Indonesia continues infrastructure offensive

With expenses of US$412 Billion Planned Between 2020 and 2024, Infrastructure development remains a focus for President Joko Widodo’s second term. However, many projects depend on the private sector, which is holding back on investment.

Indonesia's planning authority Bappenas has announced the first details of the draft of the new five-year plan (locally known as Rencana Pembangunan Jangka Menengah-Panjang or RPJMN, 2020 - 2024). According to this, the country intends to launch infrastructure projects with a record value of just under six quadrillion rupiah during this period. That's US$412 billion. It is not clear yet when the official five-year plan outlining the country's gross economic development will be published.

So far, only outlines are known. According to Bappenas chief Bambang Brodjonego, 60% of the budget will be used for infrastructure for transportation, 17% for the expansion of power generation and 10% for the water industry. Among other things, 25 new airports are to be built and 165 more are to be expanded. Whether the costs for the planned new construction of a new capital on Kalimantan (Borneo) are part of the budget total is not clear. According to Bappenas, the mega-project will be included in the five-year plan and is expected to cost $33 billion.

According to Bappenas, 40% of the $ 412 billion will come from the state budget, while another 25% will be drawn from the large state-owned enterprises. The remaining 35%, or $144 billion, shall be provided by private investors. In the past, they had been the big uncertain factor within the calculations. After all, the risks for infrastructure projects are great for them – starting with the often difficult land acquisition process, incalculable delays and even lack of legal certainty. Due to a lack of private funds, many projects were not realized, especially in the field of transport infrastructure.

The planned government spending on infrastructure projects from 2020 to 2024, according to Bappenas, is equivalent to 5.7% of the gross domestic product for that period. The basis for this is a forecast for annual economic growth of between 5.4 and 6 percent. This is an optimistic assumption compared to the estimates of international institutions.

Uncertain course for the rupiah
The last five-year plan (2015 - 2019) had provided infrastructure spending of Rp 5.5 trillion. According to the annual average exchange rate for the US dollar in 2014 – in which 1 US $ equals to 11,877 rupiah – the amount of money earmarked at the time of preparation of the plan was about $460 billion. The value of the Rupiah has fallen sharply since then. The exchange rate in May 2019 saw $1 being equal to Rp 14,300.

The proportion of planned expenditure realized is difficult to quantify. In any case, the weakness of the Rupiah will have a disabling effect because Indonesia has to buy a large part of its technology – whether it's construction machinery, electrical engineering or power plant technology – abroad. Projects with a high import share have become considerably more expensive over the past five years.

The five-year plan for the development of the Indonesian economy is traditionally not seen as a probable scenario, but rather as a kind of a best case. The reality often falls far behind the plans. This can be illustrated by a simple look at current issues.

The general growth targets for the five-year plan 2015 - 2019 have been clearly missed: economic growth should rise from 5.8% to 8%, but in fact only an average increase of just over 5 percent will be recorded. The predicted growth of the industry between 6.1 and 8.6% per annum has not even come close. In fact, it was only an average of just 4.3%.

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