Debunking Indonesia’s national strategic projects: Will the country fall into a debt trap?

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Illustration: LEONARDO A. PUTONG

Jakarta, IO – One of the most well-known economic laws widely cited by policy makers and businesses is the Say’s Law of Markets which goes “supply creates its own demand.” It means the market will automatically increase people’s purchasing power to absorb industrial output. In other words, industries will not suffer loss as long as they continue to produce goods or services. 

The Say’s law is the basis for infrastructure development, considered a driving force for the economy because demand persists and continues to increase. Infrastructure development, ranging from airports, airport rail link, to high-speed railway, is believed to create its own demand and will not result in loss for the company that builds it. 

Keynes, on the other hand, was critical of Say’s law. The highly influential economist suggested that supply should be modified to meet current demand. For maximum profit, the industry must assess demand. Infrastructure development, for example, is frequently incompatible with public demand. Finally, many state-funded facilities are in a state of neglect. 

Read: Indonesia’s debt balloons due to state finance mismanagement, disorientation

Massive infrastructure development is the crux of President Jokowi’s campaign promise through his second administration. In the first year of his first administration, the 2015 state budget (APBN) allocation for infrastructure jumped by 65.5% to Rp256.1 trillion from Rp154.7 trillion. The budget is equivalent to 12.9% of the total government spending. In 2017, this increased further by 41.6% to Rp381.2 trillion from Rp269.1 trillion in the previous year as Indonesia became the host of 2018 Asian Games. The government built infrastructure to facilitate sporting events in two provinces, Jakarta and South Sumatra. In Jakarta, the construction of Soekarno Hatta International Airport (SHIA) rail link costed Rp24.5 trillion. Meanwhile, the Palembang LRT train used up Rp12.5 trillion. 

In 2020, the Covid-19 global pandemic struck. The government then reallocated the infrastructure budget to combat and mitigate the outbreak. In 2020, the infrastructure budget was down by 28.6% to Rp281.1 trillion from Rp394.1 trillion in the year before. In 2021, it went back up to Rp417.4 trillion (48.4%), equivalent to 15% of total budget. In 2022, it touched Rp365.8 trillion, down 12.3% over the previous year. (FIGURE-1) 

Figure 1

To set the infrastructure development priorities, the government issued Presidential Regulation 3/2016 on acceleration of national strategic projects implementation. In 2017, it issued Presidential Regulation 58/2017 which laid out 245 projects and two programs. The necessary budget reached Rp4,197 trillion, which came from APBN (Rp525 trillion, SOE and/or region-owned enterprises (BUMD) to the tune of Rp1,258 trillion, and Rp2,424 trillion from the private sector.

The infrastructure financing for massive national strategic projects is expected to rejuvenate the national economy. However, there are also projects that have yet to generate expected impact.