How covid-19 will dampen indonesia’s infrastructure developments

The Indonesian economy is plagued by a range of “infrastructure gaps”, places where much-needed physical and digital infrastructure is either substandard or absent, mostly due to

under-investment. For example, many hospitals and clinics in remote provinces lack 24-hour access to clean water and electricity. Due to Indonesia’s rapid growth, industrialisation and

urbanisation in the past 20 years, its infrastructure needs have soared. Successive Indonesian governments at all levels have struggled to build infrastructure at the pace required. The

result has constrained its domestic economic performance and its trade integration with the broader Indo-Pacific region. Estimating the investment required to close these gaps is

challenging. A widely accepted figure is a World Bank estimate that Indonesia needs to invest US$500 billion in basic facilities over the next five years to support continued growth.

Indonesia’s decision to build a new national capital in the province of East Kalimantan adds an estimated US$33 billion to the bill. Finding a budget to fill the gap will get harder as

Indonesia’s economy and finances come under pressure from the COVID-19 pandemic. This will in turn affect infrastructure development. This year’s national infrastructure budget stands at

about US$29 billion. The government will directly fund a fraction of the total of US$412 billion in investments from 2020 to 2024 to build infrastructure projects, providing 40% of the total

budget, or about $US164.8 billion. The remaining funds will come from state-owned enterprises (25%) and the private sector (35%). The pandemic will force the government to reallocate funds,

while other sources of money will dry up in the ensuing recession. CHALLENGES FACING INFRASTRUCTURE DEVELOPMENT The Perth USAsia Centre has developed the _Indonesia Infrastructure Map_ to

help visualise the country’s infrastructural challenges. The map identifies Indonesia’s major projects by sector. It contains 206 infrastructure projects and will continue to be updated. The

map highlights that Indonesia has unique connectivity challenges unlike other countries of its economic status and population. One challenge is inherent to its archipelagic geography: the

country’s 17,000 islands suffer from a lack of connectivity with each other. You can see this reflected in the spread of projects on the map. Most are focused in the densely populated west,

on the islands of Sumatra and Java. According to the National Strategic Projects pipeline, Java and Sumatra have 154 projects planned compared to 79 elsewhere. By contrast, eastern Indonesia

remains sparsely serviced by new infrastructure projects. And in the provinces of Papua and West Papua they are non-existent. On its larger islands, even major economic centres are not

well-connected. For example, there is not yet a major railway connecting the two most populated cities of Jakarta and Surabaya. The lack of essential infrastructure can also be blamed on

policies like the fuel subsidy. It eats up much-needed cash, about US$9 billion a year, from the national budget. The subsidy also distorts markets, leaves Indonesia’s currency vulnerable

and incentivises reliance on motor transport. The proposed capital in East Kalimantan can be viewed as an effort to spur a new hub of economic activity off Sumatra and Java. Around this new

site there are also few existing infrastructure projects. The Balikpapan-Samarinda toll road is nearing completion and Jokowi himself said it will be connected to the new capital. If

geography wasn’t challenging enough, Indonesia now has to contend with the vexing financial and economic costs of the COVID-19 pandemic. The government’s fiscal response has consisted of

initial packages worth US$2 billion followed by a major stimulus of US$26 billion. It can finance some of this by reallocating funds from exisiting programs, but resources will become

scarcer as government revenue takes a hit from the sluggish economy. The government has raised its deficit cap to 5% in order to borrow more funds for emergency measures. Foreign lending

will also begin to dry up. A broader question hangs over how sustainable foreign loans have been, including those from China. The clouds of a credit market crisis are already gathering.

Indonesia is especially vulnerable to increased borrowing costs. The Indonesian rupiah has declined precipitously, increasing the repayment burden of its foreign-denominated debts. GETTING

HARDER TO FILL As the full force of the economic crisis due to the pandemic takes hold, it is likely Indonesia will need a lot more cash for stimulus measures. This will eat into Indonesia’s

ability to pay for its own infrastructure projects. However, Indonesia should view infrastructure development as part of its recovery, as it provides employment, opens up new markets and

creates efficiencies. A deft move for Jokowi would be to take advantage of collapsing oil prices by cutting remaining fuel subsidies and redirecting the funds to economic recovery and

infrastructure. Indonesia will need to draw more on the resources of the range of infrastructure and connectivity (I&C) initiatives that have been launched by governments in the

Asia-Pasific since 2010. These include China’s Belt and Road, Japan’s PQI and the recently established Asian Infrastructure Investment Bank, to name but a few. These initiatives collectively

offer over US$1 trillion. Participating in these also means managing the geopolitics involved. In the aftermath of the COVID-19 pandemic, Indonesia will need to carefully consider the role

infrastructure plays in its economic recovery.