Sunday, 14 February 2016

PGI Insight: Indonesia changes regulations to speed up stalled infrastructure projects

  • New regulations to provide better legal protections to local officials and contractors and overcome excessive bureaucracy are expected to accelerate many major infrastructure projects in the transport, power generation, aviation and ports sectors. 
  • Successful infrastructure development is critical for Indonesia to boost its economy, but efforts to kick-start projects under President Joko Widodo since October 2014 have stalled. 
  • The new regulations, including the expedition of construction permits and reduced oversight of local authorities, could however create new opportunities for corruption. The weak rupiah and local banks’ reluctance to finance large projects could impede project development, which is heavily reliant on private sector funding. Changes to land acquisition procedures are also likely to provoke opposition from local communities, which could increase lawsuits and protests targeting particularly controversial projects. 
Infrastructure development critical to economic growth
Indonesia is consistently ranked poorly in the World Economic Forum’s Global Competitiveness Report, lagging significantly below Singapore, Malaysia and Thailand across all measures of road, railway, port, airport and power infrastructure. A further USD 550 bn in investment is needed by the end of 2019 to achieve targets set by President Joko Widodo upon taking office in 2014. The president’s infrastructure growth plan includes around 200 projects, including major initiatives such as 35 GW of increased power generation capacity, 1,000 km of new toll roads, 49 dams and 24 commercial seaports, and the completion of the long-delayed West Java International Airport.
Despite Widodo’s pledges, infrastructure development has stalled in the first 16 months of his presidency. Some 47 current projects have been delayed by bureaucratic obstacles to land acquisition, environmental concerns, and a lack of legal protections for officials and contractors, deterring authorities from project implementation out of a fear of incrimination for regulatory violations. The suspension of the USD 5.5 bn Jakarta-Bandung high-speed rail project by the government in February 2016 due to insufficient paperwork and problems acquiring a business permit is symptomatic of common delays. In January 2015, the government also cancelled the Jakarta monorail project with contractor PT Jakarta Monorail over disagreements with the company and doubts over its ability to fund the project, which first began in 2004 and had only resumed construction in October 2013.
The infrastructure development projects are intended to facilitate Indonesia’s economic growth targets set at 5.5% of GDP for 2016, and will be a defining feature of Widodo’s presidential legacy. Both the World Bank and Fitch ratings agency have highlighted increased FDI inflows, structural reforms to promote infrastructure development, and the removal or reduction of regulatory obstacles as critical for Jakarta to achieve this economic goal. According to the World Bank, improved seaport infrastructure under current plans could reduce logistics costs by 10 to 15 percent, bringing them close to the Southeast Asian regional average of around 10 percent of GDP. Reduced transport costs and more efficient and integrated supply chain infrastructure could also boost sectors such as mining and manufacturing. 
New regulations ease burden
Presidential Instruction No. 1/2016 and No. 3/2016 came into force in February, aiming to speed up projects by: 
  • expanding central and local officials’ authority to manage and implement projects;  
  • offering officials added legal protections against incrimination for regulatory violations;  
  • making land acquisition for infrastructure projects easier.  
Since Widodo first launched his infrastructure spending plan, local authorities have been hesitant to drive projects effectively due to a complex regulatory environment. Despite encouragement at the highest levels of government, many local authorities have considered themselves liable for potential regulatory violations and have lacked confidence to expedite projects, particularly as corruption remains rampant and the Corruption Eradication Commission (KPK) has in the past aggressively pursued local officials for violations connected to infrastructure projects. 
Local authorities will now be given the authority to revise or replace rules seen to hamper projects, a measure that is hoped to simplify the regulatory framework. In addition, the home minister is authorised to annul local bylaws and instruct local authorities to revise laws perceived to obstruct developments. Authorities are also able to expedite the appointment of construction firms to carry out projects, hoped to ease and speed up the process of issuing business permits. In order to alleviate officials’ fear of facing criminal investigations when embracing the new regulations, the Attorney General and National Police will be able to perform administrative checks on alleged wrongdoings or regulatory violations before they become legal or criminal cases.  
A more efficient land acquisition process will also help speed up development of cross-provincial projects such as toll roads, which have often been delayed by political disputes between different local administrations. The new rules reduce the time needed to acquire licensing and cut the time required for sharing information on land acquisitions with nearby residents from 20 days to three days. Land acquisition requirements were considered one of the major sources of delays on projects to date, particularly for the expansion of Indonesia’s power network. 
Financing, corruption, and local opposition to remain key risks
Indonesia’s plan to acquire 70 percent of the necessary infrastructure investment from the private sector faces short-term challenges. A depreciating rupiah throughout 2015 has inflated the debt of private contractors, who often borrow in USD, and increased the cost of importing construction equipment. This has led to a lower appetite among Indonesian banks to support private sector infrastructure projects, casting doubts over whether sufficient funding can be acquired for long-term projects. For toll-road land procurement in 2016 alone, the government is currently at least USD 350 mn short of a total requirement of USD 910 mn, to be primarily sourced from the private sector. On 10 February, Widodo announced a plan to loosen restrictions on foreign investment across 49 sectors of the economy, including in energy and transport, a measure intended to increase access to financing.
Increased legal protections for local officials and efforts to expedite the issuance of construction permits also raise fresh concerns over corruption. The Attorney General and national police tasked with carrying out reviews of suspected regulatory violations are unlikely to have the capacity to effectively monitor projects. Similarly, neither organisation has a strong track-record of prosecuting public officials for corruption, with the KPK historically more effective and willing to pursue senior level officials. Corruption watchdog Transparency International ranked Indonesia at 88th of 168 reviewed countries in its Corruption Perceptions Index, with public administration and the House of Representatives highlighted as among the most corrupt institutions in the country. The government says the existing Good Governance Law and Public Information Law will ensure compliance with anti-corruption norms, but enforcement remains weak and the new regulations, especially changes to the issuance of construction permits, present more opportunities for corruption between local administrations and private companies.
Finally, the streamlining of the land acquisition process is likely to see significant opposition among the local population, and ultimately in parliament. This is likely to impact major projects, including plans to overhaul Indonesia’s seaport and land transport infrastructure. The so-called “Sea Toll Road” transport programme to connect tens of new seaports between Jakarta and Surabaya in East Java with key ports in Maluku, Papua and Riau Islands is likely to face considerable challenges by local communities. The USD 700 mn Medan port that was completed in January 2015 was delayed for eight years over a land dispute with a plantation company, and similar disputes are likely to arise elsewhere as the development project progresses. The Jakarta-Bandung high-speed railway is already facing growing opposition among some lawmakers, who have called on the government to halt it due to state budget concerns, irregularities with permits, and environmental damage to areas along the route that are susceptible to landslides. Conservation areas, such as the Walini in West Java, are likely to be damaged during the project and could prompt a review of the railway’s feasibility study. The project received its environmental permit in late January, which gives opponents until late April to file lawsuits over any perceived violations. Even if lawsuits are not filed, protests remain highly likely once construction starts, and have the potential to further delay the project. As a high-profile project, the railway’s success will be a key indicator of the government’s ability to deliver infrastructure improvements and of contractors’ to undertake major development contracts in Indonesia.