The Paradox behind Jokowi’s infrastructure drive: A real need or a bridge leading to nowhere..???

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(illustration: IO/Agung)

IO, Jakarta – Within the 4 years of leadership, the Jokowi-JK Government has pursued massive infrastructure, divided into 5 categories: energy, transportation, water resources, communication, and housing.

Government has 245 National Strategic Projects (NSP) delineated through Presidential Regulation (Peraturan Presiden – “Perpres”) Number 58 Year 2017. These 245 NSPs represent an investment of Rp 4.417 trillion. They include 15 infrastructure works and 2 programs, i.e. 1 electricity program and 1 airplane industry program. However, in 2018, after re-evaluation, the Government decided that the list of NSPs to be realized had to be reduced to 222 items plus 3 programs.

Coordinating Minister of the Economy Darmin Nasution announced that this total was generated by evaluating the list of projects in 2016 and 2017, broken down as follows: 69 road projects, 51 dam projects, 29 area projects such as Special Economic Regions (SER), strategic tourism industry, 16 railway projects, 11 energy projects, 10 port projects, 8 clean water and sanitation projects, 6 airport projects, 6 irrigation projects, 6 smelter projects, 4 technology projects, 3 housing projects, 1 aquaculture project, 1 sea wall project, 1 educational project, 1 airplane program, 1 economic equality program and 1 electricity program, with an estimated total investment value of more than Rp 4,100 trillion.

When divided according to funding source, 13% of the finance originates from State Budget/Regional Budget, 28% from State-owned Enterprises/Region-owned Enterprises, and 59% from private funding, allotted through Private-Public Partnership (PPP) schemes as well as business-to-business (B2B) ones. The Government prioritizes infrastructure construction in order to increase national competitiveness, distribute the results of development equally among regions, and reduce regional disparity.

Ambitious Infrastructure Projects
Economist Ichsanuddin Noorsy explains that according to World Economic Forum data, the Global Competitiveness Index shows that Indonesia’s infrastructure lags far behind Thailand’s, Malaysia’s or Singapore’s. “Therefore, we must see the 4 requirements for the connection between resources, production, and distribution. How far can the infrastructure provide connectivity for the amount of resources to the production site, connectivity from the production site to the distribution points? That is the first requirement, “How far are we able to provide it?”, he asked.

The second requirement is that the costs must be affordable for us to supply or purchase. For example, the Cikampek-Padalarang double-lane highway is located in an area with steep elevation and sharp turns. This kind of terrain calls for special technology. If the terrain is ordinary, it is easy to transport materials, tools, and workers there, which means that less money will be spent. But if the terrain is a harsh one, costs will rise. This is similar to the time the Sunda Straits Bridge proposal was being considered: while the construction is seemingly technologically affordable, it would be far from cheap to build.

The third requirement is to determine whether the goods are accessible or not, while the fourth requirement is whether the quality is acceptable or not. “For example, recently several infrastructure facilities were hurriedly put up but they collapsed soon afterwards. The measurements were also determined by 3 infrastructure types: basic, secondary and tertiary infrastructure. We refer to “basic” infrastructure because it responds to basic necessities of the people or the public good, such as schools, hospitals, and electricity generators. Basic infrastructures must not be commercialized,” Ichsanuddin Noorsy said.

Secondary infrastructure can be constructed cooperatively, but tertiary infrastructure can be more commercial than public-oriented. These classifications are necessary, so that the Government does not ignore their responsibility for public works or providing basic necessities for the people. In other words, Government must not shirk its responsibility over capital goods expenditures for the basic necessities of the people. This is the keyword.

“When applied to the infrastructure built by Joko Widodo, we see how ambitious he is… I would even go as far as saying ‘super-ambitious’. For an indicator, just consider the power plants that were originally natural gas-based and then changed into coal-based plants. Apparently, coal has become dominant. We might as well hand over power plants to private interests. In the end, independent power plants would entail high kilowatt per hour unit price. That means that the State is irresponsible, as electricity is a basic necessity of the people. That’s just one example,” Ichsanuddin Noorsy said.

Infrastructure vs. Job Opportunities
Suhendra Ratu Prawiranegara, Public Infrastructure Observer, said that according to data released by the Ministry of Finance’s Directorate General of Budgets, the Government’s expenditures realized in 2017 amounted to Rp 1,998.5 trillion, growing 7.2% year on year (YoY). Infrastructure expenditure also realized a spurt of growth from the same period in the year before. According to this data, total infrastructure expenditure grew 44.93% YoY in 2017. Along with the growth of Government infrastructure expenditure, there is an implication that the growth of the construction sector is around 7%. However, the infrastructure expenditure growth would not immediately exert any positive impact from a domestic economic perspective.

We can see this from the extent of worker absorption, which actually suffers from a downtrend. In August 2017, the construction sector contributed about 6.73% to the absorption of job opportunities, which is lower than the achievement in the previous year at 6.74%. In fact, according to the Institute for Development Economics and Finance (INDEF) studies, the reduction of worker absorption in 2016 was about 230,000 infrastructure (construction) sector personnel. This is a paradox in the infrastructure sector, which on one hand requires great funding, which implies a rise in the Government’s and construction State-owned Enterprises’ debt ratio. On the other hand, the infrastructure sector is apparently not entirely a reliable target for providing job opportunities for national construction workers and services.

Ichsanuddin Noorsy believes that massive infrastructure construction does not correlate with economic growth, because it does not connect resources, production, and distribution effectively and efficiently. Worker absorption also undergoes a similar fate, as they are not situated in the same chain. Furthermore, the need for domestic cement, which should have increased because of infrastructure constructions, has remained flat. “I once became a speaker at a cement workers’ union meeting. They pointed out how cement imports are excessive. This is the logical consequence of a turnkey project model of infrastructure construction. Iron is brought in from outside, cement from outside, technology from outside, in fact human resources are also brought in from outside,” he said.

The Government’s intention with infrastructure construction is to increase interconnectivity, reduce logistics costs, and maintain availability of energy supply. However, Ichsanuddin stated that this purpose has not been achieved, because they do not connect and distribute resources and products. This keeps the prices of basic necessities high. In conclusion, the Government seems to be constructing infrastructure merely to expand the market for imported goods from Japan, America, and China. “It seems that the purpose of constructing this infrastructure is to open up the market for foreign goods in our country. We can see that the infrastructure constructed does not connect resources with production, and does not help with distribution. We must admit that our competitiveness index increased from the 41st to 36st rank, but what use is the increase of the competitiveness index if it’s not followed with a decrease in prices? If the competitiveness index rises, then prices should drop, but apparently not. The multiplier effect should have been the decrease of logistics costs, but this did not happen. If logistics costs do not go down, final consumer prices will not decrease either,” he said.

INDEF researcher Abra Talattov stated that data from Statistics Indonesia (Badan Pusat Statistik – “BPS”) show that the trend for several infrastructure components, such as iron and aluminum, remains consistent from January to July 2018 with growth of 36%. Imports during the current 9 months, i.e. until September 2018, tend to remain at 35%-40%. “Cement trends are anomalous, because domestic cement production is abundant, with a surplus supply of up to 30 million ton claimed by the Cement Producers Association. Domestic cement production high, but imports are also high. Another oddity is that steel imports are high, but only 30% of the installed capacity of our factories is utilized,” he said.

Abra further stated that the spirit of infrastructure construction should not just focus on connectivity, but more importantly how construction can stimulate the real sector in the short-term, especially domestic industry. Paradoxically, this construction has actually damaged the domestic industry sector and does not stimulate the real sector. We get foreign funding, but we have to use foreign materials, experts, and workers. This type of infrastructure construction management can actually cause deindustrialization. Domestic industry would go backward instead of forward, because imports skyrocket while domestic production is at a surplus. We cannot even export this surplus, because internal support, such as energy prices, remains low while banking credit interest stays high. This is what we call the “turnkey system”.

The increase of domestic workers in the construction sector is also insignificant. This is because first, most infrastructure projects use high technology, so they are capital-intensive. Second, quite a few of workers are from abroad. Even though some of them are expert workers, there are cases of both legal and illegal workers who work at unskilled work that could have been performed by our own workers.

We must evaluate the Government’s intent to construct infrastructure for interconnectivity purposes. Is “interconnectivity” measured from the fact that people have access, or are we trying to encourage mobility? In relation to the construction of toll roads, there are cases where logistics-carrying trucks prefer to avoid toll roads because using them would end up being more expensive than using ordinary roads. Therefore, infrastructure construction does not guarantee that logistics costs would be more efficient than when using existing facilities, especially if the management of the infrastructure is left to private parties.

The Government predominantly constructs transportation infrastructure, such as highways, ports, and airports. It does not construct much energy infrastructure, such as petroleum and natural gas production, refineries, or distribution. This does not address our most pressing issue, i.e. energy security. We still depend so much on imports. Our natural energy sources, such as petroleum and natural gas, are limited. Furthermore, they are managed by foreign companies. The Government only has 35% set aside from domestic petroleum and natural gas production, managed by foreign contractors outside Pertamina. Furthermore, we consume petroleum fuel at 1.6 million barrels a day, while domestic production is only 834,000 barrels a day. That means that we have a 50% gap between supply and demand. As we need to import the remaining amount to cover our needs, we still have not achieved the purpose.

The Government’s intent to reduce logistics costs is inseparable from toll roads, ports, or airport fees and petroleum fuel costs, especially diesel fuel. Our logistics costs are relatively higher than those of other countries in the same region. This is indicated by, for example, higher cargo fees in our ports. Furthermore, we have dwelling time issues, where it takes longer for cargo to be loaded and unloaded in our ports. This means that the costs rise even more.

UI Economic Observer Ninasapti Triaswati concludes that part of the infrastructure construction targets is not achieved. For example, our electricity production target is extremely high at 35,000 MW, but we fail to achieve it due to various internal and external reasons. Internal issues include managerial problems, while external issues include limited outside funds. Another reason stated is land acquisition, i.e. land prices increasing rapidly so that funds are insufficient, land permit overlaps. These are the things not properly and completely resolved by the Government.

Ninasapti stated that several ports constructed for trans-regional interconnectivity have yielded results. However, the improvement is minimal. Toll road and airport interconnectivity has not yet been achieved due to land acquisition issues. “It is difficult to complete provincial and regency zoning plans. They are mostly still discussed, because there are a lot of overlaps and other issues,” she said.

The primary purpose of infrastructure construction is to reduce logistics costs. However, until now we have yet to hear that there is a major decrease in logistics tariffs. In fact, with another increase in petroleum fuel prices, transportation costs increase again. Transportation costs are not just affected by infrastructure, but also by logistic costs, especially fuel costs. Infrastructure construction has a medium- to long-term target, not a short-term one, while economic growth is viewed year to year. There is not much impact on economic growth during the 4 years of a Jokowi Government. We still need time before we can realize these projects fully.

Unproductive Projects
Abra Talattov indicated there should be some sort of multiplier effect from such massive infrastructure construction, as indicated by how infrastructure construction can stimulate economic growth, whether national or regional. However, economic growth still remains relatively stagnant at about 5%. The macro impact of infrastructure construction really cannot be felt in the short term. We should look forward to be able to use the infrastructure within 5-10 years, especially for industrial transportation and distribution.

The problem is that the projects are running, but not fully. The Government has a list of 245 national strategic projects (NSP). Quite a few of these projects have not even reach a construction stage. In fact, with the rationale that the Rupiah is still weakening, the Government suspended 35 projects this year. They may be listed in the NSP list, but apparently there are issues of implementation. We need to watch over the projects still under construction, so that they are completed instead of being abandoned halfway into the project.

The NSP projects that we should continue are the most strategic ones that can stimulate the real sector, especially those relating to agriculture, such as dams and irrigation channels. This is because our biggest economic structures are agricultural and industrial. We need to get such projects completed first, as well as industrial support sectors such as energy, water, ports. We must withhold, for example, the construction of toll roads in regions where even regular roads are not overloaded, such as in Sumatra and Papua. We should first construct industrial centers that can attract investments to the region.

Ninasapti Triaswati figures that the 245 National Strategic Projects cost Rp 4,140 trillion in total. Even on paper this is a high amount, so we must check the realization of the investment. Having big targets is good, but the people cannot enjoy them if they are not realized. Some realizations must be prioritized: are we to prioritize development in West, Central, or East Indonesia? “For example, are the toll roads already realized in Papua? Each region has its own characteristics. Therefore, targets are high but the realization is slow. Most of the funds are probably provided, but if the realization is slow the money will not be used. The absorption of the budget also matters. Infrastructure is a complex issue, because it is related to both Central and Regional Governments.

There must be a scale of priorities for determining whether a project is to be continued, delayed, or stopped. For example, the road constructed must exert a direct impact on people’s welfare, e.g. an irrigation road or a village road. We should develop our agriculture first, meaning that our target is independent rice, soy and sugar production. If we are still forced to import these commodities, it means that our production is insufficient.

Suhendra Ratu Prawiranegara said that the Government must review which of the National Strategic Projects the people need most – which ones must be prioritized. “We should continue projects that are our primary needs. However, other projects that are only reputational or “lighthouse” projects that do not pay off when completed. For example, the Light Rail Transit project in Palembang. Where is the urgency for it? The project took in a lot of money. What’s the use for it? Do we need an LRT in Palembang? The priority should be on irrigation or drinking water projects that the people really need,” he said.

Government Image-building
Ichsanuddin Noorsy said that “The Government’s main development criterion is “image building” – whether in infrastructure or energy, whether primary or secondary. How can we speak of energy as a national project if our country has high energy dependence, whether primary or secondary? Electricity prices continue to increase and Rupiah value spirals downward. In other words, the Government has failed. You can build as much infrastructure as you like, but as long as your energy is dictated by foreign powers or depends on foreign supply, then that’s how long your infrastructure will not increase competitiveness. As long as a country depends on foreign parties for its energy supply, its competitiveness will never improve. Even if it does, it would be temporary, not permanent.”

Ichsanuddin Noorsy has 3 suggestions for resolving the mess caused by too much infrastructure construction: first, construct electricity facilities that utilize local energy sources instead of depending on coal. For example. South Sumatra has a gas base, West Java and Central Java have geothermal bases, and East Java has gas advantages. Jakarta can get a geothermal supply from West Java, such as from Mt. Salak. We should not depend on a supply of pricey coal. The Government has made erroneous assumptions and decisions on the utilization of primary energy. It must restructure development plans by putting power plant construction as its first priority, as electricity is a basic need. The Government should not entertain ambitions of constructing 100% electrification if the State’s Electric Company (PLN) cannot afford it and even had to write begging letters to the Ministry of Finance. Second, energy. By regulating the automotive and public transportation industries, we develop both public transportation and primary energy facilities. We should stop imports of crude oil and oil products and use renewable energy products. The keywords are: first, fuel; second, food. In other words, we need to construct irrigation followed by roads. Third, finances.

The Government must resolve triple crisis: our food, fuel, and finances are all threatened. Infrastructure construction drinks up a lot of debt money. This means that Indonesia will become an exploitation center for investors for the long term, a center of construction and maintenance technology dependence, a workers’ exploitation center. In short, we are going to become cash cows and we will be powerless to refuse. When the people’s basic necessities are built on a base of debt and the debts themselves are based on interest, Indonesia is implementing a modern system of slavery.

Ninasapti Triaswati states that infrastructure construction is mostly based on debt money. The Government has been covering deficits from debts year after year. “Indonesia’s State Budget is constantly in deficit, so it would always need debts. It’s just a matter of seeing where debt money goes to, is it effective or not. What we need to remember is: how much do we have to return, and when is the maturity date? Our expenditures must not be a burden in specific years only, but we must try to equalize them in order to end depreciation. If Government is already in debt, it must still pay interest whether it makes use of the money or not. This is why we must be careful about debt, we must repay on time. Ideally, land is available as the money is liquidated, so that it is not held down in banks. Even if it is not used, we must still pay interest and a commitment fee on it. Note that our debt absorption is about 60%; look at the data in the National Development Planning Agency (Bappenas). The realization is never 100%. It depends on whether we withdraw a program loan or project loan; the difference depends on how fast we withdraw funds. Debt must become effective immediately, because if the Government takes on a debt today only to wait around and use it next year, we will lose time and expenses. We must pay out bigger costs, because the interest and commitment fees must still be paid,” he said.

He hopes that the Government puts debt as the final option and use foreign direct investment as a primary option. However, we will always need loans because our country is historically constantly overdrawn. Our expenditures are always larger than tax income. Unless one day Indonesia can say that its budget is balanced, or its income equals expenditures. So far, however, our governmental expenses continue to jump. Our income also continues to increase, but there is always a gap with expenses.

Abra Talattov states that by constructing infrastructure using debts, especially those with Private-Public Partnership (PPP) scheme, our construction State-owned Enterprises would be pressured to construct projects that are mostly cooperative with funding from outside, without considering the limit of the Enterprise’s capacity. This will push construction State-owned Enterprises into financial distress, or at least a risk of financial problems. Furthermore, State-owned Enterprises still require capital expenditure. We continue to need foreign currency to repay our short-term debts. In the end, the Rupiah will become even more depressed.

Abra said that in the political year, there is a huge risk that the policies taken tend not to have rational consideration. On the contrary, Governments tend to take irrational, short-term pragmatic policies. For example, our State Budget is limited, oil prices are still rising, and the Rupiah is still depressed. In our limited fiscal condition, the Government fails to raise gasoline prices, even though Pertamina is not subsidized for producing gasoline. The Government cannot provide subsidies because it has limited fiscal capability. This depresses Pertamina, putting it at risk of medium-term repayment failure.

The Government is planning to continue to accelerate infrastructure construction next year: this year the budget is Rp 410.5 trillion, next year it will be Rp 420.4 trillion or increasing 2%. This means that our Government’s ambition for constructing infrastructure remains consistent, in the face of other major needs. For example, social expenditures will increase 30%, miscellaneous expen­ditures increase 174%, and subsidy expenditures will also increase. “Miscellaneous expenditures” include backing up in case global oil prices continue to increase, and to increase subsidies if next year’s expenditure balloons. The Government should not make short-term policies on an irrational basis.

With such a difficult economic condition, Suhendra Ratu Prawiranegara reminds that the Government should adjust its various project plans according to its finances. If it continues to recklessly live off on loans, the Government is creating a time bomb for itself – and for us. (Dessy Aipipidely, Ekawati)