Shades of PH: Indonesia economy held back by weak infrastructure

JAKARTA, Indonesia—Months behind schedule, the construction crew racing to finish a highway encircling Indonesia’s traffic-choked capital is being blocked by a determined group of locals and the ramshackle cemetery that is home to their ancestors.

Talks on a new location have yet to reach an agreement accepted by all the relatives of the some 500 people buried there. That has not stopped authorities digging a new cemetery a short distance from the old one—pointlessly according to Yaman, the neighborhood chief.

“There is no way we can agree to that,” said Yaman, pointing to workers hacking through the thick red earth amid a mid-afternoon rain shower.  “It will be too noisy. How are we supposed to pray for our ancestors there?”

Indonesia’s economy is booming. But to sustain and deepen its growth, it badly needs new roads, bridges, power stations and ports. Land disputes such as this one in west Jakarta, and a host of other difficulties from corruption to budget-draining populism, make building such infrastructure a long and costly process. That is preventing the country from attaining the kind of transformational development experienced in a generation by countries such as South Korea and more recently China.

Last week, floods engulfed around 30 percent of Jakarta, including its central business district, dramatically exposing decades of underinvestment in the drainage and flood defenses of the city of 14 million people.

Envy of the West

To be sure, beleaguered economies in the West would envy Indonesia’s current growth rate of more than 6 percent. Coupled with political and social stability, it represents a dramatic change from the Indonesia of 12 years ago, when political crisis, separatist violence and economic meltdown led to fears the massive island nation could break apart.

Investment has soared over the last two years amid high Chinese demand for the country’s coal, palm oil and rubber and rampant consumer spending across the country. Property prices have doubled in downtown Jakarta over the last six years, while malls, hotels, housing estates and convenience stores have sprung up in towns large and small to cater to a newly minted middle class.

The boom has left some wondering whether the country should now sit alongside Brazil, Russia, India and China in the BRIC club of newly powerful emerging economies. While the government expects the country will continue to attract investment, others doubt it will fulfill its potential.

“Six or 7 percent is all well and good, but can it go the next step to 8 or 9 that the government wants?” said Gareth Leather, an Asia specialist at Capital Economics. “The main problem is the business environment is still not conducive to the kind of conditions needed for economies to grow to that level.”

Maintaining fuel subsidies

While scrimping on infrastructure, schools and hospitals, successive governments have chosen to maintain subsidies on fuel for the country’s 240 million people. Cheap fuel may win votes come election time, but it comes with a cost. In 2011, the subsidy bill ran close to $20 billion, the same amount the government is targeting to spend on infrastructure in 2013.

That figure represents a 15-percent rise on 2012, but experts doubt the government will be able to spend it all because it lacks the capacity to do so. Foreign investors can bring in expertise, but for many the country remains too risky because of corruption, legal uncertainty and problems acquiring land.

Political and social problems are also looming. Most of the leading candidates vying to replace President Susilo Bambang Yudhoyono in mid-2014 are old faces, seen as likely to champion economic nationalism rather than reforms. Labor disputes are on the rise, as are wages. While poverty is being reduced, income inequality levels are some of the highest in the world.

The country’s investment chief dismissed fears of economic protectionism, predicting Yudhoyono’s successor would be driven by pragmatism despite campaign rhetoric to the contrary.

Open economy

“Whoever the president is in 2014, if they want to maintain power, they need to provide jobs to reduce poverty,” said Basri Chatib. “Like it or not, even if they become nationalist, there needs to be an open economy.”

The infrastructure challenges facing the country become clear when traveling around it: highways between major cities cut through markets where traders spill onto the road, snarling traffic. Local fruit is often more expensive than that imported from China because of the costs of shipping to the capital from the regions. Cement costs 10 times more on outer islands than in Jakarta once it has made its way through the antiquated port system.

The challenges are especially apparent in Jakarta. As the middle class has grown, so has car and motorbike ownership. But unlike in neighboring Bangkok, Kuala Lumpur and Singapore, the city has failed to build decent public transport. As a result, commutes of 6 kilometers often take upward of 1 ½ hours.

Construction of the west Jakarta section of the ring road was supposed to finish at the end of 2012, but securing the land from locals in its path has been specially tortuous. As elsewhere, speculators—often working in league with government officials—bought up the land and have essentially set their price for the project to continue.

Waiting for payout

The cemetery was public land before locals started burying their dead there more than 20 years ago. Authorities have offered at least three alternative locations, but they have been rejected. Yaman, who goes by a single name, insists that he and the villagers he represents don’t want money to solve the problem. When out of earshot of Yaman, one villager suggested they were waiting for a payout in exchange for the right to dig up their dead. Authorities in charge of buying the land on behalf of government declined repeated attempts for comment.

A new land law that aimed at removing these obstacles stipulates that negotiations must be completed in three months and gives the government greater authority. It has been praised as giving more certainty to investors seeking to partner with the government in large projects. Still, it doesn’t apply to projects started before 2014 and, as ever in Indonesia, how it is implemented will be crucial.

Jakarta’s port, built in 1877 by the country’s Dutch colonial rulers, is a symbol of how the country is growing—and what it needs to do to catch up with the rest of Asia. Handling almost 65 percent of the country’s imports and exports, traffic has grown by 25 percent a year since 2009.

Construction work began two months ago on a $4.5-billion expansion that would double its capacity. Yet there are currently no plans to upgrade or build new road or rail links to and from the port, which is surrounded by urban sprawl and crammed with traffic.

“We can’t wait 15 years to develop a new port, with the growth we have now we need to build today,” said Richard Lino, head of the state-run corporation managing the port. “So I’m doing my part first and will then say, do you want to join with the trend.”

Customs clearance is currently more than six days, twice as long as in Kuala Lumpur, adding to business costs and clogging up the port further. “We are still fighting with the customs,” said Lino. “Everyone knows what they are like.”