What lies ahead for Indonesia’s infrastructure in 2015?

What lies ahead for Indonesia’s infrastructure in 2015?

Plans are in place to bolster Indonesian infrastructure in the year ahead, but actions will be needed to make those plans a reality.

Guest post by Marius Toime

Andrinof  Chaniago, the new minister of Bappenas, Indonesia’s National Development Planning Agency, has his work cut out. To deliver his 2015-2020 economic and social development plan, Chaniago says that Indonesia needs $450 billion of infrastructure funding, with an estimated 30% coming from the private sector. That is big money to pour into seaports, airports, power plants, roads and railways.

While the plan is still in progress, Chaniago presumably hopes that the remaining 70% will come from the state budget. However, this would mean a significant increase in 2015 infrastructure allocations compared to previous years, even with a reduction in fuel subsidy spending.

There are plenty of willing lenders – the $3 billion Sarulla geothermal power plant’s financial close earlier this year is a good example – so 30% may be possible.

Why then, did the previous Indonesian administration find it so hard to get projects off the ground despite bold master plans and fundamentally sound public-private partnership laws?

Challenges such as matching long-dated assets – often involving concessions running for 20 to 30 years, with shorter term lending favoured by banks due to Basel III incentives – have been well documented and are not particular to Indonesia.

However, other critical issues – the land acquisition process, for instance – are more firmly within the government’s control and it is these issues that Chaniago and the newly-elected President Joko Widodo, known as Jokowi, must now set about to address. On the land acquisition front, regulations due to become effective from January 1, 2015 should help expedite the process.

So what else lies ahead for Indonesian infrastructure in 2015? To begin with, the new government has begun reviewing the list of prospective projects. Changes are inevitable. The 10 seaports, 10 airports and 10 industrial estates promised by Jokowi in his election campaign, for example, are expected to be featured in the new medium term plan. In particular, seaport development should be a focus as Jokowi views maritime connectivity as crucial to Indonesia’s long term growth.

What is less clear, however, is what will be done with the bulky state owned enterprises (SOEs) – such as Pelindo II, the Indonesian port corporation – which dominate Indonesia’s domestic industry and have so far managed to escape reform.

These SOEs often have a central role in public-private partnership projects as contracting agencies but otherwise have few incentives to be competitive or take on project risks – such as demand risk – that are ordinarily placed with the public sector, resulting in stalled projects. Replacing boards and senior executives in the worst performing SOEs might be a good start but may not be enough?

Jokowi should consider all options, including privatisation, so as to take advantage of private sector efficiencies. In the case of seaports, he should consider a landlord model where port operations are carried out by private companies. In particular, privatisation could create diverse opportunities and promote new private infrastructure investment, as well as unlock capital to channel towards social and economic development projects.

With insufficient financial resources onshore, Indonesia is set to continue welcoming foreign direct investment generally in 2015, but only to the extent that it is not only about exporting raw commodities.

Following ore export restrictions, metal miners must look to invest in smelters or processing facilities or shift their focus elsewhere. As of July 2014, applications had been submitted for 64 smelters/mineral processing facilities. Even if some of these projects are overstated, this will be an ongoing feature of private investment in 2015, propelled by Chinese interests.

Playing into the broader infrastructure piece, one of the key challenges will be to develop the associated power and other infrastructure needed to support these facilities. Coal value-add requirements, however, may be postponed due to strong lobbying and a weak coal market.

Continued ASEAN integration is in the cards, with increasing presence from China and also Russia, as it turns to Asia in the face of sanctions in the West. In particular, the Asian Infrastructure Investment Bank (AIIB), the new development bank proposed by China, is likely to play a part in Indonesia’s infrastructure future. We should hear more about AIIB’s structure and investment policies in the months ahead.

A key concern is if the strong opposition in the House of Representatives will hurt Jokowi’s chances of pushing ahead with his infrastructure plans. Political risk has settled considerably since Jokowi took office, but is likely to remain at heightened levels for the time being.

Recently, Aburizal Bakrie reconfirmed his leadership of the powerful Golkar party. It remains to be seen whether the power play between Jokowi and Prabowo Subianto, the leader of the opposition coalition together with Golkar, proves to be an ongoing stumbling block. In one scenario, Jokowi could use a strong opposition to keep his politicians nimble without the shackles of an inflexible majority coalition, although this is far from certain.

Whatever happens, there is general hope that 2015 will bring fresh ideas and momentum to resolve long standing-issues around Indonesian infrastructure. Coming in on a clean platform, and with a clear message regarding corruption, Jokowi is off to a good start. Bold moves are required to tackle SOE reform and put the option of privatisation on the table.

Fundamentally, perhaps, Jokowi’s most important focus should be to ensure that specific projects are well prepared and thought out, properly structured and bankable. In this respect, the plans are in place. Making them happen needs more than words.

Marius Toime is a project finance partner in Berwin Leighton Paisner’s Singapore office. With over a decade of international experience in the Asia Pacific region, Marius has a deep and proven track record representing clients on cross-border projects in the natural resources, infrastructure and shipping sectors. Marius is recognised as a leading lawyer in all the major legal directories including Chambers Asia 2015, Legal 500 Asia Pacific 2015 and IFLR1000 (2013 edition).

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