President Joko “Jokowi” Widodo is using the revised 2015 state budget to fix what, according to analysts, is Indonesia’s Achilles heel — infrastructure, which is responsible for the economy performing below its full potential.
The President, benefitting from his bold move to fully scrap Premium fuel subsidies, will allot the biggest fiscal savings to the Public Works and Public Housing Ministry, the Transportation Ministry and the Agriculture Ministry, which will get an additional Rp 32 trillion, Rp 20 trillion and Rp 16.9 trillion, respectively.
The funds will then be used to build growth-generating infrastructure projects promoting connectivity in the archipelago. The construction of toll roads is to be quadrupled from 260 kilometers in the last five years, to 1,000 km by 2019, while railways will be extended from 5,434 km to 8,692 km.
In the energy sector, Jokowi plans to build new power plants with a combined capacity of 35,000 megawatts. As part of his maritime focus, the number of seaports — also under the watch of the Transportation Ministry — will be increased from the existing 278 to 450 within five years.
In the agriculture sector, there will be 49 new dams built within five years in order to improve farmers’ access to water, in a bid to reach Jokowi’s goal of becoming self-sufficient in rice in three years.
“When we finish building [the dams], we will have a lot of rice — so overabundant that we might be worried about what to do with the excess rice,” Jokowi said. “I have checked myself and found that for the past 30 years, water irrigation projects have not improved at all.”
Given the huge amount of money allocated, the President said he wishes to see swift progress in infrastructure development — even promising to the public that he will fire ministers failing to meet the targets.
“Many said to me: ‘Pak, please give targets that are realistic,’” Jokowi recalled. “But why should I give small targets? The ministers then could just slack off.”
The Jokowi administration expects that the economy will benefit from infrastructure development, as the President has set a target for Indonesia to expand by 5.7 percent this year, before taking off to 7 percent within the next five years.
Gundy Cahyadi, an economist at DBS Bank, acknowledged that infrastructure was the basis of everything else, and that existing infrastructure bottlenecks had driven various production costs to rise significantly right across the country.
However, he said that upcoming infrastructure projects would potentially pose a series of challenges to the government ranging from funding, to profitability of the projects themselves. “Would the private sector be willing to construct roads in Papua?” he asked.
The government will need to address other issues as well, such as those related to land acquisition and project feasibility, to ensure that the realization will go as expected.
“The main risks of this infrastructure overhaul will depend on the will of the government. How serious are they and how willing are they to work hard to achieve the target?” Gundy wrote in an email.
Other economists also said that Jokowi might face obstacles in achieving his objectives. In addition to the problems that can arise when building infrastructure, there are financing issues as well as the issues related to funding and other bureaucratic reforms.
“They [the ministries] are simply not capable of handling spending increases of the magnitude envisaged in the budget,” said Taimur Baig, the chief Asia economist with Deutsche Bank.
“In the past, both central and local government bodies have struggled to spend their allocated sums due to delays in bidding, procurement and account preparation,” he noted.
Poor human capital and supply-side bottlenecks had also caused spending to grow slowly, according to Baig.
Separately, UOB economist, Ho Woei Chen, lauded the government for starting the infrastructure revamp. However, she said that more clarity was needed regarding the government’s plans to start a land bank and to expedite projects and procurements.
“There might be some issues in the early stage, but things are expected to improve,” said Ho.
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