Transport Infrastructure Investment in Indonesia

still a preliminary paper..

Transport Infrastructure Investment in Indonesia

by Yudo Anggoro, University of North Carolina at Charlotte

Indonesia’s economy has been booming for the last ten years. The economy is growing in a comfortable 6 – 6.5% growth rate annually, putting Indonesia as having the third highest economic growth in the world, after China and India. Even the world economic crisis in 2008, up till now, did not significantly hurt the Indonesian economy, thanks to the growing number of middle class in Indonesian society as the backbone of the economy.

However, in order to sustain the performance of its economy, Indonesia should put more focus on its infrastructures, especially transportation infrastructures. Currently, the transportation infrastructures in Indonesia significantly lag behind that of its South East Asia neighbors. There was very low investment in transportation sector, especially after the 1998 economic crisis in Asia. After the crisis, and during the economic recovery period, transportation sector was the target of budget cut by the government.

Unfortunately, poor transport infrastructures have contributed to a low level of international competitiveness for Indonesia. The weaknesses in transport infrastructures also hinder the development of Indonesia economy. The poor quality and inadequacies in roads, ports, and railroads have resulted in considerably higher logistic costs in Indonesia compared to most other South East Asia countries. In a simple explanation, logistic costs are costs of transporting goods from one place to another. The lower logistic costs of a country indicate the better competitiveness of that country.

The logistic costs of developed countries, on average, are 9% -12% of their GDP, or around $50 billion.  The Economist in 2006 predicted the logistic costs of Indonesia were 20%-25% of its GDP. The logistic costs in China were 21%; Thailand 18%; Singapore 7%; India 13%; Europe 11%; and Malaysia 13%. The high logistic costs in Indonesia contribute to the low competitiveness of Indonesian products. It is hard to imagine that the price of local fruit in Jakarta is more expensive than that of imported from China because the shipping cost is higher.

In order to alleviate this problem, the Indonesian government put the budget of $21 Billion alone for infrastructure investment in 2013. The government also projected to attract $150 Billion of private investment to overhaul its transport infrastructure. In the long term, in 2011 the government launched the Master Plan for Acceleration and Expansion of Indonesia Economic Development 2011-2025. This master plan explains the intention from the Indonesian government to build six economic corridors in Indonesia, where each corridor will be supported by several industry clusters. One of the goals of this master plan is to create connectivity in Indonesia. Connectivity can be achieved through the development of national transportation system, a system that can connect all places in Indonesia by using comprehensive transportation modes. In this master plan, transportation system is also required to maintain the connectivity among economic corridors.

Since massive transport infrastructure investment in Indonesia is required, therefore, the aim of my paper is to analyze the optimal model for transport infrastructure investment in Indonesia. Does public-private partnership model work for this kind of investment, but how? Is foreign investment needed for this transport infrastructure investment? The second goal of this paper is to analyze the impact of transport infrastructure investment to the Indonesian economic development. How far does this transport investment contribute to the Indonesian economy? What are the obstacles of implementing this investment? My paper attempts to seek the answers of those policy questions.