Indonesia aims to invest around $430 billion in infrastructure from this year to 2024, a 20 percent increase compared with the $359.2 billion invested from 2015-19. However, some challenges – such as land acquisition and contractual frameworks – stand in the way of the country achieving its ambitious goal.
Last year, the government said it would provide $159 billion of the spend needed for infrastructure over the next five years. It added that state-owned companies would provide around $90 billion, with the private sector expected to invest the $180 billion balance.
The country’s infrastructure development is mostly taking place in the transportation sector. According to Fitch Solutions, roads, rail and port infrastructure projects account for 29 percent, 22 percent and 23 percent, respectively, of the total value of infrastructure projects in the current planning and construction phases.
The largest project in the pipeline is the $33.7 billion Trans-Sumatra toll road project, with more than 400 out of a total 2,900 kilometres completed as of June. Also, the $6 billion Jakarta-Bandung high-speed railway is a key project supported by a soft loan from China as part of the Belt and Road Initiative, Fitch noted.
“We believe the government will continue to primarily develop the transportation sector, particularly in ports and railways,” Ayik Candrawulan Gunadi, partner at ABNR Counsellors at Law, told Infrastructure Investor.
“Referring to the most recent Public-Private Partnership Book, out of 83 prospective PPP projects, there are 50 in the transportation sector, including roughly 13 port and 15 railway projects,” he said.
Last November, the Indonesian government received a $100 million intermediary loan from the Asian Development Bank to boost private investment in infrastructure projects. The government said it would on-lend the ADB loan to PT Indonesia Infrastructure Finance through PT Sarana Multi Infrastruktur, a state-owned infrastructure financier and a stakeholder of IIF.
Private capital participation in Indonesia’s infrastructure, however, may struggle to meet the 41.8 percent share of the planned 2020-24 infrastructure spend.
“Despite various incentives and financing schemes the government of Indonesia has introduced for infrastructure development, we are inclined to say that private sector participation, especially in greenfield projects with greater construction risk as opposed to brownfield projects, are still restrained due to the legal uncertainties and excessive bureaucracy,” Gunadi said.
“Discrepancies between the regulatory framework on licensing requirements implemented by the central government and local governments are often found in the early stages of infrastructure development. Further, while the private sector expects predictable capital expenditure for projects, the legal uncertainties in land acquisition – particularly where there is a pending dispute over the land title or a landowner who refuses to sell the land – may become a bottleneck for projects and lead to cost overruns.”
Legal matters aside, it may also be challenging to introduce a sophisticated contractual framework and risk allocation in infrastructure projects where the project owner is a regional government which is new to a public-private partnership, Gunadi said.
“A unique way of negotiation may be needed to convince the project owner to accept a market standard contractual framework and to ensure that each risk is allocated to the party which can manage it best. After all, proper risk allocation is crucial to present projects as bankable to potential lenders.”