Indonesia targets crumbling roads to boost economy

A bridge collapse on Nov. 26 in northern Indonesia was the latest blow to the country's international competitiveness at a time when investors are increasingly looking to take advantage of strong growth in Southeast Asia's largest economy. An investigation is underway into the cause of the collapse, which sent cars, motorbikes, and a public bus tumbling into the murky Mahakam river, killing at least 21 people, but analysts say poor construction and maintenance, and insufficient use of materials are partly to blame.

Woefully inadequate infrastructure is one of the biggest challenges facing Indonesia, say investors, who often complain that a lack of roads and inefficient shipping networks hold up business. 

“At least 30 percent of a company’s production costs go to transportation,” says Latif Adam, an economist at the Indonesian Institute of Sciences, a government research center. He notes that the global average is closer to 10 percent.

Rampant corruption, legal uncertainties, and bureaucratic delays also threaten to undermine foreign investment at a time when Indonesia is banking on private financing to support around half of the $200 billion it has committed to infrastructure development.

As of October, officials in the capital, Jakarta, had spent only 30 percent of their annual infrastructure budget. They're now scrambling to use the rest before year’s end, says Mr. Adam, who worries that rush jobs could lead to more incidents like the bridge collapse.

Building connective infrastructure for a nation comprised of 17,500 islands has its challenges, but Franz Drees-Gross, the World Bank’s manager for sustainable development, which covers infrastructure, says legal constraints – including rigid tariff structures that constrain public utilities' budgets – pose some of the biggest problems.

As a result, Indonesia’s combined power generation is less than South Africa’s, which has roughly 200 million fewer people. Piped water supply, which only reaches half the population, is dropping. Road coverage relative to land mass is among the lowest in Southeast Asia. In Jakarta, the capital, only 2 percent of the population has access to septic facilities.

“You expect that in a post-conflict country, but not a place like Indonesia,” says Mr. Dress-Gross.

Indonesia's transition

Since former President Suharto stepped down in 1998, Indonesia has rapidly transitioned from a centralized, authoritarian country to a relatively stable, democratic one.

But that transition coincided with the 1997-98 Asian financial crisis, when infrastructure spending dropped from around 8 percent of gross domestic product to a measly 2 percent. It hit 3 percent in 2010, similar to what the US spends, but far below emerging market giant China, which is investing around 9 percent. 

Adam says at least 5 percent of GDP should go toward infrastructure development in an economy that is seeking breakneck growth like Indonesia. 

With economies in the US and Europe faltering, Indonesia has emerged as a relative beacon of stability, thanks largely to its natural resource wealth and strong domestic consumption. Investment is now at a record-high $20 billion, with growth for 2011 expected to reach 6.4 percent. 

Economists say that figure could be even higher if infrastructure improved. If it doesn’t, the economy could falter.

“You can’t keep growing at 6 or 7 percent if you have these huge bottlenecks,” says Dress-Gross, who explains that Indonesia’s ability to develop its infrastructure is important for regional stability, since an economic shock could send millions of people back into poverty. (Of the 134 million people the World Bank considers middle class, those who earn between $2 and $20 a day, the majority hover around the $2 mark.)

It could also have an impact on the United States, which is looking to enhance trade with Indonesia in the hope of boosting its own economic fortunes.

Trade expansion?

For now, logistics costs remain one of the biggest barriers to trade expansion. Nearly 80 percent of the country’s ports suffering from dilapidation and damage caused by lack of maintenance. That makes it cheaper for Jakarta to import apples from China than its apple-growing hub Malang, 430 miles away in east Java.

In the World Bank’s 2010 Logistics Performance Index, which ranks countries according to ease of trade, Indonesia fell 32 spots, to 75th out of 155 economies.

To correct the imbalance, President Susilo Bambang Yudhoyono has set out an ambitious $400 billion 15-year development plan, nearly a quarter of which will go toward projects such as highways, ports, and power plants. The country aims to extend its road network by 20,000 kilometers (12,400 miles) and add 15,000 megawatts of new power capacity by 2014.

“It’s the right time for Indonesia to get our act together,” said Suryo Sulisto, the chairman of the Indonesian Chamber of Commerce, which represents some of the country’s leading businesses.

He says legal guarantees, including the passage of a much-anticipated land acquisition bill, are needed before investors will be willing to put their money into infrastructure projects. Legislators on Wednesday approved the final draft of the land bill, which will make it easier for developers to obtain land for projects, such as toll roads, by allowing them to expropriate land for compensation. Analysts say the new law could increase Indonesia's chances of achieving an investment grade rating next year, sparking further investment. The one sticking point, say economists, is whether the government will have the political will to implement it, since land clearing has met strong resistance from local communities.

Corruption adds to the problem, say anti-graft officials, who suspect the bridge collapse in coal-rich East Kalimantan resulted from the use of insufficient materials. Built to resemble San Francisco’s Golden Gate, the 720-meter-long bridge was only 10 years old when it fell.

Drees-Gross says Indonesia could look to Colombia or Chile as examples of countries with similar sized economies that have been good at expanding water supply coverage and attracting private investment in infrastructure.

Another example of a country that has been investing heavily in its infrastructure: China.

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