Infrastructure setbacks in Indonesia reflect broader risks

Infrastructure setbacks in Indonesia reflect broader risks

President Jokowi’s desire to secure his infrastructure vision before next year’s election holds risks for Indonesia as well as his own candidacy.

Doubts are growing over Indonesian President Joko ‘Jokowi’ Widodo’s infrastructure vision, following a spate of construction-related accidents on elevated toll roads and railways. 15 accidents have occurred over the past six months, mainly at Jakarta sites handled by state-owned enterprises (SOEs). Nine people have been killed and many others injured, leading to a suspension of work pending enquiries.

These accidents necessitate reflection upon the broader risk that Jokowi’s lofty ambitions carry. His desire to realise as many projects as possible before the 2019 election has influenced construction companies to overemphasise project progress at the expense of required safety measures and quality management procedures. If not addressed, economic and logistical risks associated with these projects will mushroom into broader political risks for the government moving forward.

Indonesian infrastructure: a risky model

Jokowi’s aggressive infrastructure drive was the cornerstone of his 2014 election campaign. He had promised 225 priority infrastructure projects spanning ports, airports, industrial plants, toll roads and railways – with a budget of US$450bn. Jokowi has hedged his bets by asking the private sector to shoulder most of the cost. The state budget has only committed US$15bn, with SOEs contributing a further US$48bn.

There is thus a need to reflect on the quality of these projects, their investment potential, and the government’s ability to see them through.

Just 26 ‘priority projects’ have been delivered at the time of writing. Many, like the landmark US$6bn Jakarta-Bandung high-speed railway, have been delayed by red tape and insufficient financing. Nevertheless, the target completion date for most projects remains unchanged. Rushed work is likely a contributing factor in the accidents, with difficult completion targets encouraging risky workplace practices and shoddy workmanship.

Waskita Karya, the state contractor responsible for seven of the accident-hit projects, has come under pressure. Waskita is likely to face economic sanctions, pending enquiries conducted by an investigating committee. The suspension order will further damage Waskita’s finances. The company faces mounting debt and negative cash flow, with payment only received upon project completion. Company director M. Choliq has subsequently announced plans to divest US$294.8m worth of assets, to finance this debt.

The government still lacks half of the funds required for the US$327bn worth of projects currently in the pipeline. But its poor project management, and the precarious position of Waskita, will not reassure foreign investors.

Opaque environment discouraging for investors

Erwida Maulia questions the suitability of those appointed to do the work. She notes that despite Jokowi’s calls for a greater role for FDI, the bidding process often disadvantages the private sector. Bid winners are often those offering the simplest methods and cheapest prices, and there is demonstrable favouritism towards Waskita Karya and other SOEs.

Within such an environment, the recruitment of underqualified labour is widespread (the vast majority of Indonesia’s construction workers are without certification). There is also a lack of regular and tight project supervision. Overall, these workplace accidents, combined with a lack of accountability and an opaque bidding process, represent a red flag for investors. This is problematic at a time when the government is hard-pressed to find suitable financiers.

To compound the problem, workplace practices, particularly with large infrastructure projects covering multiple provinces, are often loosely legally enforced. Because of the difficult hurdles faced by authorities in acquiring land for infrastructure development, the Indonesian government has relaxed land acquisition procedures. In the bid to accelerate the acquisition process, a tight legal framework will be viewed as a secondary objective, enhancing operational risk. There is moreover a lack of clear jurisdiction between different government departments and agencies.

The role of China

Uncertainty shown by western investors has pushed Indonesia closer to China. Beijing is an obvious backer for Jakarta, given its own Belt and Road Initiative (BRI) plans. Through the BRI China has invested in Indonesia’s electricity sector, funding the construction of power plants and port facilities.

Jakarta and Beijing have committed to joint infrastructure projects in North Sumatra, North Kalimantan and North Sulawesi. China is now Indonesia’s second-biggest source of FDI, behind Singapore, and will likely surpass Singapore within the next 5-10 years. Relying so heavily on one country has its own risks, while China’s reputation for neglecting rigorous safety practices will further exacerbate the issue at hand. But without China’s substantial financial weight, infrastructure modernisation will almost certainly fail, progressively constricting GDP growth (predicted at 5.3% for 2018, below Jokowi’s 7% target).

Jokowi’s credibility at risk

Jokowi’s infrastructure pledge, particularly to develop the eastern provinces (Kalimantan, Bali, Nusa Tenggara, Sulawesi, Maluku, and Papua), was undeniably a calculated move. According to The Diplomat, currently 80% of economic growth is attributed to western Indonesia, whilst 52% of villages (around 39,000) have limited access to electricity and telephone lines.

Previous governments have not focused on narrowing this development gap. Jokowi’s mandate was won through promising infrastructure investment to improve rural-urban connectivity and promote equality between west and east. Doing so while reducing the costs for logistics and business, and harnessing Indonesia’s growing tourism potential in the process, reflected a win-win situation. Sadly, however, unfulfilled infrastructure promises will hit the east’s development the hardest.

On several fronts, the administration’s credibility has been dented ahead of the April 2019 election. Jokowi’s first challenge is the upcoming local and gubernatorial elections across 39 cities and 115 regencies, on 27 June. These will play an important role in his bid to retain the presidency next year.

Opposition lawmakers will seize the chance to embarrass and interrogate Jokowi and his allies over these infrastructure failings. Combined with fierce opposition from hardline Islamic groups, these setbacks risk reducing his advantage over election rival Prabowo Subianto, against whom he bitterly contested in 2014’s election.

Jokowi’s popularity rating nevertheless remains higher than his rivals, according to a recent survey. Under Jokowi, Indonesia has regained its investment grade sovereign debt rating – for which he will be remembered. He retains the backing of the major coalition parties going into next year’s contest.

Overall, although infrastructure remains the strongest basis for economic growth, Jokowi will be cautious about the risks of excessive strain over the next 12 months. To regain investor confidence, he will ensure his government is seen to take necessary measures to address the current problems. But so long as his administration avoids real scandal before next April, Jokowi will have the luxury of being able to curb his ambitions – with a view to extending his vision across another five-year term.

About Author

Alexander Macleod

Alex is a Manchester-based Analyst specializing in Southeast Asian political and security risk. He holds a PhD in Politics and Geography from the University of Newcastle, where he examined the role that online media play in promoting and sustaining Malaysia's racialized political landscape during general elections. Alex also freelances as a social media manager for a digital marketing consultancy. He blogs at