High hopes for Indonesia to realize its ambitious infrastructure plans

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High hopes for Indonesia to realize its ambitious infrastructure plans

The Indonesian president Joko Widodo – or Jokowi – is pushing forward numerous infrastructure development projects across the archipelago, which he had promised when he took office two years ago. That drive, however, is not without major challenges faced ahead.

While Indonesia is indeed ambitious with its infrastructure plans, state budget may be trimmed at its margins and may result in inadequate funds allocated to all the projects. Jowoki stressed upon the need to upgrade the economy by saying, “this is something we absolutely must do to build the foundation of our economy, even if the work is bitter at the beginning”.

The Infrastructure projects being underway do not only include new roads and railway lines, they also consist of new seaports, airports, power and smelter plants and dams. These projects are crucial for jump-starting the Indonesian economy and bring improved connectivity to its 17,400 islands.

One of the many impending challenges face by Indonesia is the underdeveloped roads and highways that have not yet been upgraded for decades. The result of not having proper roads and highways is causing its logistics costs to rise as well.

According to the Indonesian Chamber of Commerce and Industry (Kadin Indonesia), about 17 percent of a company’s total expenditure in Indonesia is used by logistics costs. This means that the costs of goods shipped from Indonesia to foreign nations become higher than if the same commodity were to be imported. That has caused Indonesian exporters indefinitely lose out on lucrative opportunities, as its logistics challenges have made the cost of its products and services unacceptably high.

Far-flung regions such as Papua or the eastern provinces of Celebes have remained undeveloped and remained inaccessible to this day. Jokowi’s commitment in raising connectivity on the back of infrastructure investment will give greater social mobility and give Indonesians a share the nation’s economic prosperity.

Indonesia’s top priority is indeed to overhaul its roads and highways, as transportation lines are seen under construction in many regions of the country. Key projects include the planned Trans-Sumatra toll road; Trans-Java toll road; railways in Java, Sumatra and Kalimantan; seaports; and airports. The Trans-Java toll network, for instance, provides unbroken toll roads in the country’s main island.

The toll roads are part of Jokowi’s plan to add at least 1,100 kilometers of functionally operable roads by the end of his term in 2019. And that is only the icing on the cake. Also in the pipeline is the Balikpapan-Samarinda Toll Road, Manado-Bitung Toll Road, Serang-Panimban Toll Road, Soekarno-Hatta Railway, North-South Line Jakarta MRT, Makassar-Parepare Railway, Light Rail Train (LRT) South Sumatra, and the East Kalimantan Railway, among others.

Meanwhile, a high-speed railway network from Jakarta to Bandung, given to a Chinese consortium, will potentially change the face of rail travel in the country, along with the construction of a 720-kilometer railway from Jakarta to Surabaya that was awarded to Japanese investors. Other development plans include a power plant for Batang, an electric steam power plant for South Sumatra, oil refineries and a port each for Bitung and Kuala Tanjung, and hydroelectric power plants.

Indeed, Indonesia may have big ambitions to create a prosperous nation that will enjoy the perks of a newly inter-connected country, but none can be realized without the required funds. While there is no accurate estimates on just how much investment Indonesia needs to overhaul its country, various news reports have placed the figure at between USD 400 billion and USD 450 billion.
To achieve these funds, the country is banking heavily on the amount of tax revenue it could recoup from the tax exiles living overseas, and who it is prepared to pardon. However, while Indonesia has come a long way in improving its tax system both in terms of revenues raised and administrative efficiency, the tax take-up rate is still painfully low.

Measures to broaden the nation’s tax base aimed at bringing more self-employed into the tax system are noticeably absent, as are plans aimed at enhancing investment incentives. However, a streamlined and comprehensive tax regime is just what Jakarta needs.

Additionally, participation from the private sectors is pivotal to assist with the development of the power plant projects. Foreign direct investment is needed as it provides financing as well as access to skills and technology. While there is no guarantee that Jokowi’s projects will ever come to pass, if they do, they will rival similar undertakings by China over the last 30 years.

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