Ironies of infrastructure: -Employment rates remain low -Halt on highway construction project

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(illustration: IO/Rudraksha)

IO, Jakarta – The Government of President Joko Widodo (Jokowi) and Vice President Jusuf Kalla (JK) have set a total of 245 National Strategic Projects as stipulated by Presidential Decree (Perpres) Number 58 year 2017. These 245 projects represent an investment of Rp 4,417 trillion, including 15 infrastructural sectors and 2 programs, i.e. one power generation program and one aircraft industry program.

13% of the funding originates from the National Income and Expenditure Budget (Anggaran Pendapatan dan Belanja Negara – ‘APBN’)/Regional Income and Expenditure Budget (Anggaran Pendapatan dan Belanja Daerah – ‘APBD’), 28% from State-owned Enterprises (BUMN)/Region-owned Enterprises (BUMD), and 59% from private funding sources – normally obtained through the Public-Private Cooperation (Kerja Sama Government dengan Badan Usaha – ‘KPBU’) scheme or a business-to-business (B2B) scheme.

Of these hundreds of strategic projects, many were actually initiated decades ago, but never got off the ground or become stuck halfway. This includes the Trans-Java toll road, whose construction has been troubled for 20 years, and the Umbulan Drinking Water Supply System (Sistem Penyediaan Air Minum – ‘SPAM’), which was initiated 40 years ago. The various projects comprise toll roads, national road infrastructure (non-toll), railway structures and facilities, airports, harbors, one million homes, oil refineries and gas pipelines, energy from waste, infrastructure for waste water systems, flood prevention dams, postal routes across the country, dams, broadband facilities, other scientific and technological projects, special economic territories, tourism facilities, smelter plants, and marine, fishery, and electricity generation infrastructure.

The Government apparently expected that these 245 projects will be completed in 2019.

Of the 245, how many are actually near completion? As of November 2017, only 4 were 100% completed. 147 projects are still under construction, 9 are still in a transaction process, and 87 projects are still in preparation.

Disrupted construction
According to Bhima Yudhistira, Economic Observer from the Institute for Development of Economics and Finance, construction of infrastructure is important as it relates to connectivity, which in turn affects logistical costs. ‘Logistical costs in Indonesia are quite high, 15% of the Gross Domestic Product (GDP). This is costlier than that of other Asiatic countries. This is what lowers the competitiveness of Indonesian food products, which carry higher prices because of high logistical costs,’ Bhima said to the Independent Observer.

Unfortunately, the massive infrastructural construction efforts of the past 3 years have failed to generate significant benefits. ‘So it has not been effective in reducing logistical costs. The initial objective and the implementation do not match. Why is that? Because we aren’t even sure whether we’re going to transport goods or people! If we want to transfer goods, the first infrastructure to be constructed should be infrastructure from factories or industrial areas to ports. That would cut down logistic costs. This is where it’s a mismatch. For example, if you want to construct the Sumatran toll road, you should remember that it’s close to the biggest industrial area in Indonesia, which is Batam. Well, no notice is taken of Batam, meaning that the Trans-Sumatra road ends up with no link to the industrial area in Batam,’ he said.

Bhima continued to say that the irony behind the construction of infrastructure is that it does not stimulate the economy, but rather allows it to remain stagnant. ‘Indonesia’s growth rate is only 5%. Compare this with Malaysia’s at 5.8%, Vietnam’s at 6.5%, and the Philippine’s and India’s, both at 6.6%. Suppose the growth of the processing industry is lower than 5%, then de-industrialization occurs. Back in 2002, the growth of the manufacturing industry was still 25% of GDP, but now it decreased to 20% of GDP. That’s a decrease of 5%, meaning that there is a disconnection between the construction of infrastructure and manufacturing. That’s why it does not affect employment rates, and there is no significant impact on logistical costs either,’ he said.

In terms of employment rates, data from the Investment Coordination Agency (Badan Koordinasi Penanaman Modal – ‘BKPM’) state that in 2017 there were 216,000 fewer workers than in 2016. Not only that, more investment entered the service sector than the manufacturing sector. ‘This means that infrastructure construction cannot increase employment rates, nor can it bring foreign manufacturing investors to Indonesia. This is the where the disconnection lies,’ Bhima said. ‘There is no increase in employment, because major contractors prefer to use machinery rather than human labor. So it’s the wrong concept of infrastructure that we need to question, not the infrastructure itself,’ he said.

Dream projects
Bhima said that the 245 National Strategic Projects are ‘dream projects’, because private businesses are not interested in working on infrastructure. 90% of the costs for the infrastructure projects are obtained from the State budget (APBN). ‘If it’s from APBN, we are forced to get into debt, specifically to other countries. Well, we already have a significant increase in our debt level within the past 3 years. If there is no rationalizing, no braking of infrastructure construction, it will be dangerous for our fiscal condition – which in turn would endanger the trust of our investors,’ he said.

Currently, the Government set aside 410 trillion a year for infrastructure expenditures. Just for the Jabodetabek Light Rail Transit (LRT) project, the initial budget was Rp 26.7 T, but it has risen to Rp 31 T. Bhima said that the budget expanded because of inappropriate initial planning. ‘So there are planning problems, specifically about the costs estimated for land acquisition. Costs for materials might be estimated quite precisely, but land acquisition costs tend to roam,’ he said.

Similar to the Jabodetabek LRT project, the Jakarta-Bandung Rapid Train project also uses up a huge volume of money: $5.9 billion (Rp 70 T). The project, initially planned for operation in 2019, has now been delayed until 2024. One of the main factors behind the delay is land acquisition. The project is to be executed by the High-Speed Railway Contractor Consortium, a group of 7 contractors who will construct the 142.3-kilometer-long Jakarta-Bandung Rapid Train Railway for PT Kereta Cepat Indonesia-Cina (KCIC), a consortium between Indonesian BUMNs and the China Railway Group Limited, as the developer of the project. Majority funding for the project is through  China Development Bank loan. In the final calculation, the cost for the railway project will be about US$ 41.25 million per km.

China Railway Group previously constructed the 308 km-long Haikou-Sanya Rapid Train Railway in China, at a cost of only US$ 10 million per km, along a route with much harder more challenging geological/geographical conditions than those faced with Jakarta-Bandung. Another comparison is made with another project of the company in Iran, i.e. the 400 km Teheran-Ishafan Rapid Train Railway. For this project, they only required a budget of US$ 2.73 billion. This means that the costs of the Jakarta-Bandung Rapid Train Railway project are exorbitant.

In fact, the China Railway Group Limited (CREC) stated that it has not actually signed the US$ 2.7 billion contract with Iran. Furthermore, CREC China claimed to bear only the costs of the above-rail construction in the Iranian Rapid Train project, not including below-rail costs. In contrast, the Jakarta-Bandung Rapid Train project includes the costs of all construction, both above-rail and below-rail.

Bhima further said that the Jakarta-Bandung Rapid Train project is not an urgent priority, pointing to the unfortunate example of the Soekarno-Hatta Airport train, whose occupancy rate does not even reach 50%. ‘We don’t want to construct something with insufficient number users, because the operational costs will be burdensome to us while we have to repay our heavy debts to China. It would be much better to cancel the whole thing,’ he said.

Increased debt
Bhima believes that such massive infrastructure construction is just part of President Jokowi’s image-building. ‘Why does he insist on finishing the infrastructure construction by 2019? That’s because infrastructure construction is one of the means of campaigning that is easiest for the people to accept. Mr. Jokowi refused to acknowledge a decrease in public purchasing power, but Social Aid Funds 2018 has earmarked 10 million beneficiaries. That’s to save the lower-class’ purchasing power. There is a contradiction here: there is something denied here, but it’s executed in 2018. The budget of the Ministry of Social Affairs doubled that it’s a 100% increase. That’s a very steep price to pay for political ambition, which will end up sacrificing the people after all,’ he said.

Bhima admits that Indonesia’s economy is being ruined by the Government’s own internal policies. Indonesia’s debts tend to move in unhealthy and unproductive directions. Unfortunately, the Government continues to deny this. ‘I call this “denialnomics” – they keep on trying to deny what is happening, then they will only state that our economy is in trouble when they crash. If we remind them of debts, the Government always says that we have been having debts since Soekarno’s days, so please don’t blame the regime. Actually, we are not trying to blame anyone, we are simply trying to prevent from falling deeper into trouble,’ he said.

In the latest Indonesia’s Central Bank (BI) data published on Monday (19/2). BI recorded the total amount of Indonesia’s foreign debts at the end of last year at US$ 352.2 billion, or about Rp 4,754 trillion (exchange rate of US$ 1 = Rp 13,500). Total debt increased 10.1% over that of the previous year (year on year – ‘YoY’). The increase in foreign debt is mostly caused by Governmental borrowing, which increased 29% over that of 2016, at US$ 137.4 billion, to US$ 177.32 billion. The ratio of Indonesian foreign debt against GDP as of the end of Quarter IV of 2017 remained stable in a 34% range. Otherwise, the ratio of short-term debt to total foreign debt also remained stable in the 13% range.

Multiple accidents
With the massive amount of construction, 14 accidents have occurred in various infrastructure projects within the past year. The latest of this is the collapse of a pillar at Bekasi, Cawang, Kampung Melayu (Becakayu) Toll Road early morning on Tuesday (20/2/2018). 7 workers were reported to have been injured.

Andi Rukman Karumpa, Secretary General of the Indonesian National Construction Contractors (Gabungan Pelaksana Konstruksi Nasional Indonesia – ‘Gapensi’), responded, ‘This is in fact caused by rushing these infrastructural project, which pushes experts to look for short-cuts, ignoring technical specifications. So when an earth tremor occurs, cracks appear or the structures shift. Furthermore, people tend to be more careless because construction work nowadays relies on advanced technology. It is unwise for contractors to rely overmuch on advances in technology, because in the end, it is humans who must check, review, and decide on things. Project Chiefs and Unit Heads in the field must be disciplined and check the location every so often, especially when important decisions need to be made,’ he said.

Andi requests all project contractors to emphasize and enforce compliance and discipline according to safety procedures throughout the construction of any project, especially during critical points. ‘We all know where the critical points are. The more critical the condition, the tighter the procedure should be performed. We really must not take it lightly – do regular direct checks so that we can make better decisions,’ he said.

Therefore, he said that his organization would not hesitate to request that the Government tighten supervisory management for the implementation of health safety and security management systems (sistem manajemen kesehatan dan keselamatan kerja – ‘SMK3’), especially in construction projects, if accidents continue to happen. ‘Don’t play around – this is about human lives. Even though we have advanced technology, don’t be careless. Any technology will have weak points that must be covered with disciplined human work,’ he said. ‘We should treat this the same as with aeronautics – flight technology is very advanced, but no human error is allowed. High regulation is always relevant, no matter how advanced construction technology gets,’ he said.

Projects temporarily halted
Within the past 2 months, there have been 5 infrastructure project accidents. This has caused the Government to suspend all elevated construction work.

‘We agreed to suspend all heavy elevated infrastructure work,’ said the Minister of Public Works and People’s Housing, Basuki Hadimuljono, after a meeting held on Tuesday (20/2/2018). The meeting was also attended by the Minister of BUMN, Rini Soemarno; the Minister of Transportation, Budi Karya Sumadi; and a number of First Echelon officials from these ministries. Basuki said that the suspension applies in general to all elevated projects, i.e. not just toll roads, but also LRT and bridge projects. ‘Yes, the entirety of current projects in Indonesia,’ Basuki reiterated. He added that the Government will be evaluating all elevated infrastructure construction thoroughly: ’We will be evaluating the HR, the construction, the maintenance – everything.’

Bhima responded positively to the Government’s decision to suspend all elevated projects. He believes that management needs to be improved, as the planning is too rushed and the monitoring too weak. This proves that infrastructure projects are not managed professionally. ‘The consequences of such carelessness is that projects cannot be completed according to deadlines, which is costly because the Government must still make repayment installments on both principal and interest, which takes longer,’ he complained.

Bhima said that the Government should pay more attention to important criteria when doing infrastructure construction in the future. First of all, the rationalization of projects: no unfeasible projects should be considered in the first place. Second, infrastructure must be connected to industrial areas. So before toll roads are built, industrial areas must be repaired. Third, the infrastructure should be intensive, which requires a large number of workers. Fourth, middle to lower class contractors should be involved, so that regional contractors can survive. For example, when constructing the Trans-Papua road, there must be more Papuans than outsiders employed. This means that the infrastructure is directly connected to the economic output of local people. Fifth, the infrastructure should be pro-people. This means that it must be directly related to the people’s existing employment in order to increase their spending power. For example, when building in an agricultural area, irrigation and water storage infrastructure should be set up as well, in order to optimize local budgets. (Dessy Aipipidely)