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Jakarta Post

Analysis: Strengthening domestic connectivity ahead of the AEC

  • Mamay Sukaesih

    The Jakarta Post

Jakarta   /   Wed, December 31, 2014   /  12:49 pm

The level of competitiveness of Indonesia'€™s infrastructure among ASEAN countries is still relatively low. Indonesia'€™s infrastructure quality was ranked 72nd of 144 countries in the Global Competitiveness Index (GCI) in 2014/2015, higher, though, than in 2013/2014, when it was ranked 82nd out of 142 countries.

The quality of Indonesia'€™s infrastructure within ASEAN was ranked third, below Singapore and Malaysia. Indonesia'€™s infrastructure quality for roads, ports and air transport was the fourth-lowest among ASEAN countries.

Indonesia has the longest road length in ASEAN. However, only 65.85 percent is paved. This is lower than in Singapore (100 percent), Philippines (79.2 percent), Malaysia (81.1 percent), Thailand (94.5 percent) and Brunei (92.2 percent).

Lack of infrastructure makes logistics costs in Indonesia higher than the average for ASEAN countries. Based on World Bank data, the cost to import in Indonesia reached US$647 per container in 2014, the fourth-highest import cost in ASEAN.

There are challenges for Indonesia ahead of the advent of the ASEAN Economic Community (AEC) in 2015. These challenges are (1) lack of infrastructure (2) a high-cost economy (3) low capacity of human capital. All of these challenges relate to domestic connectivity. Strengthening connectivity can be done through infrastructure (such as ports, airports and roads) and transportation (such as shipping and airlines). Domestic connectivity will provide a multiplier effect in the economy, such as connectivity between regions, smooth distribution channels and regional development.

Strengthening connectivity could decrease Indonesia'€™s trade deficit with ASEAN. Indonesia'€™s exports to ASEAN were 22.3 percent of Indonesia'€™s total exports in 2013, while imports from ASEAN were 29 percent of total imports. The Indonesia-ASEAN trade balance has been in deficit since 2005 and growth in Indonesia'€™s imports from ASEAN is higher than the growth of Indonesia'€™s exports to ASEAN. Strengthening connectivity can happen through improvement of infrastructure and transportation capacity. Therefore, better infrastructure means higher efficiency in business activities, which will create competitiveness, especially for domestic business players. By being highly competitive, domestic businesses are expected to support export and strengthen our trade balance.

Four of 12 ASEAN infrastructure projects are in Indonesia: a power plant project in Dumai Sumatra -Malaka, a 150-KV power-transmission project in Sanggau, West Kalimantan, and Sarawak, the rehabilitation of 150km of border roads and the development of highways in Bitung-Manado, North Sulawesi. The estimated funds required are US$400-500 million, supplied by the ADB and the ASEAN Infrastructure Fund (AIF).

According to the Master Plan on ASEAN connectivity (MPAC), there are 42 priority ports in ASEAN, of which 14 are in Indonesia: Belawan, Dumai, Palembang, Panjang, Tanjung Priok, Tanjung Emas, Tanjung Perak, Pontianak, Banjarmasin, Balikpapan, Makassar, Bitung, Sorong and Jayapura. Furthermore, the Nautical Highway System (RoRo) and inter-state shipping will be developed based on the MPAC.

Besides infrastructure, another important aspect in connectivity is transportation. ASEAN connectivity allows free movement between ASEAN countries by land, air and sea. For example, in the sea transportation sector, ASEAN connectivity allows vessels from ASEAN countries freedom to dock anywhere in Indonesia. Therefore, improving transportation capacity is another important aspect ahead of the AEC.

The transportation sector'€™s contribution to Indonesia'€™s GDP continued to increase from 3.46 percent in 2008 to 3.79 percent in 2013. Transportation sector growth for 2008-2013 was 5.9 percent CAGR. Road transportation provides the biggest contribution at 2.03 percent. Furthermore, growth in the transportation sector since 2009 was above national growth, except in 2012. In 2012, transportation sector growth decreased because the growth of air and rail transportation decreased significantly. Since 2011, the growth of railway transportation has been negative.

To improve domestic connectivity, the government issued the Masterplan for the Acceleration and Expansion of Indonesia'€™s Economic Development (MP3EI) 2011-2025 in May 2011. The indication of infrastructure investment was Rp 2,338.3 trillion for 2011-2014. MP3EI financing for the infrastructure sector was mainly for energy and road infrastructure. The main sources of financing of the MP3EI were from state-owned enterprises and the private sector because government budget is very limited in its ability to fund infrastructure development. However, the realization of MP3EI is considered not to have been optimal.

Realization of the MP3EI was indeed relatively low, largely because of land acquisition problems, legal uncertainties and poor coordination between nation and local government. The realized investment of the MP3EI from 2011 to June 2014 reached Rp 854 trillion, or just 36.5 percent of the investment indication for the period. Realization of groundbreaking infrastructure was Rp 412 trillion and realization of groundbreaking real sector was IDR 441 trillion.

The new government of Indonesia has a new concept for connectivity known as the Maritime Highway. This concept involves boosting services to meet demand, through the main line of the central corridor that connects Indonesia'€™s major ports (hubs), accompanied by continuous lines (feeders) that connect the feeder ports (spokes). The project calls for funding of Rp 699.9 trillion for the next five years. Indonesia is to build 24 major ports in the next five years. Development of the 24 major ports needs Rp 243.7 trillion. These ports include priority ports in the MPAC.

The government has a limited budget for connectivity-strengthening, so private-sector participation is very important. According to National Development Planning Board (Bappenas) projections, the government can only finance 25 percent of total infrastructure development for 2015-2020. There need to be supportive actions to accelerate Indonesia'€™s connectivity-strengthening. First, legal certainty related to land acquisition. Second, well-established coordination between central and local government. Third, government guarantees for infrastructure development. Fourth, creating a conducive investment climate to attract investors.

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The writer is a regional analyst at Bank Mandiri (Persero) Tbk.

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