In February last year, President Susilo Bambang Yudhoyono touted a policy to develop economic corridors on five major islands under the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI). However, little progress has been made. The Jakarta Post’s Hans David Tampubolon, Nurfika Osman and Rendi A. Witular explore the issues.

The construction of Sei Mangke special economic zone in North Sumatra may be the latest example of how investors are being hindered by severe and costly burdens, as well as time and legal uncertainties, in dealing with bureaucracy.

Designed to be one of the six economic corridors to be developed under the MP3EI, the project is currently in a hiatus after the Simalungun district administration, which oversees the zone’s location, refused to rezone the land from agricultural use to commercial development.

Giant consumer products group Unilever, one of the nine major investors committed to spending hundreds of millions of dollars on factories in Sei Mangke, has considered cancelling its investment plans because of the unclear status of industrial estate lands, according to North Sumatra provincial administration.

Given the rigidity of the autonomy law that was passed in 2002, both the provincial and central government do not have the authority to force the Simalungun administration to amend its decision.

The defiance displayed by the Simalungun administration, and other regional governments, is among the unresolved problems that have hindered infrastructure development since 2005.

A report arranged by the Committee for the Expansion and Acceleration of Indonesian Economic Growth (KP3EI), which works under the coordinating economic minister, has identified at least six problems hampering MP3EI projects.

The group presented its findings during the recent three-day International Infrastructure Conference and Exhibition at the Jakarta Convention Center.

Apart from land-acquisition issues and a lack of coordination among government ministries, agencies and local governments, the KP3EI has also highlighted licensing and permit issues, both at the central and local government level, overlapping concession permits relating to the use of forest areas, and a change in land status to reserve
areas for nature.

Overlapping mining permits (IUPs), slow progress in determining spatial planning, and a failure by the Transportation Ministry to issue licenses for special air and seaports and railway networks are also among the problems. A lack of energy supply, particularly gas for industry in Java, has further undermined investor appetite.

The KP3EI claims that although 87 percent of MP3EI projects are already on stream last year, progress in their development remains unknown. There were 114 projects worth Rp 420 trillion (US$44.2 billion) planned in 2011. In 2012, there are 59 projects worth Rp 370 trillion, of which only 65 percent had been worked on as of the first half of the year. Their progress also remains uncertain.

The construction of a Rp 17.5 trillion railway network linking the coal-rich Tanjung Enim area and Lampung, for example, is already on going, but the project has stalled as it apparently has to pass through forest and residential areas, according to the KP3EI.

The group also revealed that a railway network planned to serve coal miners in East Kalimantan faced similar problems as the Rp 22 trillion-worth project has had to change routes to avoid protected peat lands.

Lin Che Wei, the founder of Independent Research and Advisory Indonesia (IRAI), said there would be many more such stalled projects unless the government immediately come up with a solution.

“The government needs to concentrate on the goal of the MP3EI program, and it should be more focused on fixing weaknesses in regulations or policy to help smooth project construction,,” Lin said.

“The program, and the economic corridor concept, are new for the government. Thus, any moves to resolve problems should not be made on a business-as-usual basis.”

According to the KP3EI, government officials were only able to develop sufficient capabilities in identifying problems, not solving them.

The lack of problem-solving capabilities in the state apparatus is due to technical factors, such as the lack of full-time human resources, complexity in coordination with other state officials and a lack of understanding of the importance of the MP3EI programs among local administrations.

Industry Minister MS Hidayat has even expressed his frustration over the unresolved problems.

“I have now participated in three infrastructure summits and the problem in our infrastructure development has always been about regulatory issues. I do not know whether the regulatory issues that were brought to our attention in the previous two summits have been properly resolved or not,” he said.

Indonesia, Southeast Asia’s largest economy, is in dire need of an expanded infrastructure capacity as its economy grew by an average of more than 6 percent in the past five years. Economists have voiced concerns over the crumbling infrastructure that could prevent the country from growing by 7 percent or more.

Poor infrastructure has created high costs for the economy and logistical bottlenecks are expected to get worse following industrial expansion in Java. Indonesia’s land transport costs, for example, are far higher than those of neighboring Vietnam, Malaysia and Thailand, according to the World Bank.

Road vehicles are the predominant mode of transport in Indonesia, accounting for 70 percent of freight ton per kilometer and 82 percent of passenger per kilometer. However, road expansion, including toll-road development under Public-Private Partnership (PPP) schemes, has been sluggish, .

 By 2010, there were only 742 kilometers of toll roads even though the first development was back in 1978. That is less than a third of the estimated need of 2,400 kilometers according to the Public Works Ministry’s strategic plan, and lags well behind several countries in the region in terms of expressway density.

Nusantara Infrastructure managing director Bernardus Djonoputro told the infrastructure conference that the low realization of PPP projects had revealed problems within the government. “Of all the PPP projects, only 13 out of 79 managed to get to pre-qualification phase,” Bernardus said.

“There is a need for an improvement. Some big challenges in PPP implementation include the fact that project preparation is often not optimal,” he said.

“Poor feasibility studies, land acquisition problems and poor PPP management have also posed challenges. These need to be addressed,” he added.

The poor preparation has discouraged many local and overseas financial institutions from supporting PPP projects, over fear of future legal turmoil.

Coordinating Economic Minister Hatta Rajasa, however, claims progress has been made in the government’s efforts to resolve the problems, including by ongoing bureaucratic reform. He also said the government had issued numerous progressive regulations, such as the presidential regulation on land acquisition, to accelerate infrastructure development.

However, businesses believe that many of the claims are practically meaningless. The newly issued land-acquisition regulation, for example, is only applicable to new projects.

Ongoing projects, which have currently run aground, will still have to face the hassle of dealing with
bureaucracy.

Among the ongoing projects that have seen no benefits from the new regulation is the development of 24 toll roads, including sections of the Jakarta outer ring road and the trans-Java toll roads. The entire project, which will cover 605 kilometers, is worth around Rp 160 trillion.

What is MP3EI?

The program is a set of plans and actions to build economic clusters and business centers on all of Indonesia’s major islands to support their unique local economies.

The corridors are defined as six economic development highways, mostly located along coastlines, which will connect economic growth centers on five islands: Java, Sumatra, Kalimantan, Sulawesi and Papua.

For example, the northern coast of East Java will be developed as a hub for the petrochemical and shipbuilding industries, while the province’s inland areas will be developed as centers for the food and beverage sectors.

South Sumatra and Riau will become the nation’s hubs for the palm oil processing industry under the scheme, while Bali and Lombok will be centers for tourism.

Remote and isolated Papua has been slated to become a center for gas, gold and copper exploration, while its southern parts would be allocated to food plantations.

Issues hindering infrastructure development

• Sudden change of forest status to conservation areas.
• Delayed issuance of spatial planning regulations for provinces.
• Lack of energy sources, particularly gas for industry in Java.
• Delayed issuance of special port permits by the Transportation Ministry.
• Lack of coordination between government ministries, agencies and local administrations.
• Officials only able to identify and validate problems, not solve them.
• Lack of MP3EI program introduction to regional working teams.
• Overlapping mining permits (IUPs)
• Poor planning and regulation for projects under PPP schemes
• Complex land acquisition process
• Weak preparation and selection procedures in PPP projects
• Weak PPP preparation has discouraged financial institutions to invest in infrastructure projects
• Absence of viable gap funding mechanism for PPP projects

Source: KP3EI and others

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