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Analysis: Infrastructure improvement on track, but needs to speed up
Improving infrastructure is a major economic policy concern for the government to support the 2019 target of 6 to 8 percent economic growth and gross domestic product (GDP) per capita of US$7,000
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mproving infrastructure is a major economic policy concern for the government to support the 2019 target of 6 to 8 percent economic growth and gross domestic product (GDP) per capita of US$7,000.
The relationship between infrastructure and economic growth has been explained in literature, for example Straub (2008).
Infrastructure can be linked to economic growth through direct and indirect effects. Direct effects can be seen through the increase of infrastructure stock that will raise the productivity of other factors.
For example, roads or bridges will accommodate private investment as access to certain remote or isolated areas.
Similarly, investment is expected to improve and, in turn, increase production as entrepreneurs are given access to certain services, such as electricity or telecommunications.
In addition to the direct effects, Straub (2008) states infrastructure has indirect channels to affect economic growth.
They can consist of the reduction of private capital adjustment costs, the rise of labor productivity through reduced commute time and stress, the improvement of both health and education, the fall of transportation costs, which leads to economies of scale.
According to the latest Global Competitiveness Index (GCI), which is contained in the 2016-2017 Global Competitiveness Report, Indonesia’s infrastructure rank at 60th place, an improvement from 82nd place in 2013-2014, before Jokowi’s era.
In 2015, the government started to focus more on targeted subsidy by removing fuel subsidy and accelerating infrastructure projects. In the two years of Jokowi’s administration, we can note some accomplishments in land, sea and air infrastructure projects.
In land infrastructure, there were the completions of 2,225-kilometer-long national roads and 179.33-km-long spoors.
Twenty four ports were established as “sea toll” and six airports of international standard were introduced in 2016.
Furthermore, infrastructure development in Jokowi’s administration has been focused outside Java, as the National Development Planning Agency (Bappenas) has identified the need for road quality improvement in Kalimantan, Papua and Timor Leste, in its report.
Although Indonesia has experienced an improvement in its overall infrastructure rank, note that the quality of its infrastructure is lower compared to its peers in ASEAN, such as Singapore, Malaysia and Thailand.
According to the 2016-2017 CGI, Indonesia ranks 60th out of 148 countries surveyed in terms of infrastructure quality.
Meanwhile, Singapore, Thailand and Malaysia’s infrastructure ranked second, 49th and 24th, respectively.
Indonesia ranks 75th in terms of port infrastructure quality and ranks 75th in terms of road infrastructure quality.
That puts Indonesia behind Singapore, Thailand and Malaysia in regard to port and road quality.
Based on the comparison against peer countries and own economic growth that is still below 6 percent, the government needs to expedite infrastructure development more significantly.
However, financing becomes the main issue that limits infrastructure acceleration in Indonesia.
According to the National Mid-Term Development Term (RPJMN) 2015-2019, Indonesia needs total infrastructure financing of Rp 5.52 quadrillion ($413.53 billion) or Rp 1.1 quadrillion per year.
The majority of the funds will come from the state budget, with Rp 2.22 quadrillion and private sector with Rp 1.69 quadrillion.
The remaining infrastructure funds will come from other sources, including the regional budgets with Rp 43.3 trillion and state-owned enterprises (SOEs) with Rp 1.07 quadrillion.
Some of the priorities this year are 815-km new roads, 9,399-meter bridges, 550- km rail tracks, 55 seaports, 14 airports, irrigation systems, 128,000 household gas networks and many more. It will cost the government Rp 387.7 trillion to accomplish its entire plan this year.
It is common knowledge that the government needs more cash to fund its projects. Last year, the tax amnesty was able to support the state budget and ensure that various infrastructure project could be carried out.
However, this year the tax amnesty will not generate a high amount of funds. Therefore, to increase the infrastructure budget, the government obliges that 15 percent of the transfer fund be spent on infrastructure.
With this, the government can push regional administrations to also participate in infrastructure development and reduce the state budget for infrastructure spending.
This method can also increase construction growth since all of the regional administrations will surely spend some of their transfer funds on infrastructure.
The concern about this method is how to ensure the effectiveness and quality of infrastructure spending in the regions.
The local administrations need to carefully design infrastructure projects, assess their viability and ensure proper execution. This need to be done to ensure infrastructure projects are not being improperly carried out due to poor planning and lack of feasibility study.
Bank financing is expected to only fill 45 percent of total infrastructure financing needs of Rp 1.1 quadrillion per year. Banks are constrained in their ability to channel infrastructure loans, given their liquidity capacity.
In addition, infrastructure loans have long-term characteristics that can cause high risk for banks, whereas bank deposits consist of short-term funds.
The high risks of the infrastructure sector are reflected in the non-performing loans (NPL) of the construction sector.
In 2016, the construction sector’s NPL and special mention loans were roughly 9.4 percent, higher than the NPL and special mention loans of the overall banking industry that only reached 7.4 percent.
However, there were a few sectors with low NPL and special mentions percentage. These sectors were road construction, rail construction and seaport construction. Each of them had low NPL of 3.8 percent, 2.6 percent and 3.1 percent, respectively.
They also recorded high growth rates. Road construction loans grew 41.7 percent, rail construction loans rose by 82.1 percent and seaport loans jumped 129.5 percent.
Those sectors are included in the government’s list of priority infrastructure, making them prospective for bank financing.
Massive infrastructure development is one of the major requirements to achieve the desirable economic growth target of 6 to 8 percent.
It requires huge financing to expedite the infrastructure development. Regional governments and banks can still be expected to participate in infrastructure development.
However, the government should keep looking for breakthrough schemes to expedite infrastructure financing and maintain SOE and private sector involvement.
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The writer is an economist at Bank Mandiri.
