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Monday 21 Aug 2017 | 14:33 | SYDNEY
Monday 21 Aug 2017 | 14:33 | SYDNEY

What to do about Indonesia's notorious infrastructure



28 October 2013 13:28

Indonesia’s infrastructure is notoriously deficient. Installed electricity capacity per capita is one-third of China’s. Port congestion hinders exports.

Planes are landing on runways that would be regarded as dangerously short in many countries. Jakarta floods regularly. Jakarta traffic routinely gridlocks, with the slightest disturbance resulting in hours of delay and disruption. This graph shows the rise in travel times for typical Jakarta journeys (though things have worsened since 2011): 

The long-awaited Jakarta monorail has just resumed construction after a decade in hiatus. The first two lines are still a couple of years away and an adequate network a decade or more away. Meanwhile a million cars and six million motorbikes join the throng each year.

Why this mess? The story starts, as many do, with the 1997 Asian crisis. Before that, infrastructure spending made up a respectable 6% of GDP (for background see p.37 here). Half of this came from the budget, more from the state-owned enterprises, and a substantial sum from the private sector. Foreigners were, for example, building large electricity generators to sell the output to the state-owned distributor. Of course these contracts had various governance deficiencies and were overpriced, but when they were halted (at the IMF’s insistence) in 1998, the stage was set for today’s shortfalls.

Deregulation produced innovation in the Soeharto era, notably in telecommunications. A sector which had traditionally been a government monopoly almost everywhere (remember those old Bakelite phones we leased at great expense from the PMG?) was swiftly transformed by technology into a private-sector-dominated industry operating under competitive market conditions. You no longer heard the old jibe that ‘half of Jakarta is waiting for a phone to be installed, and the other half is waiting for a dial-tone’. Mobile phones, then Blackberries, by-passed fixed-line transmission. Indonesians became the world’s greatest Facebook fans. So successful was this deregulation that Indonesia, deficient in all other infrastructure, invested more in telecommunications than most of its regional neighbours, with enough competing suppliers to bid prices down: 3G for your iPad costs well under $10 a month.

But telecommunications is an exception. It is an example of where infrastructure can be supplied competitively. It is not a ‘public good’ characterised by ‘non-excludability’ (everyone can benefit from public goods like streetlights, footpaths and parks. It’s hard to exclude people so it’s hard to make them pay).

There are other examples: electricity, water and toll-roads, for example, are all excludable. But they have a different problem. It is not efficient to duplicate expensive networks. It doesn’t make sense to have two parallel competing toll-roads or to duplicate water pipes. These are natural monopolies and cannot set their own prices through competition. Once price regulation gets into the project appraisal calculation, a private supplier gets nervous and builds in a large risk premium.

Nevertheless, one-third of infrastructure was privately supplied in the Soeharto era. Granted, infrastructure was much easier to implement then. Land for toll-roads or a new airport was acquired with a degree of compulsion which is not possible in the post-1998 democratic era.

The push for ‘good governance’ and the anti-corruption efforts should be applauded, but the random and bureaucratic nature of these processes imposes huge delays on approvals. And it goes without saying that less honest practices are still common, also delaying implementation as the ‘one-stop shop’ of the Soeharto era no longer exists. Budget processes can be byzantine, and the post-1998 decentralisation has shifted important components of infrastructure to dysfunctional local governments.

President Susilo Bambang Yudhoyono, now nearing the end of his term, made infrastructure a priority right from the start: the first international conference was held in 2006 and the conferences are still coming thick and fast.

There has been progress. Parliament has passed a law on compulsory land acquisition. Jakarta’s port expansion seems on track at last. Visitors to Bali will notice a new freeway, completed in time for the APEC meeting, cutting across the Benoa mangrove swamps (no land acquisition problems there).

The planning process envisages a huge expansion of infrastructure (though even this would leave gaps, as the years of neglect have to be redressed). For the moment, financing won't be a binding constraint on such ambitions; it is administrative and operational capacity, together with the approval process and land acquisition. But if Indonesia is to get on top of its infrastructure shortages (which are undoubtedly restraining the pace of growth), infrastructure will have to be built at this pace or even faster.

Such is the shortage that just about any half-sensible infrastructure is profitable, at least in an economic sense and often even in a commercial sense as well. It’s tempting to argue that the guiding principle should be ‘just do it’. But then, there are some grandiose projects waiting to be implemented if the bureaucratic reins are loosened too much.

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