Marking its first year in power, Indonesia’s new government has launched a major drive to boost the nation’s transport, power and water infrastructure. The administration in Jakarta is taking a leading role in helping to overcome the challenges facing the industry, and the private sector has been given a clearer, more efficient legal and administrative framework within which to operate. As a result, the government is also continuing to focus on developing an infrastructure investment programme estimated to be worth $460bn-500bn, which, if successful, would create opportunities across the board and the archipelagic nation.
By the Numbers
In terms of transport, Indonesia had 287,926 km of asphalted and 220,074 km of non-asphalted roads in 2013, the most recent year for which figures were available from Statistics Indonesia. In addition, there were two rail networks: 3464 km of active line on the island of Java and 1352 km on Sumatra. Inactive line on the two islands totalled 2860 km and 483 km, respectively. The railways are owned and operated by the state rail network, Kereta Api Indonesia (KAI).
In terms of ports, the nation has over 100, and they are a key form of infrastructure given that the archipelago consists of more than 17,500 islands spread across three time zones. The busiest ports in the country are Tanjung Priok in Jakarta, Tanjung Perak at Surabaya, Belawan in Sumatra, Balikpapan in Kalimantan and Makassar in Sulawesi.
Four state-owned enterprises (SOEs) operate the main ports, Pelindo I in Belawan, Pelindo II in Tanjung Priok, Pelindo III in Tanjung Perak and Pelindo IV in Makassar. The smaller ports are overseen by local governments and the Ministry of Transport (MoT). The nation also has some 145 airports and airfields, 25 of which are run by two SOEs, Angkasa Pura I and Angkasa Pura II, with the rest overseen by the MoT’s Directorate General of Civil Aviation (DGCA).
Power Segment Statistics
In power, the state electricity company, Perusahaan Listrik Negara (PLN), which owns and operates about 85% of the country’s generating capacity, had a total installed capacity of 33,464.42 MW in 2013, according to figures from Statistics Indonesia. Independent power producers (IPPs) make up the rest. The actual capacity of the system may be substantially lower, however, with Vice-President Jusuf Kalla telling the press in March 2015 that total generating capacity was 17,540 MW.
Despite a 2009 law, the PLN has an effective monopoly on distribution and its network is most developed on Java, with some outer islands still experiencing irregular supply. In 2011 national electricity coverage was just 71%, and by 2014 the figure had risen to 74%, according to the State Ministry of National Development Planning (BAPPENAS). The government has a target of 90% electrification by 2020. Most generation capacity uses fossil fuels (48% coal, 22% natural gas, 12% oil), with 11% coming from hydroelectric, 2% from geothermal, 5% from waste heat and some renewables.
Water Projects
In water, the constitution states that provision of water services is a local government responsibility. Local authorities thus control water utilities (PDAMs), with the number of these companies reaching 547 in 2013, according to Statistics Indonesia. Piped water provision is in need of improvement, with access to clean water supply at just 55% in 2014, according to a BAPPENAS report, compared to 85% in Thailand, Indonesia’s regional peer. This has had a significant impact on public health. Infant mortality in terms of number of deaths per 1000 live births, for example, fell between 1971 and 2010 from 145 to 26 deaths, but then rose again to 34 in 2012.
Water availability also affects agricultural output. The BAPPENAS report showed that dam irrigation coverage in the country was 11%, compared to Thailand’s 20%. The lack of irrigation impacts the rice surplus – rice being the staple crop – with this at 1.81m tonnes per year in Indonesia but 10m tonnes per year in Thailand. Another related area of infrastructure provision in need of investment is flood defence and coastal protection. Indonesia lies both north and south of the equator in a region known for intense tropical storms, while removal of vegetation and forest land in particular has left many inland communities susceptible to increased flood risk. Jakarta itself was hit badly by flooding in 2007, with at least four killed and 20,000 evacuated. In addition, the country is on a major fault line, producing earthquakes and volcanic eruptions. Disaster relief measures and infrastructure, such as debris and sediment control and disaster management facilities, are thus also in need of investment. A further challenge here is the fact that areas in north Jakarta are sinking at a rate of 7.5-14 cm per year, with the sea level likely to be some 3-5 metres above street level in 50 years’ time, if no action is taken. This makes flood defences for the capital an urgent necessity, along with other projects to address the impact of changes in relative heights on the area’s drainage patterns.
Challenges
Successive governments have been aware of the need to improve infrastructure. They have produced a series of national plans aiming to bring in the private sector, via public-private partnerships (PPPs), to help fund a major upgrade. Areas in need of attention include roads – Jakarta was recently deemed to be the world’s most congested city. BAPPENAS reports that vehicle density nationwide stands at 511 vehicles per km, compared with Thailand’s 450. Only 33% of Indonesia’s roads are 6 metres wide or more versus 80% in Thailand. In rail, railway density is 0.25 km per sq km, as compared to 0.79 km per sq km, and the average speed of a vehicle in urban areas is 8.3 km per hour.
In sea transport, much international traffic currently goes to Singapore and Port Klang in Malaysia, transshipping onto smaller vessels that serve Indonesian ports, as these currently lack the ability to accommodate larger, Triple-E class vessels. Although it is improving, congestion at the ports is still severe, particularly at Tanjung Priok and Tanjung Perak. Airports are also facing connectivity problems with the hinterlands they serve, particularly in Jakarta and Surabaya, where journey times into town can be excessive. In transport overall, the World Bank reports that for 2013, logistics costs amounted to some 27% of GDP, a major brake on economic development and higher than Vietnam (25%), Thailand, (20%) and Malaysia (13%). The respective figures for Singapore and the US were 8% and 9.9%.
Electricity Coverage
In electricity, meanwhile, the 74% coverage ratio compares with 100% in Thailand, which has a reserve capacity of 30% and consumption per capita of 1800 KWh. The respective figures for Indonesia are 10% and 680 KWh per capita. According to Vice-President Kalla, only eight out of 22 power plants in the country have a “safe” reserve margin of 30% or more. The Ministry of Energy and Mineral Resources has also stated that the country needs an additional 230 GW of power by 2030, which translates into more than 10,000 MW of extra capacity per annum.
With the water infrastructure also in need of an upgrade, a thorough-going investment programme is necessary. Infrastructure spending itself has been around 5% of GDP for many years, however, as compared to China’s 8.5%. BAPPENAS puts the figure at 5.04% in 2014, down from 5.07% in 2013, although up in cash terms from Rp466.69trn ($38.39bn) to Rp521.7trn ($42.92bn). It peaked at 5.24% in 2006 – a figure that came after a low of 3.77% in 2005. The funding comes from four different sources: the central government budget, local government budgets, SOEs, and the private sector. The breakdown in 2014 was 39.6% central government, 30.9% local government, 16% SOEs and 13.4% private sector. However, by mid-2015 the private sector’s contribution decreased.
Key Investment Needs
In 2011 the previous government of President Susilo Bambang Yudhoyono launched a major, long-term development programme, the Master Plan for the Acceleration and Expansion of the Economic Development of Indonesia (MP3EI). This specifically highlights the need for infrastructure improvement and runs to 2025. The plan aims to transform Indonesia into one of the world’s top 10 economies by that year, via real annual economic growth of 7% to 9%. To achieve this, the total investment needed was calculated at around Rp4000trn ($330.64bn).
The MP3EI has made progress, but was hampered by a variety of factors. Problems with land acquisition in particular have held up projects, while the emphasis in the plan on private sector funding – with PPPs expected to account for around 20% of the financing – turned out to be a stretch, as private sector companies were reluctant to commit to infrastructure projects with a high cost and low internal rate of return (IRR). The new government has recognised the need for more state funding and risk taking in infrastructure, as well as the need for organisational and regulatory changes to create a more investor-friendly framework.
Budgets & Bureaux
The new government has launched a revised National Medium Term Development Plan (RPJMN) for 2015-19, with a boosted budget and emphasis on infrastructure, while in February 2015 the Indonesian parliament also approved a revised annual budget for the year, boosting state spending to an historic high of Rp1980trn ($163.67bn).
Capital expenditure was almost doubled in the revised budget, with two of the main beneficiaries being the Ministry of Public Works and the MoT. The central government allocation for infrastructure was up by nearly 50%, at Rp290trn ($23.97bn), while the budget also allows for a reduction in dividend payments by SOEs, which should help to strengthen their financial position. The funding increase is being financed by the phasing out of subsidies on fuel, which started in November 2014. With the exception of a small subsidy on diesel for fishermen and the very poor, the ending of this growing fiscal burden has freed up an estimated $18bn for fresh government investment.
At the same time, a number of institutions are being reorganised, with new bodies also established to facilitate the PPP process, including the Committee of Infrastructure Priorities Development Acceleration (KPPIP), under the Ministry of Economic Affairs, while the Ministry of Finance (MoF) is forging ahead with its PPP Centre, tasked with handling PPP project preparation and auction and the preparation of a revised PPP Book. Sarana Multi Infrastruktur (SMI) and Indonesia Infrastructure Finance (IIF) have been set up to facilitate project financing, while Penjamin Infrastruktur Indonesia (PII) has been established to boost project creditworthiness and the Government Investment Centre set up to facilitate the financing of land acquisition. On this, Presidential Decree No. 30/2015 has been signed, enshrining into law better compensation packages and timetables for compulsory purchases. The process may still be lengthy, at up to 500 days, but the new regulations mark a major improvement on previous practices. However, as of mid-2015 the government was planning to shut down PII and transfer all its assets to SMI.
Implementation
With a much-improved budget and administrative infrastructure in place, the roll-out of physical infrastructure is now moving ahead. A BAPPENAS study on the RPJMN shows that for the full programme to be implemented, some Rp6500trn ($537.29bn) will have to be invested over the 2015-19 period. This breaks down into Rp1270trn ($105.31bn) on roads, Rp278trn ($22.98bn) on railways, Rp166trn ($13.72bn) on urban transport, Rp563trn ($46.54bn) on sea transport, Rp91trn ($7.52bn) on ferries, Rp182trn ($15.04bn) on aviation, Rp1080trn ($89.27bn) on electricity, Rp535trn ($44.22bn) on energy and gas, Rp1090trn ($90.1bn) on water resources, Rp666trn ($50.05bn) on clean water and waste, Rp384trn ($31.74bn) on housing, and Rp242trn ($20bn) on information and communications technologies (ICT).
The amount needed for investment is considerably more than the savings from ending fuel subsidies and from the increased central government budget, resulting in a financing gap that the government hopes will be filled by SOEs, local authorities and the private sector. The new government has also prioritised certain areas of infrastructure to focus available resources in the most important areas. In transport, the priority is the ports and maritime infrastructure, while boosting power and water capacity has also been highlighted.
Expected Improvements
In the maritime sector, the “Sea Toll Road” plan will bring improvements to 24 ports, six of which are to become major focal points. The 24 include seven on Sumatra, three on Java, five on Kalimantan, four on Sulawesi, two on Papua, and one each in the Nusa Tenggara, Halmahera and Maluku islands. The six focus points are Belawan, in Sumatra; Batam, adjacent to Singapore; Tanjung Priok in Jakarta; Tanjung Perak, the port for Surabaya in East Java; Makassar in South Sulawesi; and Sorong in Papua.
Also in transport, 15 airports will be upgraded or built from scratch. Five of these are on Kalimantan, four on Sulawesi, two on Papua and one each on Sumatra, Java, Nusa Tenggara and Maluku. Nine airports are also to receive cargo-handling improvements, including the national gateway, Soekarno Hatta, in Jakarta. Of these, 10 have been prioritised, eight for cargo and passengers, and two as tourism projects.
Rail is getting a boost as well, with the 15.7-km north-south line of the Mass Rapid Transit (MRT) system in Jakarta prioritised, along with some 3258 km of railway lines on Java, Sumatra, Sulawesi, Kalimantan and Papua. This includes the $3.24bn Trans-Sumatra railway, with a feasibility study on this expected to report back by the end of 2015; the $2.76bn Trans-Kalimantan railway, which would begin from scratch in 2016; the $2.76bn Trans-Sulawesi line, which would also be entirely new; and a Trans-Papua railway currently subject to a detailed feasibility study. In terms of road transport, phase one of the 2600-km Trans-Sumatra Highway broke ground in April 2015, with the contract for the massive project being awarded to the state-owned Hutama Karya.
Water, Water Everywhere
In the water sector, there are also major provisions in the RPJMN. As part of the country’s broader effort to expand and improve water infrastructure, 49 reservoirs will be constructed, including three at Lampung and four at Aceh in Sumatra, with that island also getting reservoirs at Riau, Lausimeme and Komering.
On Java, two reservoirs are targeted for Banten and two for the Yogjakarta Special Region, alongside the Mantenggeng reservoir in Central Java and the Semantok, Bagong, Lesti and Wonodadi reservoirs elsewhere on the island. Bali is expected to get three new reservoirs; Kalimantan will have two; Sulawesi, eight; the Maluku Islands, one; and the Nusa Tenggara Islands will end up with 11 reservoirs.
Much also remains to be done in terms of water treatment. “Water treatment plants are still in an early stage of development,” Meelan Gurung, group managing director of Acuatico, told OBG. “In fact, today 50% of water produced per litre goes to waste. Developing wastewater plants, therefore, is an option for investment that should be carefully looked at and analysed.” Furthermore, the massive National Capital Integrated Coastal Development (NCICD) project is a three-phase scheme that aims to strengthen Jakarta’s flood defences and redevelop key areas of the city, at an estimated total construction cost of $21.5bn.
Phase 1 aims to slow down coastal erosion around Jakarta, heighten existing sea walls, upgrade the urban drainage system, prevent upstream river water from entering the Jakarta area and accelerate water sanitation programmes. The second phase will add an outer sea wall along the west side of Jakarta Bay along with the start of land reclamation. The final phase will see the east side of the bay also similarly treated, depending on the rate of subsidence there. The project also entails the creation of a new central business district and waterfront on the reclaimed land.
Power
BAPPENAS has outlined seven hydroelectric projects. In North Sumatra, work began on the Asahan 3 project, with an expected capacity of 2 x 87 MW, in January 2015, while Jatibarang in Central Java will see 1.5 MW produced using the recently opened reservoir. West Java has schemes under way at Upper Cisokan (4 x 260 MW of future capacity), Jatigede (110 MW) and Rajamandala (47 MW), while Titab brings 1.8 MW to Bali and Pandan Duri will generate 3.5 MW for Lombok. Some 25 geothermal projects are also up for tendering in 2015, with a target of geothermal providing 10% of new power generated by 2020.
Twelve of 80 solar power plant projects were also at the tendering stage in early 2015, plus a much delayed coal-fired station at Batang, which would generate 2000 MW, should also be operational by 2018.
Given the need for some 10,000 MW of additional capacity per annum, however, the grid is in need of some major new suppliers. IPPs are expected to deliver around 70% of the new capacity, with an extra 35,000 MW target set for the period up to 2020. The need for power is representative of the tremendous amount of new investment Indonesia seeks.
Outlook
Many of the projects described are in the midst of securing financing, while others are still being planned or debated. The new PPP Unit is expected to publish a PPP Book during 2015 that will outline the projects that are open to investment and their expected timelines. This will create significant opportunities for private investors to get involved in the early stages of the country’s massive infrastructure overhaul.
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