Indonesia secures infrastructure expansion with state aid

The expansion of Indonesia's undersized infrastructure is one of the most important projects of Joko Widodo's presidency. But many projects have been shaken by the economic crisis as a result of the COVID-19 pandemic. The archipelago's major construction companies, most of which are state-owned, have had to cope with large business losses and continue to go into debt. 

The Ministry of State Owned Enterprises has now applied for special grants for state-owned companies in the amount of 72 trillion rupiah for the budget year 2022. That equates to around US$5.5 billion. So far, around half of them have been approved. Thus, certain infrastructure projects are bound to keep going. In 2021, state-owned companies are expected to receive a further 33 trillion rupiah (around $2.3 billion) in financial injections for infrastructure projects. 

In the economic crisis, many state-owned construction companies lost their scheduled business. The government is sticking to the construction of the new capital in the province of East Kalimantan, but it will be delayed and take significantly longer than originally planned. Numerous road construction projects were interrupted. The Garuda airline, the country’s flagship carrier, had to return part of its fleet and is considered to be de facto bankrupt. State banks were urged during the crisis to extend credit lines.

State-supported infrastructure projects in 2022 

Source: press reports 

Slow recovery in the construction sector 

The construction industry has been an important economic driver in recent years. Their growth rates were always well above those of the economy as a whole. But in 2020 the ratio turned: The construction sector shrank by 3.3 percent. The recovery in the first half of 2021 was also rather hesitant with growth of 1.7 percent. 

While there was considerable excess capacity in building construction before the crisis, at least in large cities like Jakarta, the need for infrastructure expansion is almost inexhaustible. There is a lack of roads, bridges, ports or airports everywhere. As a result, the high logistics costs hinder the economic development of the island kingdom. The Medium-Term Development Plan (RPJMN) for the period from 2020 to 2024 provides for construction projects valued at around $500 billion which, even in good times, could only be partially realized. 

Simple construction projects are carried out by local construction companies who obtain their equipment mainly from China and Japan. Special technology can, however, come from Germany. More demanding large-scale projects are often taken on by Japanese companies (such as the subway construction in Jakarta) or Chinese corporations (such as the Jakarta-Bandung express train line). They provide unrivaled low-cost loans and have largely closed supplier networks. 

The problem of state enterprises 

The domestic economy is dominated by large state-owned companies in most sectors. Be it the construction industry, the oil and gas sector, power supply, fertilizer production, food logistics or the manufacture of medicines: Nobody knows their exact role in economic activity. Estimates go from 35 to 40 percent. 

These corporations are politically bound by instructions, work inefficiently and are not very willing to reform. Press reports put their total debt at Rp 2.1 quadrillion, the equivalent of about 150 billion US dollars. The electricity company PLN alone should account for $35 billion in debt. 

At least there are reform approaches. In 2019, Erick Thohir became Minister of State-Owned Enterprises. The former owner of Inter Milan football club comes from one of the most influential families in the archipelago. Thohir gradually reduced the number of the originally 142 state-owned companies with their 800 subsidiaries to 41. Some are to be floated on the stock exchange in parts. Many corporations are likely to remain unattractive for private investors. An early solution to the problem of inefficient public-sector companies is therefore not in sight. 

Original article: https://www.gtai.de/gtai-de/trade/branchen/branchenbericht/indonesien/indonesien-sichert-infrastrukturausbau-mit-staatshilfen-694412