According to data from the Committee for the Acceleration of Priority Infrastructure Delivery (KPPIP), the progress of national strategic projects is still on track. As of December 2018, many infrastructure projects were still under construction, most of which are likely to be completed in 2019. The total value of these projects is Rp 2.5 quadrillion (US$177.46 billion), which is distributed in all regions with the largest proportion being in Java (Rp 502.7 trillion), followed by Sulawesi (Rp 303.3 trillion) and Sumatra (Rp 282.7 trillion). The ongoing projects are also allocated in some sectors, with the largest being in the electricity sector (Rp 1.03 quadrillion), special economic zones (Rp 362.9 trillion) and energy (Rp 278.1 trillion).

From 2016 to 2018, a total of 46 national strategic projects were completed with a total investment value of Rp 159 trillion, including toll roads, airports, seaports, railways and dams. The majority of the national strategic projects that have been completed are toll road projects, with 14 projects completed. Most of the completed toll road projects are part of the trans-Java toll road. Only one section of the trans-Sumatra toll road has been completed, which is the Medan-Kualanamu-Lubuk Pakam-Tebing Tinggi toll road.

Infrastructure development has a positive impact on logistics performance and expediting the flow of goods and people. According to the World Bank’s Logistics Performance Index, Indonesia’s logistics performance was up from 63rd position in 2016 to 46th in 2018. Indonesia’s logistics cost to GDP also declined from 25.7 percent of GDP in 2013 to 23.5 percent of GDP in 2017. Besides improving logistics costs, infrastructure development has also lowered the average dwell time at ports from 5.16 days in 2014 to 3.2 days in 2018.

To accelerate the impact of infrastructure on logistics performance, integrated infrastructure is important. According to a 2013 McKinsey report, Indonesia’s logistics costs were divided into three components: transportation costs (46 percent), inventory costs (34.8 percent) and administration costs (19.2 percent).

Therefore, infrastructure development needs to be integrated with other infrastructure and operating systems. For instance, toll road development should be integrated with ports or airports and industrial estates or special economic zones. The infrastructure should also be followed by the development of an integrating system such as the national single window.

Furthermore, infrastructure has an output multiplier effect on the economy. Based on our calculation using Input Output Table 2010, all infrastructure types have more than one output multiplier, which means the development of infrastructure (final demand) will increase all the output needed for the final demand to more than 1.

For example, roads, bridges and ports have an output multiplier of 1.88. This means that for every Rp 1 trillion increase in final demands (such as investment) in roads, bridges and ports, the total output for the economy would be increased by Rp 1.88 trillion.

Infrastructure development also boosts the local economy and creates a new source of local economic growth. Infrastructure is a positive catalyst for the local economy because it creates a connection between producer, consumer and markets. Besides that, infrastructure not only connects two regions but also empowers society in the local economy.

In this article, we take the trans-Java toll road project, which was completed in December 2018, as an example. The trans-Java toll road reduces travel time from Jakarta to Surabaya to around 10 hours from 20 hours previously, which means that goods transport from Jakarta to Surabaya can increase from three times a week previously to six times a week. The manufacturing industry in Java may increase and lower inflation may be seen in some regions as a result of acceleration in the transport of goods and people.

To maximize the impact of infrastructure development, local administrations play an important role. Local administrations should be creative in grabbing market opportunities through the development of local small and medium enterprises (SMEs) along the trans-Java toll road. Local administrations could create SME centers at rest areas along the toll road to promote local products such as local cuisine, souvenirs and tourist destinations so that it can improve the local economy and empower the community.

Besides developing SME centers, local administrations could develop the tourist sector. Local administrations could develop tourist destinations based on local culture and natural diversity.

Transportation access from toll road exits to tourist destinations should be improved by local administrations. In line with the huge numbers of millennial tourists, tourist destinations must be able to attract more young people.

Local administrations need to develop tourist destinations that are more attractive and beautiful for millennials, or in modern parlance, more “Instagrammable”. Furthermore, providing connectivity infrastructure in tourist spots, such as Wi-Fi and transportation access, is also pivotal.

The trans-Java toll road is also an incentive for investors to invest in the area around the road.

Local administrations need to support investment in the region by improving the ease of doing business, incentives and legal certainty. Besides that, local administrations must have certainty in spatial and land use planning. This will give certainty to investors to build plants in the region.

Investment in the local economy has the potential to increase thanks to the trans-Java toll road. This will increase locally generated revenue in the region along the trans-Java toll-road.

Based on Finance Ministry data, the majority of provinces along the trans-Java toll road had higher locally generated revenue in 2018 than in 2017. For instance, Pasuruan city had locally generated revenue in 2018 of Rp 139.47 billion, higher than in 2017 at Rp 129.63 billion.

To further open perspectives on the investment climate in Indonesia, Bank Mandiri will hold the Mandiri Investment Forum 2019 with the theme “Indonesia: Invest Now!” on Jan. 31, 2019. This forum will discuss several strategies for policymakers and private investors in navigating the economy during the political year.

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The writer is a senior regional analyst, PT Bank Mandiri

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