Sometimes a trip from Jakarta airport to a city centre hotel will take five hours; others it will take 20 minutes.
The journey has become synonymous with the infrastructure woes facing Indonesia: a country with 300 million people, which is an ordeal to navigate. But a sector that requires hundreds of billions of dollars of investment could be the saving grace for an economy that’s going from bad to worse.
That was the takeaway message from GTR’s Indonesia Trade and Commodity Finance conference in Jakarta, where experts scratched their heads in unison at the myriad problems facing the world’s fourth most populous nation.
KPMG says Indonesia needs US$70bn of infrastructure investment imminently. The Asian Development Bank (ADB) puts the long-term figure at 10 times that. However, all are agreed that trade in Indonesia will continue to languish until some of that capital is put to work.
The construction effort alone would help pick up some of the oversupply in industrial commodities lying in warehouses around the Southeast Asian nation, with nickel, copper and iron ore reserves going unsold due to the slowdown in China.
But where will this money come from? Delegates at the event voted on a three-pillared financing assault from development banks, commercial banks and the Indonesian state budget.
On the development bank front, the ADB last year committed to tripling its budget for Indonesia, while there are already six projects under consideration by the nascent Asian Infrastructure Investment Bank (AIIB). The totality of these would be US$12bn – some way short of the deficit.
Dominic Zimmer, the head of export finance for Asia at LBBW Singapore said that “this shows very clearly the role to be played by the commercial lending sector” – but it may not be as simple as it sounds.
There are still central bank restrictions on investing in Indonesia. While the country’s “ease of doing business” ranking has improved under President Jokowi’s rule, business is still often arduous.
“It can still take three to six months to get your final license and start building, or whatever your business is,” says Ricky Natapradja, the head of Euler Hermes’ Indonesian business.
Raising capital for Indonesian projects can be hard work too. Onshore borrowing can be restricted by pricing, collateral requirements and unwillingness to match the tenors large project finance deals usually require. International lenders, meanwhile, are sometimes put off by the accounting standards here.
The Indonesian government has been making some moves on the transport infrastructure front, and recent developments in the power sector have been encouraging too.
This week, the Adaro consortium announced it was close to finalising US$3.2bn for the Batang power project in Java, which will put two 1,000MW power plants onto the grid.
The deal is expected to be signed in June, with 48% of the finance coming from the Japan Bank for International Cooperation (JBIC), 32% from commercial banks and 20% in equity. The coal-fired station will offer the Adaro Energy Group the chance to burn some of its own supply, having been left high and dry by China’s snubbing of Indonesian coal.
“A commitment to mid-sized, pragmatic infrastructure projects would encourage more commercial financing.”
Meanwhile, the Jakarta to Bandung high-speed rail project is seen as a statement of intent by the Indonesian government – but the statement may not be the correct one, Zimmer says.
The US$5.5bn project is Indonesia’s first venture into high-speed territory and will be constructed by China Railway International, with China Development Bank providing 75% of the cost.
But is this really what Indonesia needs? Local opposition has grown amid allegations of financial irregularities. And while projects such as these may display commitment to investment, they run the risk of becoming “lighthouses” – isolated pieces of infrastructure, with no connection to or reflection of the real, underlying need.
A commitment to mid-sized, pragmatic infrastructure projects would encourage more commercial financing, the LBBW banker said, while other speakers pointed to the 2018 Asian Games as an opportunity to stimulate real investment into the sector.
The games will be split between Jakarta and Palembang and could have a transformative impact on the local infrastructure. Large events are often opportunities to invest in civil and transport infrastructure, both of which would boost the trade economy.
But one should only look at the lost legacy of the 2000 Olympics in Athens and the successive World Cups in South Africa and Brazil to realise that this is not always the outcome.
In Brazil, corruption plagued the bidding process for infrastructure projects, with billions being syphoned off and very little material investment being made – an issue that brought hundreds of thousands to the streets, in protests which threatened to overshadow the tournament itself.
Indonesia ranks 88 on Transparency International’s Corruption Perceptions Index. Tales of graft in the country are rife and while that’s not to say the opportunity will be lost, it is a signal that expectations should be managed.
The opportunity for Indonesia, if managed carefully, is great. But infrastructure should not be viewed as a panacea for all of the country’s many ailments, merely a way of getting back on track.