 9% by 2035 with further reforms in port operating models and better development of port infrastructure, it added.

But the recent suspension of accident-plagued elevated rail and road work casts doubt over the way forward of infrastructure development. In total, there have been 14 accidents in the past six months at sites handled by state-owned builders, causing nine deaths and many other injuries.

“I told the public works minister to tighten supervision ... because it is not happening in just one place, but in so many other places,” Mr Widodo told reporters last Tuesday following the latest accident earlier that morning. “Regular and tight supervision is necessary. We hope it will address negligence and other components in construction.”

Officials at the Ministry of Public Works and Housing, which is in charge of infrastructure construction, said the length of suspensions would depend on the result of evaluations, but work could be halted for up to a month. However, they insisted the suspensions should not disrupt infrastructure development targets.

But to some including myself, the moratorium is a rare step back for Mr Widodo, who has promised to build some $350 billion worth of roads, railways, airports and other infrastructure to help people get around. He has been counting on these projects to improve economic equality across the archipelago and make businesses more competitive.

But frequent accidents have raised questions about whether these projects were well planned and designed in the first place. Ordering a half to construction that is already under way is an aggressive approach that could also spook financiers.

Some funding schemes might be renegotiated and any prolonged delays could put pressure on the finances of the contractors. Waskita Karya, the state-owned contractor for nearly half of the accident-hit projects, has seen a surge in debt levels after raising funds from banks and capital markets.

The government has so far received pledges for just over half the funds needed to help develop some $327 billion worth of projects in the pipeline. Just $15 billion has come from the state budget, with about $83.5 billion to be put up by the private sector.

The World Bank has said that Indonesia has a $1.5-trillion infrastructure gap compared with other emerging economies. The country certainly needs outside money given that government revenue has been battered by the end of the commodities boom and tax compliance remains poor.

Out of 245 projects in Mr Widodo’s pipeline, just six have been completed since the programme started in 2016, at a cost of $976 million. The credibility of the government as well as the transparency and accountability of its infrastructure schemes will be vital to attract the huge sum of private funding needed, with the bulk committed by China.

For Mr Widodo himself, the delays could undermine his credibility ahead of the April 2019 presidential election. Campaigning for local elections just began the week before the president’s order to halt infrastructure construction. Gubernatorial elections are planned in half of Indonesia’s 34 provinces on June 27, while polls in 39 cities and 115 regencies will also have a significant bearing on Mr Widodo’s bid to retain the presidency next year.