00074918.2015.1061916
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
INFRASTRUCTURE POLICY IN INDONESIA,
1965–2015: A SURVEY
Peter McCawley
To cite this article: Peter McCawley (2015) INFRASTRUCTURE POLICY IN INDONESIA,
1965–2015: A SURVEY, Bulletin of Indonesian Economic Studies, 51:2, 263-285, DOI:
10.1080/00074918.2015.1061916
To link to this article: http://dx.doi.org/10.1080/00074918.2015.1061916
Published online: 24 Aug 2015.
Submit your article to this journal
Article views: 195
View related articles
View Crossmark data
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji]
Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 263–85
Fifty Years of BIES
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
INFRASTRUCTURE POLICY IN
INDONESIA, 1965–2015: A SURVEY
Peter McCawley
The Australian National University
This survey, irst, provides an overview of the main developments in the infrastructure sector in Indonesia during the past ive decades and, second, considers what the
main policy and management bottlenecks in infrastructure appear to be. The overview of main developments indicates that, in broad terms, most parts of the sector
have expanded considerably but that the needs remain acute for further expansion
and for attention to the maintenance of existing facilities. Demand for infrastructure
is high, especially since the regulated prices set for infrastructure services are often
low. Access is often dificult, however, because of shortages of infrastructure, and
quality is often unsatisfactory because of poor maintenance and indifferent management. These problems of access are exacerbated by the regulation of prices. This
overview also points to the markedly different performances of industries in which
pro-competitive policies have been applied and those in which more traditional
policies of close regulation have restricted the operation of markets.
Keywords: infrastructure, regulation, law, prices, markets, land, inance
JEL classiication: L51, L90, L97, L98
INTRODUCTION
Infrastructure plans and policies in Indonesia are a bewildering kaleidoscope of
promises, underfulillment, delays, and outright cancellations. The various industries (transport, power, water, telecommunications, and so on) within the sector
operate largely as silos, with little coordination between them; central, provincial,
and district governments house a myriad of policymakers and regulatory agencies; and, because engineers and oficials who believe in planning tend to dominate policy-making circles, economic principles are often brushed aside in the
design of infrastructure policy.
This survey of infrastructure policy in Indonesia will draw in particular on
relevant material published in the Bulletin of Indonesian Economic Studies (BIES)
since its irst issue, in 1965. It will cover the main developments in the sector during the past 50 years and discuss the main policy and management bottlenecks
holding back growth in infrastructure in Indonesia. Two matters need to be noted
at the outset. First, infrastructure policy is currently a top concern for economic
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000263-23
http://dx.doi.org/10.1080/00074918.2015.1061916
© 2015 Indonesia Project ANU
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
264
Peter McCawley
policymakers—ministers and oficials alike—in Jakarta. President Joko Widodo,
in his irst few months in ofice, announced major proposals for the infrastructure sector: he abruptly cancelled tentative but long-standing plans to build the
large ($20 billion) Sunda Strait Bridge; he unveiled a number of projects to expand
ports across Indonesia, consistent with his emphasis on the country’s maritime
development; and he said he planned to add 30,000 megawatts of capacity to the
generation industry. A range of other projects in other industries have been put
forward in recent months.
These announcements have raised expectations for a burst of activity in the
Indonesian infrastructure sector, while other events in the region have emphasised the need to pay closer attention to infrastructure in developing countries
in Asia. The imminent establishment of China’s multilateral Asian Infrastructure
Investment Bank, for example, has attracted strong international interest.
Second, few of the main issues in infrastructure policy that attract widespread
comment today are new. The basic problems were discussed in early issues of
BIES, in its Survey of Recent Developments series. Yet it is striking how little progress has been made over the last 50 years in tackling these problems; the actual
development of infrastructure has been signiicant yet insuficient.
FRAMEWORK
Infrastructure policy is complex. Senior policymakers in government need to
avoid becoming too closely involved in the details of management; they should
concentrate mainly on designing the overall frameworks for policy in each industry. Perhaps the key challenge in inding the balance between these two considerations is to design effective, industry-speciic regulatory arrangements.
It is useful to have a framework when evaluating infrastructure policy. As a
irst step, it is helpful to deine infrastructure. This article uses a slightly amended
version of the deinition suggested by Wharton (1967): infrastructure is the physical capital and the institutions or organisations, both public and privately owned,
that provide economic services and have a signiicant effect, directly or indirectly,
on the economic functioning of economic actors (both individuals and irms) but
are external to each actor.
Many factors inluence demand and supply for infrastructure (igure 1).1 The
details vary from industry to industry, but on the demand side in Indonesia there
are often several distinct markets for infrastructure services. On the one hand,
there is a demand from different types of consumers (household, industrial, commercial, and others) in the modern, formal sector of the economy. On the other
hand, there is also a demand from small-scale consumers.2
On the supply side, a number of related but separate policy issues exist. Financial
concerns naturally loom large for senior policymakers. Technical requirements,
1. The discussion here draws on an earlier article (McCawley 2010).
2. Small-scale consumers of infrastructure services are an important part of the overall
infrastructure market in Indonesia. However, they are generally neglected by large-scale,
often state-owned suppliers in the formal sector (see McCawley 2010).
Infrastructure Policy in Indonesia, 1965–2015: A Survey
265
FIGURE 1 Framework of Policy Issues in the Indonesian Infrastructure Sector
Overall political, regulatory, & legal issues for the sector
Financial issues
Household
Subsidy issues
Internal resources (prices)
Public
Domestic
Foreign
Private
Price
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Industrial
Demand
Supply
Domestic
Foreign
Technical issues
Commercial
Engineering
Land
Governance & management
Environmental issues
Othera
Maintenance & sustainability
Source: McCawley (2010).
a
Includes social and government consumers, for example.
including access to land, often limit the options for the supply of services. Matters
of governance and internal management need close attention. Safeguards such
as environmental and social standards affect community expectations. And there
are wider policy considerations as well, such as the overall framework of political,
regulatory, and legal issues within which infrastructure sectors must operate, and
the broad inancial and economic constraints—including pricing policies—set
down for infrastructure industries.
As igure 1 shows, it is inevitable that many issues in the infrastructure sector
in Indonesia will be contested by many interest groups. On the demand side,
larger consumers of infrastructure services in the formal sector can be expected to
press for increases in supply. Smaller consumers, many of whom are in the informal economy, often resort to imaginative, ad-hoc measures to gain access to infrastructure. On the supply side, there is a push-and-pull between policymakers and
other actors involved in different sectors. Further, the regulatory framework in
Indonesia is not well established. Institutional decisions—such as those of the
parliament, the executive, or the Constitutional Court, if not those of local governments—can cause much uncertainty for actors in infrastructure operations.
POST-INDEPENDENCE
There was relatively little growth in the infrastructure sector during the 1950s and
into the 1960s. The previous decades of the 1930s and 1940s had, of course, been
dificult ones. Important parts of Java had been well served by the transport and
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
266
Peter McCawley
other communications sectors at the beginning of the 20th century,3 but services
in the railways and most other parts of the transport industry steadily declined in
the following decades. By the late 1950s, the dilapidated transport network added
considerably to the costs of transporting rice and to the losses within the marketing network. A good deal of rice was transported through simple infrastructure
systems (carts, carrying-poles, and bicycles) on unsealed tracks. Trains and trucks
carried food supplies to the main cities in Java, while in Sumatra and Kalimantan
considerable use was made of waterways (Mears 1961).
To be sure, President Sukarno had on various occasions announced major infrastructure plans during the 1950s and 1960s. But too often, as on many occasions
since then, ambitious infrastructure plans were not supported with the resources
needed. By the beginning of the New Order period, most infrastructure across the
nation had long been neglected.
ROADS AND MOTOR TRANSPORT
In the early 1970s, a revolution in road transport began. As the road network
grew, and as the economy became more open to foreign investment and imports, a
remarkable structural transformation in the road transport system began to occur.
Traditional forms of public transport, such as the becak (trishaw) and dokar (horsecart), found it hard to compete with the swelling numbers of buses and small
pick-up trucks (often called ‘colts’) appearing on the roads (Booth and McCawley
1981, 8). Indonesian consumers also quickly took to the use of light motorcycles
produced by well-known Japanese suppliers such as Yamaha, Honda, and Suzuki.
Into the mid-1980s, the numbers of both trucks and motorcycles on Indonesian
roads grew by well over 12% per year, signiicantly faster than the economy and
the population (table 1).4
These developments were transformative of what is now called ‘connectivity’
in Indonesia. The cost and convenience of both local journeys and long-distance
intercity travel improved dramatically. Workers from previously isolated rural
areas in Java, such as Gunung Kidul, in Yogyakarta, increasingly took up construction jobs as far aield as Jakarta or even South Sumatra (Dick 1981b, 88).
Circumstances in the outer islands, however, were varied. In some places, rapid
changes took place. In North Sumatra, for example, the road system improved
greatly during the 1970s (Ginting and Daroesman 1982, 71). But in other places,
especially in eastern Indonesia, there was less improvement.
3. In a survey of competition between the railways and other modes of transport at the
time, Dick (2000, 187) observes that Java, by 1900, already had ‘a sophisticated agroindustrial economy integrated by overlapping networks of telegraphs, telephones, railways, narrow-gauge tramways and good roads. Nowhere in Southeast Asia could boast
better infrastructure. Elsewhere in East Asia, only Japan could compare’.
4. The tables in this article draw on various editions of Statistik Indonesia (BPS 1970–2013a),
whose data are not always consistent or complete. All possible care has been taken to ensure accuracy of data in this article. In a few cases, to bridge gaps, extrapolation has been
necessary to prepare a full data series. The data shown in the tables are taken to relect the
rising demand for better infrastructure in Indonesia.
Infrastructure Policy in Indonesia, 1965–2015: A Survey
267
TABLE 1 Motor Vehicles and Economic Change in Indonesia, 1970–2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Registered motor vehicles (’000)
Population
(million)
Per
capita
GDP
(Rp m,
2000
prices)
Cars
Buses
Trucks
Motorcycles
GDP
(Rp tn,
2000
prices)
239
11,485
24
2,286
103
5,615
440
84,732
292
2,769
116
249
2,513
11,121
Average annual growth (%)
1970–1975
9.9
7.8
1975–1980
10.8
19.7
1980–1985
9.2
21.4
1985–1990
5.8
15.6
1990–1995
9.9
8.0
1995–2000
7.6
–0.7
2000–2005
12.6
12.2
2005–2013
9.7
8.6
14.0
19.3
12.3
3.9
5.5
5.0
11.3
8.5
22.1
17.5
12.4
4.9
8.3
8.4
16.1
14.6
6.7
7.2
3.1
7.1
7.8
0.5
4.7
5.9
2.3
2.4
2.1
1.8
1.5
1.5
1.5
1.5
4.2
4.6
0.9
5.2
6.2
–1.0
3.2
4.4
9.8
13.0
5.4
1.8
3.5
1970
2013
1970–2013
9.4
11.2
Sources: Data on registered motor vehicles from BPS (1970–2013a)—see footnote 4. Data on GDP and
population from Van der Eng (2010), updated to 2013 with data from national accounts and from BPS
(2013b).
The rapid expansion of oil production since the late 1960s and the rise of oil
prices during the 1970s yielded a signiicant increase in public revenue. Around
the same time, Indonesia’s increasing export earnings qualiied it for additional
foreign loans. Both revenue sources helped fund road and infrastructure programs in the 1970s and 1980s. Throughout the 1980s, real investment in roads
continued to grow at a strong rate of around 7% per year (table 2).
Faced with a tightening iscal situation at the end of the 1980s, policymakers began looking for other ways to inance infrastructure spending. A growing
acceptance of the need to mobilise private-sector investment was relected in policies on roads and other main parts of the infrastructure sector. Throughout the
1990s, arrangements such as management contracts and joint ventures between
state enterprises and large private irms were entered into for such projects as
toll-roads, which involved build–own–transfer and build–own–operate contracts.
Partnerships of this kind did not always go smoothly, however, and tendering
processes sometimes lacked transparency (Hill 1996, 185).
Investment in roads fell sharply after the 1997–98 Asian inancial crisis. Between
the mid-1970s and the mid-1980s, real investment in local roads at the district
level (relected in the length of roads) had grown by almost 10% per year. Between
1995 and 2005, it slumped to less than 2% per year. One of the much-discussed
features of this slowdown in investment has been the increasing trafic congestion
in Java, and especially in Jakarta (Thee and Negara 2010, 304). Demand for road
space in Indonesia has grown much more rapidly than supply. The total length
Peter McCawley
268
TABLE 2 Length of Roads, 1970–2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
State
Province
District
Total
Length of roads (’000 kilometres)
1970
10.2
2013
38.6
22.7
53.6
51.4
410.5
84.3
502.7
Average annual growth (%)
1970–1975
2.1
1975–1980
1.9
1980–1985
0.2
1985–1990
10.0
1990–1995
3.5
1995–2000
1.9
2000–2005
5.6
2005–2013
1.4
4.4
3.7
2.9
–0.1
–0.4
4.2
–3.0
3.7
4.9
9.0
9.2
8.1
2.9
1.3
1.4
3.9
4.4
6.9
7.2
6.8
2.5
1.7
1.2
3.6
2.0
5.0
4.2
1970–2013
3.1
Source: Data from BPS (1970–2013a)—see footnote 4.
of roads across the country between 1970 and 2013 grew by slightly more than
4% per year (table 2). In the same period, the number of motor vehicles grew by
around 12% per year. Greater reliance on railways, particularly in Java, would
seem to be urgently needed in the coming decades.
RAIL TRANSPORT
By the beginning of the 1970s, the rail industry had suffered from decades of
neglect. The main central railway stations in Jakarta—such as downtown Kota,
Gambir, Pasar Senen, and Jatinegara—were chaotic, while the trains themselves
were badly maintained. In Central Java, it was reported that the railways were
required to maintain uneconomic routes for social reasons and that revenues
had continued to decline ‘mostly owing to non-payment of fares by the military’
(Partadireja 1969, 39).
In the outer islands, the neglect of the rail industry was, if possible, even more
marked. In West Sumatra’s railway system, passenger trafic had declined sharply
in the late 1960s, and more than half of the passenger equipment was more than
70 years old (Esmara 1971, 51). In Aceh, most of the locomotives, which were
wood-ired, were more than 80 years old. The railway had been running at a large
loss for many years (Boediono and Hasan 1974, 50). It ceased operations, in effect,
in the early 1970s.
During the next several decades, the industry had mixed fortunes. After a
sharp decline in passenger trafic in the early part of the 1970s, there was a recovery and then a generally steady growth in demand. Over the period 1970–2013,
total passenger trafic—almost all of which was in Java—increased at the modest
but sustained rate of 3.5% per year (table 3).
Infrastructure Policy in Indonesia, 1965–2015: A Survey
269
TABLE 3 Railway Trafic, 1970–2013
Freight (’000 tonnes)
Passengers (million)
1970
2013
Java
Sumatra
Total
Java
Sumatra
Total
46.0
211.3
4.0
4.0
50.0
215.3
2.7
8.3
1.3
18.5
4.0
26.8
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2013
–15.3
13.7
3.0
4.9
20.5
5.8
–4.6
4.5
–9.0
8.7
–6.6
–3.2
1.7
9.3
–4.5
3.2
–14.8
13.2
2.2
4.5
19.9
5.8
–4.6
4.5
0.0
2.1
1.3
8.9
4.5
–0.7
–5.7
8.3
1.5
6.3
13.0
16.8
7.3
4.7
–1.1
4.6
0.5
3.6
6.5
13.3
6.2
2.9
–2.4
5.6
1970–2013
3.6
0.0
3.5
2.6
6.4
4.5
Sources: Data from BPS (1970–2013a)—see footnote 4. GDP and population data from Van der Eng
(2010), updated to 2013 with data from national accounts and from BPS (2013b).
The recovery of passenger trafic relected ongoing attempts to improve the
overall management of the rail system. These efforts became especially noticeable
after the decision was taken in the early 1970s to electrify the system in parts of
Java. Main railway stations across Java became much better organised and maintained. Nevertheless, despite signiicant improvements, major problems remain.
One is the inancial challenge facing state-owned PT Kereta Api Indonesia (KAI).
Prices for railway services, especially passenger travel, are still very low and do
not cover the full costs. PT KAI must therefore rely on uncertain subsidies from
the central government. It is dificult for PT KAI to increase tariffs, because of
the universal expectation in Indonesia that railway services be provided at low
cost, and because of cut-throat competition from operators of high-risk bus and
truck transport. These operators often do not cover the full costs of their use of
the road system (Jakarta Post, 29 Sept. 2010, 8 Dec. 2011). Another challenge is the
urgent need to fund large investments in other parts of the railway system, most
of which is still badly neglected. Many of the main lines in Java remain single
track, and most are in need of repair. The main line in the eastern part of East Java,
from Surabaya to Banyuwangi, is still single track, for example.
Looking ahead, it would seem that a resurgence of the rail industry is needed.
Signiicant plans for increased investments were listed in the government’s 2011
master plan for Indonesia’s economic development (Coordinating Ministry of
Economic Affairs and Bappenas 2011). In Java, road-trafic density often seems
close to breaking point, and in parts of the outer islands there is a growing need
for expanded rail services to transport goods, especially coal, to ports for export
or for use in Java.
Peter McCawley
270
TABLE 4 Air Trafic, 1970–2013
Domestic
Passenger
arrivals
(million)
Cargo
loaded
(’000 tonnes)
Passenger
arrivals
(million)
Cargo
loaded
(’000 tonnes)
0.6
73.9
4.7
484.1
0.2
12.6
1.3
211.2
Average annual growth (%)
1970–1975
33.0
1975–1980
16.2
1980–1985
2.9
1985–1990
7.8
1990–1995
8.0
1995–2000
–8.7
2000–2005
25.7
2005–2013
13.9
44.0
14.4
4.0
10.1
9.7
–5.4
16.7
6.5
28.5
9.5
0.0
13.8
14.3
–0.5
7.7
10.2
23.3
33.7
4.3
31.1
15.0
0.0
–2.2
5.7
1970–2013
11.4
10.1
12.6
1970
2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
International
11.8
Source: Data from BPS (1970–2013a)—see footnote 4.
AIR TRANSPORT
Like other parts of the infrastructure sector in Indonesia, at the end of the 1960s the
airline industry was in a neglected state. The state-owned PT Garuda Indonesia
Airways had a near-monopoly in the main domestic routes, and international carriers did not see Indonesia as an encouraging market. Prospects for the industry
began to pick up quickly, however, as overall economic conditions improved. In
recent decades, air services in Indonesia have expanded rapidly. Over the period
1970–2013, both domestic and international services grew by around 10% per
year (table 4)—signiicantly faster than the economy. Indeed, developments in
the airline industry over the past ive decades provide useful lessons on competition policy for other parts of the infrastructure sector. For most of the irst three
decades, an inward-looking, protectionist approach inluenced Indonesian policy
towards regulation of the industry. The situation changed dramatically after the
1997–98 inancial crisis, when much more vigorous competition became the norm
in Southeast Asia.
Despite the restrictions on expansion imposed by the dominance of Garuda,
growth during the 1970s, beginning from a low base, was very rapid. Across
Indonesia, regional airline services improved markedly, greatly facilitating oficial and business travel and boosting tourism in well-known centres such as Bali
and Yogyakarta. In Yogyakarta, the number of lights to Jakarta operated by main
airlines expanded from four per week in 1968 to four per day in the late 1970s
(Hill and Mubyarto 1978). Throughout the decade, domestic passenger trafic
grew by around 20% per year (table 4).
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Infrastructure Policy in Indonesia, 1965–2015: A Survey
271
This burst of growth in domestic air travel slowed somewhat during the 1980s,
relecting a slowdown in the Indonesian economy and a reluctance by regulators to encourage competition in the industry. There was later a recovery into
the 1990s, until the 1997–98 inancial crisis led to a short but sharp contraction in
domestic and international air services in Indonesia.
The 1997–98 crisis forced reform in the industry, both in Indonesia and in other
parts of Southeast Asia (Damuri and Anas 2005). Deregulation and liberalisation allowed the entry of new, low-cost carrier irms such as Lion Air, Adam Air,
and Citilink (a Garuda subsidiary), which were soon competing vigorously and
transforming the airline business in Indonesia. Domestic passenger trafic, especially, began to expand rapidly. In the decade to 2013, the number of domestic
passengers grew by around 15% per year, rising from 18.1 million to 73.9 million.
Many of the main airline terminals across Indonesia are now packed for much
of the time. In Jakarta, in 2011, more than 51 million passengers passed through
Soekarno–Hatta airport, around 130% above the original capacity of 22 million
planned in 1985 (Jakarta Post, 3 Aug. 2012).
SHIPPING
The shipping industry, including ports, is part of Indonesia’s connectivity system. Three dimensions of connectivity are relevant in Indonesia’s water transport
industry: intra-island connectivity, interisland linkages, and international transport arrangements (Baird and Wihardja 2010, 159).
In some parts of the outer islands, water transport systems provide the most
important form of intra-island connectivity. In South Kalimantan, for example,
‘rivers and canals . . . are like roads and highways in Java’ (Partadireja 1970). In
Riau, a province in southern Sumatra, most of the towns and most of the population are located along 15 navigable rivers, so the local system carries large volumes of cargo and passengers.
Interisland and international shipping systems, which often rely on substantial port facilities, attract more attention from policymakers than do the smaller
intra-island links. In the late 1960s, the sailing time of ships was said to be greatly
limited because many ports were silted up, and it was reported that only 30% of
navigation buoys worked (Panglaykim, Penny, and Thalib 1968, 23).
As was the case in other parts of the infrastructure sector, the use of shipping
services recovered during the 1970s and strengthened during the latter part of
the 1980s and into the next decade (table 5). But the 1997–98 crisis and the subsequent prolonged slowdown had a severe impact on shipping. It was not until the
Indonesian economy began to return to higher rates of growth, around 2007, that
the level of activity in the industry showed a marked improvement.
Competition and regulation have been central topics of much of the policy discussion about shipping in Indonesia. In the late 1960s, costs, prices, and competition arrangements all contributed to high levels of ineficiency in the shipping
industry (both in the use of ships and in the ports). At the time, as in the succeeding decades, three issues were frequently mentioned as needing attention.
First, the levels of costs and prices in the industry were a subject of constant
comment (Ray 2003, 262). Domestic freight rates in Indonesia were very high: the
Peter McCawley
272
TABLE 5 Sea Cargo Handled in Ports, 1970–2012
Interisland
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Loaded
Foreign
Unloaded
Loaded
Unloaded
Total cargo (megatonnes)
1970
9.5
2012
312.6
11.9
327.7
21.6
488.2
4.4
69.6
Average annual growth (%)
1970–1975
8.1
1975–1980
7.7
1980–1985
12.8
1985–1990
13.4
1990–1995
20.8
1995–2000
–6.5
2000–2005
3.3
2005–2012
11.0
8.0
10.4
10.6
13.1
9.1
0.2
3.4
10.5
19.8
2.5
–1.9
14.8
3.8
1.4
2.6
17.2
15.9
3.6
7.6
10.4
22.8
–9.2
2.3
4.7
8.2
7.7
6.8
1970–2012
8.7
Sources: Data from BPS (1970–2013a)—see footnote 4. For selected years (2000–2004, 2007, 2008, and
2011), data were taken from the CEIC Indonesia Premium Database.
Note: Annual estimates for the years between 1970 and 1974 for interisland cargo were calculated by
projecting the GDP growth rate for 1975 backwards, and those for foreign cargo by projecting real
growth of exports and imports for 1975 backwards.
cost of shipping cement by sea from Gresik (near Surabaya) to Jakarta, for example, was higher than from Tokyo to Jakarta. Second, the competitive arrangements in the industry did not encourage orderly and eficient market conduct.
Sometimes there was unfair competition from non-commercial vessels such as
naval or other government-owned ships. At other times, nationalist and protectionist ideas restricted entry.5 Third, the shipping industry was hampered by poor
management and by the existence of a myriad of local payments that needed to
be made in the ports.
These ineficiencies in the ports, bureaucratic delays, and informal payments
are universally regarded as unacceptable but are apparently hard to overcome.
They remain major problems in the Indonesian shipping industry.
ELECTRIC POWER
In the early 1970s, much of Indonesia was still very poorly served with electricity
from the national electricity company, Perusahaan Listrik Negara (PLN). Across
the nation, a good deal of electricity was generated by the private sector, either
by the larger private manufacturing irms or large hotels (mainly for their own
5. In a discussion of Law 17/2008 on Shipping, Dick (2008, 404) surveyed the shipping
regulations and concluded that ‘the extra costs of ineficient Indonesian-lag ships have to
be borne as a tax on the nation’s trade’.
Infrastructure Policy in Indonesia, 1965–2015: A Survey
273
TABLE 6 Public Supply of Electricity Capacity and Output, 1970–2013
Capacity
(megawatts)
Output
(gigawatt hours)
657
47,223
2,084
213,750
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2013
14.3
14.8
17.1
10.1
10.4
8.7
–0.2
9.7
12.6
17.5
15.0
15.9
9.1
11.2
6.0
7.0
1970–2013
10.5
11.4
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
1970
2013
Source: Data from BPS (1970–2013a)—see footnote 4.
consumption) or by plantations and estates in some rural areas. All sorts of substitutes for a reliable public supply were used as well. In late 1972, when widespread
power cuts occurred more frequently in Jakarta than they do now, prices of candles, portable generators, kerosene, and pressure lamps rose by as much as 50%.
These increases affected many Jakarta citizens, most of whom at that time were
not even connected to the formal electricity supply.
Total installed capacity in the public electricity system in Indonesia in the late
1960s was less than 700 megawatts and production was less than 20 kilowatt
hours per person (compared with around 7,000 kilowatt hours per person in the
United States in 1970). In reality, more than 70 years after public supplies of electricity were irst introduced in Indonesia in the 1890s, only a small proportion of
the Indonesian population had access to electricity. During the 1970s, however,
the World Bank and the Asian Development Bank supported investments in
electric power projects, beginning from a modest base (Thompson and Manning
1974). Both capacity and output grew by around 15% per year during 1970–80
(table 6).
Investment in the expanding power industry was partly inanced out of domestic resources but often drew on international funding of one sort or another, such
as support provided by multilateral investment banks or export credits. The large,
600-megawatt Asahan power plant and aluminium smelter in North Sumatra,
opened by President Soeharto in 1982, involved a total investment of around $2
billion. The bulk of the inance was provided by a group of Japanese private companies and the Japanese government (75%), while the remaining funding was
provided by the Indonesian government (Ginting and Daroesman 1982, 68).
In addition to capacity and output growth in electric power during the 1980s,
there were two other developments in the industry. First, increasing attention
was given to rural electriication. Access to electricity in rural areas of Indonesia
was extremely low during the 1970s. A rural electriication program in Bali in the
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
274
Peter McCawley
1970s had proved successful (Bendesa and Sukarsa 1980, 48) and had encouraged
PLN to consider using similar approaches elsewhere. By the late 1970s, PLN and
other donors were actively supporting rural electriication programs in various
parts of Indonesia (McCawley 1978, 61).
Second, structural change was occurring within the industry. In the late 1980s,
as on many occasions since then, the Indonesian government pointed to the possibility of expanding the gas industry to support electricity production. But in
the event, this proved dificult: there was already an increasing reliance on coal
(Conroy and Drake 1990, 14). For example, the large, 4,000-megawatt electricity
plant at Paiton, in East Java, built during the 1990s, is coal-ired (Wells 2007).
The 1990s brought two further major changes in the industry’s operating environment. The irst was the announcement of ambitious plans to open the industry to private investment. By the late 1990s, more than 20 private companies had
expressed interest in building power stations, especially with an eye to providing
power to industrial consumers. Reporting on these developments, Soesastro and
Drysdale (1990, 29) noted that ‘similar schemes for private sector participation in
the development of infrastructure are also being considered in the management
of container terminals in a number of Indonesian ports’.
This emphasis on private investment came at a cost. Concerns about debt levels, especially levels of foreign private debt, soon became signiicant (Muir 1991,
3). In mid-1991, the governor of Bank Indonesia, the central bank, reported to parliament that the country’s offshore commercial loans in March of that year stood
at $16 billion, up by $10 billion from a year earlier. Concerns that the rising levels
of debt were related to doubtful investments in infrastructure were a harbinger of
the problems that would emerge in the power industry at the end of the decade
(Wells 2007).
In the 1990s, Van der Eng (1993, 26) noted that the government was looking
for large-scale investments from the private sector but that private-sector investment had not proceeded quickly, ‘because there is as yet no satisfactory outcome
to negotiations over pricing. . . . If the price PLN pays itself is too low, electricity
generation will not be proitable—and therefore not of interest—to private irms’.
Kristov (1995, 73) observed that ‘price has become a controversial issue—both the
retail price private producers would charge the public, and the wholesale price
at which they would sell in bulk to the state utility, PLN’. After a careful analysis,
Kristov concluded that the cost of supplying electric power during most of the
1980s was more than 40% higher than PLN’s average sales revenue.
The second major change to affect trends in the power industry during the decade was the 1997–98 Asian inancial crisis. The crisis caused a sharp depreciation
in the value of the rupiah, harming the revenue lows and balance sheets of many
companies across Indonesia. Nowhere was this more marked than in the power
industry; it became clear that the strategy of the early 1990s of relying on private
foreign investment to fund the expansion of power plants was seriously lawed
(Wells 2007).
The dificult experience during the 1997–98 crisis had a lasting inluence on the
approach of policymakers towards infrastructure policy during 2000–2010. On
coming to ofice in 2004, the administration of President Yudhoyono responded
to the infrastructure shortages in several ways, including by setting speciic targets for expansion for each industry. In the electric power industry, for example,
Infrastructure Policy in Indonesia, 1965–2015: A Survey
275
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
TABLE 7 Telephone Calls, 1970–2010
Domestic ixed line
(billion pulses)a
International
(million minutes)
1970
2010
400
8,200
1
2,362
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2010
17.6
32.0
8.8
13.4
22.3
–8.1
4.4
–14.2
23.8
22.7
20.9
27.7
21.4
10.6
8.9
35.2
7.8
21.1
1970–2010
Source: Data from BPS (1970–2013a)—see footnote 4. Estimates for 2001–4 are interpolated between
2000 and 2005, assuming a constant growth rate of 8.9% over the period.
a
Fixed-line telephony, excluding calls made via mobile telephone.
two 10,000-megawatt fast-track programs to expand generating capacity were
announced, the irst in 2006 and the second in 2010. This approach of setting targets, however, had limited success: there were delays, and both programs proceeded rather more slowly than expected.
TELECOMMUNICATIONS
Telecommunications has been one of the most dynamic industries in Indonesia
during the past 50 years. Developments in the industry have gone through four
distinct phases.
In the irst phase, during the 1970s and 1980s, telecommunication facilities expanded rapidly as new technologies, such as interisland microwave
systems and, from 1976, the Palapa communication satellites owned by
Telecommunications provider PT Indosat, were used to expand links across the
country, supplementing the overland and submarine cable systems. Supply long
struggled to keep up with demand. In the main urban areas, such as Jakarta
and Bandung, shortages of telecommunication facilities were acute (Grey 1984).
Nevertheless, the use of both domestic and international telephone connections
increased rapidly (table 7).
The second phase began in 1989, when private participation, through public–
private partnership arrangements, was permitted in the ixed-line industry, relecting the broad trend of encouraging private-sector participation in infrastructure
(Lee and Findlay 2005). In the event, this phase of market-oriented reform was
unsuccessful. The contract-based partnerships system provided only short-term
solutions for the acute lack of capacity.
Peter McCawley
276
TABLE 8 Households with Access to Telecommunications, by Technology, 2009–12 (%)
2009
2012
Fixed-line
telephone
Mobile
telephone
Internet
10
6
62
84
12
31
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Source: Data from BPS (1970–2013a)—see footnote 4.
A third period of reform began in 1999, when Law 36/1999 on Telecommunications established a revised framework for operations. A duopoly structure was
created in ixed-line operations, accompanied by a wider, pro-market approach.
These reforms acknowledged the importance of competition and of a sound regulatory regime, although there were still limits on market entry.
Under the revised framework, a fourth and very dynamic stage has emerged in
recent years. New telecommunication technologies have looded into Indonesia,
within a highly competitive market structure. Local irms such as Telkomsel,
Indosat, and Mobile-8 (Smartfren), supported by multinational companies such
as Samsung, LG, and Nokia, are now prominent in the market, offering all kinds
of discounts on mobile phones and advertising widely. Customers are moving
away from the old ixed-line system—table 7 shows that the use of domestic
ixed-line calls dropped sharply during 2005–10—and taking up mobile phones
with enthusiasm. Internet use has expanded rapidly as well (table 8).
These recent developments illustrate the gains that can be made in the infrastructure sector when an appropriate regulatory regime is established. Perhaps
the main lessons from the burst of growth in telecommunications in Indonesia
during the past decade are the importance of encouraging markets to work, of
facilitating the entry of new technology, and of attracting new investment. Careful
market design, relying on an effective regulatory regime, is needed to enable
capital-intensive infrastructure industries such as telecommunications to develop
quickly (Magiera 2011).
WATER, SANITATION, AND IRRIGATION
The management of water and sanitation remains one of the most pressing issues
in infrastructure policy in Indonesia. Yet it is extremely dificult to tackle the problems in the industry, because attention to cost recovery is often considered irrelevant (Asian Development Bank 2012, 8). The results are widespread. Access to
potable water from municipal water supplies is extremely limited, so elite consumers opt to rely largely on expensive bottled water. Frequent looding occurs
in both urban and rural areas during rainy seasons. Adequate public sanitation
services are almost non-existent in many parts of Indonesia. And irrigation policy
poses many challenges.
The 1970s saw some improvements in municipal water supply. However, as
was the case in other parts of the infrastructure sector, institutions in the formal
sector—such as modern hotels, large factories, and some elite residential establishments—relied little on the public system, preferring to install their own systems.
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Infrastructure Policy in Indonesia, 1965–2015: A Survey
277
During the next few decades there were attempts to improve the public watersupply system by strengthening the extensive urban network of local watersupply establishments, or Perusahaan Daerah Air Minum, of which there were
more than 300. But these establishments were constrained by bureaucratic controls and by enforced low prices. Across Indonesia, much of the population opted
out of any relationship with the public system, choosing instead to rely on informal water suppliers and on natural supplies of water. In rural areas, even in small
towns, much of the population depended on springs and wells. This is hardly surprising, because simple local systems often provide better and more cost-effective
supplies of water than larger systems (Perkins 1994).
Attention to large-scale sanitation services has been similarly lacking for many
decades. Communities resist paying for services that they have come to expect
public agencies to provide for free. Government agencies have therefore found
it dificult to raise monies to fund public sewerage systems. In urban areas, private septic facilities are widely used, but their installation and maintenance are
poorly regulated. Serious externalities in the form of environmental and health
problems are liable to occur. Frequent looding during rainy seasons is another
major water-management issue. Every few years, large-scale looding in Jakarta
leaves up to 1 million people needing temporary refuge. Widespread looding
in other areas of Indonesia receives less publicity but imposes great social and
economic costs.
Managing irrigation and drainage systems has been vital to Indonesia’s agricultural economy since the 19th century. After independence in 1945, attempts
were made to expand the irrigation system but existing systems were neglected.
As Booth (1977, 50) noted, ‘the systems laid out by the colonial government during the prewar period fell into an almost unchecked decline between 1940 and
1968’. During the 1970s, agricultural development programs supported by foreign donors and the Indonesian government provided funding to rehabilitate and
expand irrigation networks, particularly in Java and Bali. The eficiency of irrigation systems depends crucially on the extent to which operation and maintenance
are extended downstream to the tertiary levels of the systems (Van der Eng 1996,
41, 156). Special attention was also given to the expansion of irrigation facilities
in the outer islands, to support the national transmigration programs being promoted at the time.
Signiicant efforts were made during the 1980s to expand the irrigation system. Between 1969 and 1994, irrigation systems serving 2.5 million hectares were
rehabilitated and 1.7 million hectares of new irrigation systems were developed.
However, inancing maintenance activities continued to be dificult. Around 60%
or more of operation and maintenance budgets were reported as having been
spent on staff costs, leaving little available for routine maintenance (Vermillion,
Lengkong, and Atmanto 2011, 2). More recently, since the 1990s, discussion about
investment priorities in the irrigation industry has been closely linked to plans for
food security. One view is that food security can be strengthened by the development of major food-growing areas in the outer islands. But the economic feasibility of large investments in new irrigation projects in the outer islands depends,
in turn, on the economic feasibility of new food estates outside Java. Under these
circumstances, the development of large irrigation projects of this kind is fraught
with uncertainty.
278
Peter McCawley
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
CONSIDERATIONS FOR INFRASTRUCTURE POLICY
It is clear from this survey of developments across the infrastructure sector during
the past ive decades that a wide range of issues need to be considered in formulating infrastructure policy in Indonesia (igure 1).
Demand
Policymakers in Indonesia have rarely been prepared to address community
expectations about the supply of infrastructure services. The idea that utilities
should not be run for proit but should instead serve the public underpins the
expectation of low prices for utilities. Populist political leaders have often encouraged consumers to expect that utility services (often referred to as a basic need)
be provided at subsidised prices. The sources of these subsidies are rarely directly
mentioned, but it seems clear that advocates of low prices believe that the subsidies should be paid for by the government, or by the (mostly) state-owned utilities providing the infrastructure services, or perhaps, in one way or another, by
the private sector.
Related to the idea that utilities should serve the public is the distinction
between the provision of services to small and large consumers. The market for
providing utility services to small consumers in Indonesia is very large. Many
authors writing in BIES about the infrastructure sector have referred to the various challenges of providing services to consumers in the small-scale and informal
economy (Dick 1975a, 1975b, 1981a, 1981b; McCawley 1978; Gibson 1986; Hughes
1986; Munasinghe 1988; Perkins 1994). However, the larger utilities in the formal
state-owned sector ind it very dificult to reach out to this market. Until formal
institutions such as the large state-owned utility enterprises can design programs
to reach out to the informal economy, they will continue to be seen as alien to the
needs of ordinary rakyat (people).
Supply
No single constraint holds back the supply of infrastructure in Indonesia. Rather,
numerous issues combine to constrain growth.
Finance
Investors and inancial specialists in Jakarta often say that money is not the problem
holding back infrastructure development in Indonesia. They argue that it is usually not dificult to raise funds for infrastructure activities in Indonesia—whether
from banks or from bond issuers—provided that the borrowers provide appropriate guarantees to the inanciers. They suggest that as long as technical problems,
such as those of project design and land access, and pricing arrangements are clariied in a satisfactory way, inance will be forthcoming from the markets.
In a detailed survey of Indonesia’s experience with private investment in the
power industry in the 1990s, Wells (2007) provides a more sceptical view. He traced
the processes between 1990 and 1997 by which PLN signed 26 agreements with
private investors for generation projects. The investments represented around
11,000 megawatts and provided at least $13 billion of investment. But when the
1997–98 crisis struck, those arrangements quickly ran into trouble, because PLN’s
revenue lows were in rupiah while its obligations were in US dollars. Extended
contract disputes broke out when PLN tried to renegotiate the terms of the deals
agreed to with foreign investors. Wells notes that the whole process of raising
Infrastructure Policy in Indonesia, 1965–2015: A Survey
279
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
private inance and entering into long-term arrangements with foreign investors
was dificult for PLN, and concludes that ‘private ownership of generating capacity is not the only possibility, nor should it be a goal in itself. . . . If Indonesia can
do no better in new arrangements, privatization is simply too costly. Borrowed
funds and state ownership, with all their problems, would be preferable’ (362).
Technical Issues
There is no doubt that there is a shortage of well-prepared and well-documented
projects in Indonesia available for investors to examine. This shortage became
clear around the time of several infrastructure summits during the period of the
Yudhoyono administration. The details of projects provided to potential investors at these summits were often very slim. In some cases, websites purporting to
provide data on large projects turned out to be blank. In the event, the response
to the summits was disappointing. Hardly any of the projects offered at the irst
summit were taken up, and at the second summit, ‘although potential investors
. . . generally showed wary optimism, most opted for a wait-and-see approach’
(Lindblad and Thee 2007, 26).
A lack of detailed project data was also apparent in the government’s master
plan for Indonesia’s economic development (Coordinating Ministry of Economic
Affairs and Bappenas 2011). The master plan provided a strategic framework for
infrastructure investment across Indonesia, with an emphasis on supporting the
development of economic corridors. It contained a pipeline of possible projects,
but detailed supporting project proposals were often not available in the implementing sectoral ministries.
A related technical issue concerns access to land. Policymakers in Indonesia
recognise that a lack of access often delays project construction. In recent years, a
range of steps have been taken to try to make it easier to obtain land for infrastructure development, including promulgating a new land law. Implementing the law
has proved dificult, however; legal clarity in obtaining access to land is often
lacking. Henderson, Kuncoro, and Nasution (1996) discussed land access in their
survey of development problems in Jabotabek (Jakarta, Bogor, Tangerang, and
Bekasi). They pointed to very poor land market institutions of â
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
INFRASTRUCTURE POLICY IN INDONESIA,
1965–2015: A SURVEY
Peter McCawley
To cite this article: Peter McCawley (2015) INFRASTRUCTURE POLICY IN INDONESIA,
1965–2015: A SURVEY, Bulletin of Indonesian Economic Studies, 51:2, 263-285, DOI:
10.1080/00074918.2015.1061916
To link to this article: http://dx.doi.org/10.1080/00074918.2015.1061916
Published online: 24 Aug 2015.
Submit your article to this journal
Article views: 195
View related articles
View Crossmark data
Full Terms & Conditions of access and use can be found at
http://www.tandfonline.com/action/journalInformation?journalCode=cbie20
Download by: [Universitas Maritim Raja Ali Haji]
Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 263–85
Fifty Years of BIES
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
INFRASTRUCTURE POLICY IN
INDONESIA, 1965–2015: A SURVEY
Peter McCawley
The Australian National University
This survey, irst, provides an overview of the main developments in the infrastructure sector in Indonesia during the past ive decades and, second, considers what the
main policy and management bottlenecks in infrastructure appear to be. The overview of main developments indicates that, in broad terms, most parts of the sector
have expanded considerably but that the needs remain acute for further expansion
and for attention to the maintenance of existing facilities. Demand for infrastructure
is high, especially since the regulated prices set for infrastructure services are often
low. Access is often dificult, however, because of shortages of infrastructure, and
quality is often unsatisfactory because of poor maintenance and indifferent management. These problems of access are exacerbated by the regulation of prices. This
overview also points to the markedly different performances of industries in which
pro-competitive policies have been applied and those in which more traditional
policies of close regulation have restricted the operation of markets.
Keywords: infrastructure, regulation, law, prices, markets, land, inance
JEL classiication: L51, L90, L97, L98
INTRODUCTION
Infrastructure plans and policies in Indonesia are a bewildering kaleidoscope of
promises, underfulillment, delays, and outright cancellations. The various industries (transport, power, water, telecommunications, and so on) within the sector
operate largely as silos, with little coordination between them; central, provincial,
and district governments house a myriad of policymakers and regulatory agencies; and, because engineers and oficials who believe in planning tend to dominate policy-making circles, economic principles are often brushed aside in the
design of infrastructure policy.
This survey of infrastructure policy in Indonesia will draw in particular on
relevant material published in the Bulletin of Indonesian Economic Studies (BIES)
since its irst issue, in 1965. It will cover the main developments in the sector during the past 50 years and discuss the main policy and management bottlenecks
holding back growth in infrastructure in Indonesia. Two matters need to be noted
at the outset. First, infrastructure policy is currently a top concern for economic
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000263-23
http://dx.doi.org/10.1080/00074918.2015.1061916
© 2015 Indonesia Project ANU
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
264
Peter McCawley
policymakers—ministers and oficials alike—in Jakarta. President Joko Widodo,
in his irst few months in ofice, announced major proposals for the infrastructure sector: he abruptly cancelled tentative but long-standing plans to build the
large ($20 billion) Sunda Strait Bridge; he unveiled a number of projects to expand
ports across Indonesia, consistent with his emphasis on the country’s maritime
development; and he said he planned to add 30,000 megawatts of capacity to the
generation industry. A range of other projects in other industries have been put
forward in recent months.
These announcements have raised expectations for a burst of activity in the
Indonesian infrastructure sector, while other events in the region have emphasised the need to pay closer attention to infrastructure in developing countries
in Asia. The imminent establishment of China’s multilateral Asian Infrastructure
Investment Bank, for example, has attracted strong international interest.
Second, few of the main issues in infrastructure policy that attract widespread
comment today are new. The basic problems were discussed in early issues of
BIES, in its Survey of Recent Developments series. Yet it is striking how little progress has been made over the last 50 years in tackling these problems; the actual
development of infrastructure has been signiicant yet insuficient.
FRAMEWORK
Infrastructure policy is complex. Senior policymakers in government need to
avoid becoming too closely involved in the details of management; they should
concentrate mainly on designing the overall frameworks for policy in each industry. Perhaps the key challenge in inding the balance between these two considerations is to design effective, industry-speciic regulatory arrangements.
It is useful to have a framework when evaluating infrastructure policy. As a
irst step, it is helpful to deine infrastructure. This article uses a slightly amended
version of the deinition suggested by Wharton (1967): infrastructure is the physical capital and the institutions or organisations, both public and privately owned,
that provide economic services and have a signiicant effect, directly or indirectly,
on the economic functioning of economic actors (both individuals and irms) but
are external to each actor.
Many factors inluence demand and supply for infrastructure (igure 1).1 The
details vary from industry to industry, but on the demand side in Indonesia there
are often several distinct markets for infrastructure services. On the one hand,
there is a demand from different types of consumers (household, industrial, commercial, and others) in the modern, formal sector of the economy. On the other
hand, there is also a demand from small-scale consumers.2
On the supply side, a number of related but separate policy issues exist. Financial
concerns naturally loom large for senior policymakers. Technical requirements,
1. The discussion here draws on an earlier article (McCawley 2010).
2. Small-scale consumers of infrastructure services are an important part of the overall
infrastructure market in Indonesia. However, they are generally neglected by large-scale,
often state-owned suppliers in the formal sector (see McCawley 2010).
Infrastructure Policy in Indonesia, 1965–2015: A Survey
265
FIGURE 1 Framework of Policy Issues in the Indonesian Infrastructure Sector
Overall political, regulatory, & legal issues for the sector
Financial issues
Household
Subsidy issues
Internal resources (prices)
Public
Domestic
Foreign
Private
Price
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Industrial
Demand
Supply
Domestic
Foreign
Technical issues
Commercial
Engineering
Land
Governance & management
Environmental issues
Othera
Maintenance & sustainability
Source: McCawley (2010).
a
Includes social and government consumers, for example.
including access to land, often limit the options for the supply of services. Matters
of governance and internal management need close attention. Safeguards such
as environmental and social standards affect community expectations. And there
are wider policy considerations as well, such as the overall framework of political,
regulatory, and legal issues within which infrastructure sectors must operate, and
the broad inancial and economic constraints—including pricing policies—set
down for infrastructure industries.
As igure 1 shows, it is inevitable that many issues in the infrastructure sector
in Indonesia will be contested by many interest groups. On the demand side,
larger consumers of infrastructure services in the formal sector can be expected to
press for increases in supply. Smaller consumers, many of whom are in the informal economy, often resort to imaginative, ad-hoc measures to gain access to infrastructure. On the supply side, there is a push-and-pull between policymakers and
other actors involved in different sectors. Further, the regulatory framework in
Indonesia is not well established. Institutional decisions—such as those of the
parliament, the executive, or the Constitutional Court, if not those of local governments—can cause much uncertainty for actors in infrastructure operations.
POST-INDEPENDENCE
There was relatively little growth in the infrastructure sector during the 1950s and
into the 1960s. The previous decades of the 1930s and 1940s had, of course, been
dificult ones. Important parts of Java had been well served by the transport and
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
266
Peter McCawley
other communications sectors at the beginning of the 20th century,3 but services
in the railways and most other parts of the transport industry steadily declined in
the following decades. By the late 1950s, the dilapidated transport network added
considerably to the costs of transporting rice and to the losses within the marketing network. A good deal of rice was transported through simple infrastructure
systems (carts, carrying-poles, and bicycles) on unsealed tracks. Trains and trucks
carried food supplies to the main cities in Java, while in Sumatra and Kalimantan
considerable use was made of waterways (Mears 1961).
To be sure, President Sukarno had on various occasions announced major infrastructure plans during the 1950s and 1960s. But too often, as on many occasions
since then, ambitious infrastructure plans were not supported with the resources
needed. By the beginning of the New Order period, most infrastructure across the
nation had long been neglected.
ROADS AND MOTOR TRANSPORT
In the early 1970s, a revolution in road transport began. As the road network
grew, and as the economy became more open to foreign investment and imports, a
remarkable structural transformation in the road transport system began to occur.
Traditional forms of public transport, such as the becak (trishaw) and dokar (horsecart), found it hard to compete with the swelling numbers of buses and small
pick-up trucks (often called ‘colts’) appearing on the roads (Booth and McCawley
1981, 8). Indonesian consumers also quickly took to the use of light motorcycles
produced by well-known Japanese suppliers such as Yamaha, Honda, and Suzuki.
Into the mid-1980s, the numbers of both trucks and motorcycles on Indonesian
roads grew by well over 12% per year, signiicantly faster than the economy and
the population (table 1).4
These developments were transformative of what is now called ‘connectivity’
in Indonesia. The cost and convenience of both local journeys and long-distance
intercity travel improved dramatically. Workers from previously isolated rural
areas in Java, such as Gunung Kidul, in Yogyakarta, increasingly took up construction jobs as far aield as Jakarta or even South Sumatra (Dick 1981b, 88).
Circumstances in the outer islands, however, were varied. In some places, rapid
changes took place. In North Sumatra, for example, the road system improved
greatly during the 1970s (Ginting and Daroesman 1982, 71). But in other places,
especially in eastern Indonesia, there was less improvement.
3. In a survey of competition between the railways and other modes of transport at the
time, Dick (2000, 187) observes that Java, by 1900, already had ‘a sophisticated agroindustrial economy integrated by overlapping networks of telegraphs, telephones, railways, narrow-gauge tramways and good roads. Nowhere in Southeast Asia could boast
better infrastructure. Elsewhere in East Asia, only Japan could compare’.
4. The tables in this article draw on various editions of Statistik Indonesia (BPS 1970–2013a),
whose data are not always consistent or complete. All possible care has been taken to ensure accuracy of data in this article. In a few cases, to bridge gaps, extrapolation has been
necessary to prepare a full data series. The data shown in the tables are taken to relect the
rising demand for better infrastructure in Indonesia.
Infrastructure Policy in Indonesia, 1965–2015: A Survey
267
TABLE 1 Motor Vehicles and Economic Change in Indonesia, 1970–2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Registered motor vehicles (’000)
Population
(million)
Per
capita
GDP
(Rp m,
2000
prices)
Cars
Buses
Trucks
Motorcycles
GDP
(Rp tn,
2000
prices)
239
11,485
24
2,286
103
5,615
440
84,732
292
2,769
116
249
2,513
11,121
Average annual growth (%)
1970–1975
9.9
7.8
1975–1980
10.8
19.7
1980–1985
9.2
21.4
1985–1990
5.8
15.6
1990–1995
9.9
8.0
1995–2000
7.6
–0.7
2000–2005
12.6
12.2
2005–2013
9.7
8.6
14.0
19.3
12.3
3.9
5.5
5.0
11.3
8.5
22.1
17.5
12.4
4.9
8.3
8.4
16.1
14.6
6.7
7.2
3.1
7.1
7.8
0.5
4.7
5.9
2.3
2.4
2.1
1.8
1.5
1.5
1.5
1.5
4.2
4.6
0.9
5.2
6.2
–1.0
3.2
4.4
9.8
13.0
5.4
1.8
3.5
1970
2013
1970–2013
9.4
11.2
Sources: Data on registered motor vehicles from BPS (1970–2013a)—see footnote 4. Data on GDP and
population from Van der Eng (2010), updated to 2013 with data from national accounts and from BPS
(2013b).
The rapid expansion of oil production since the late 1960s and the rise of oil
prices during the 1970s yielded a signiicant increase in public revenue. Around
the same time, Indonesia’s increasing export earnings qualiied it for additional
foreign loans. Both revenue sources helped fund road and infrastructure programs in the 1970s and 1980s. Throughout the 1980s, real investment in roads
continued to grow at a strong rate of around 7% per year (table 2).
Faced with a tightening iscal situation at the end of the 1980s, policymakers began looking for other ways to inance infrastructure spending. A growing
acceptance of the need to mobilise private-sector investment was relected in policies on roads and other main parts of the infrastructure sector. Throughout the
1990s, arrangements such as management contracts and joint ventures between
state enterprises and large private irms were entered into for such projects as
toll-roads, which involved build–own–transfer and build–own–operate contracts.
Partnerships of this kind did not always go smoothly, however, and tendering
processes sometimes lacked transparency (Hill 1996, 185).
Investment in roads fell sharply after the 1997–98 Asian inancial crisis. Between
the mid-1970s and the mid-1980s, real investment in local roads at the district
level (relected in the length of roads) had grown by almost 10% per year. Between
1995 and 2005, it slumped to less than 2% per year. One of the much-discussed
features of this slowdown in investment has been the increasing trafic congestion
in Java, and especially in Jakarta (Thee and Negara 2010, 304). Demand for road
space in Indonesia has grown much more rapidly than supply. The total length
Peter McCawley
268
TABLE 2 Length of Roads, 1970–2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
State
Province
District
Total
Length of roads (’000 kilometres)
1970
10.2
2013
38.6
22.7
53.6
51.4
410.5
84.3
502.7
Average annual growth (%)
1970–1975
2.1
1975–1980
1.9
1980–1985
0.2
1985–1990
10.0
1990–1995
3.5
1995–2000
1.9
2000–2005
5.6
2005–2013
1.4
4.4
3.7
2.9
–0.1
–0.4
4.2
–3.0
3.7
4.9
9.0
9.2
8.1
2.9
1.3
1.4
3.9
4.4
6.9
7.2
6.8
2.5
1.7
1.2
3.6
2.0
5.0
4.2
1970–2013
3.1
Source: Data from BPS (1970–2013a)—see footnote 4.
of roads across the country between 1970 and 2013 grew by slightly more than
4% per year (table 2). In the same period, the number of motor vehicles grew by
around 12% per year. Greater reliance on railways, particularly in Java, would
seem to be urgently needed in the coming decades.
RAIL TRANSPORT
By the beginning of the 1970s, the rail industry had suffered from decades of
neglect. The main central railway stations in Jakarta—such as downtown Kota,
Gambir, Pasar Senen, and Jatinegara—were chaotic, while the trains themselves
were badly maintained. In Central Java, it was reported that the railways were
required to maintain uneconomic routes for social reasons and that revenues
had continued to decline ‘mostly owing to non-payment of fares by the military’
(Partadireja 1969, 39).
In the outer islands, the neglect of the rail industry was, if possible, even more
marked. In West Sumatra’s railway system, passenger trafic had declined sharply
in the late 1960s, and more than half of the passenger equipment was more than
70 years old (Esmara 1971, 51). In Aceh, most of the locomotives, which were
wood-ired, were more than 80 years old. The railway had been running at a large
loss for many years (Boediono and Hasan 1974, 50). It ceased operations, in effect,
in the early 1970s.
During the next several decades, the industry had mixed fortunes. After a
sharp decline in passenger trafic in the early part of the 1970s, there was a recovery and then a generally steady growth in demand. Over the period 1970–2013,
total passenger trafic—almost all of which was in Java—increased at the modest
but sustained rate of 3.5% per year (table 3).
Infrastructure Policy in Indonesia, 1965–2015: A Survey
269
TABLE 3 Railway Trafic, 1970–2013
Freight (’000 tonnes)
Passengers (million)
1970
2013
Java
Sumatra
Total
Java
Sumatra
Total
46.0
211.3
4.0
4.0
50.0
215.3
2.7
8.3
1.3
18.5
4.0
26.8
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2013
–15.3
13.7
3.0
4.9
20.5
5.8
–4.6
4.5
–9.0
8.7
–6.6
–3.2
1.7
9.3
–4.5
3.2
–14.8
13.2
2.2
4.5
19.9
5.8
–4.6
4.5
0.0
2.1
1.3
8.9
4.5
–0.7
–5.7
8.3
1.5
6.3
13.0
16.8
7.3
4.7
–1.1
4.6
0.5
3.6
6.5
13.3
6.2
2.9
–2.4
5.6
1970–2013
3.6
0.0
3.5
2.6
6.4
4.5
Sources: Data from BPS (1970–2013a)—see footnote 4. GDP and population data from Van der Eng
(2010), updated to 2013 with data from national accounts and from BPS (2013b).
The recovery of passenger trafic relected ongoing attempts to improve the
overall management of the rail system. These efforts became especially noticeable
after the decision was taken in the early 1970s to electrify the system in parts of
Java. Main railway stations across Java became much better organised and maintained. Nevertheless, despite signiicant improvements, major problems remain.
One is the inancial challenge facing state-owned PT Kereta Api Indonesia (KAI).
Prices for railway services, especially passenger travel, are still very low and do
not cover the full costs. PT KAI must therefore rely on uncertain subsidies from
the central government. It is dificult for PT KAI to increase tariffs, because of
the universal expectation in Indonesia that railway services be provided at low
cost, and because of cut-throat competition from operators of high-risk bus and
truck transport. These operators often do not cover the full costs of their use of
the road system (Jakarta Post, 29 Sept. 2010, 8 Dec. 2011). Another challenge is the
urgent need to fund large investments in other parts of the railway system, most
of which is still badly neglected. Many of the main lines in Java remain single
track, and most are in need of repair. The main line in the eastern part of East Java,
from Surabaya to Banyuwangi, is still single track, for example.
Looking ahead, it would seem that a resurgence of the rail industry is needed.
Signiicant plans for increased investments were listed in the government’s 2011
master plan for Indonesia’s economic development (Coordinating Ministry of
Economic Affairs and Bappenas 2011). In Java, road-trafic density often seems
close to breaking point, and in parts of the outer islands there is a growing need
for expanded rail services to transport goods, especially coal, to ports for export
or for use in Java.
Peter McCawley
270
TABLE 4 Air Trafic, 1970–2013
Domestic
Passenger
arrivals
(million)
Cargo
loaded
(’000 tonnes)
Passenger
arrivals
(million)
Cargo
loaded
(’000 tonnes)
0.6
73.9
4.7
484.1
0.2
12.6
1.3
211.2
Average annual growth (%)
1970–1975
33.0
1975–1980
16.2
1980–1985
2.9
1985–1990
7.8
1990–1995
8.0
1995–2000
–8.7
2000–2005
25.7
2005–2013
13.9
44.0
14.4
4.0
10.1
9.7
–5.4
16.7
6.5
28.5
9.5
0.0
13.8
14.3
–0.5
7.7
10.2
23.3
33.7
4.3
31.1
15.0
0.0
–2.2
5.7
1970–2013
11.4
10.1
12.6
1970
2013
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
International
11.8
Source: Data from BPS (1970–2013a)—see footnote 4.
AIR TRANSPORT
Like other parts of the infrastructure sector in Indonesia, at the end of the 1960s the
airline industry was in a neglected state. The state-owned PT Garuda Indonesia
Airways had a near-monopoly in the main domestic routes, and international carriers did not see Indonesia as an encouraging market. Prospects for the industry
began to pick up quickly, however, as overall economic conditions improved. In
recent decades, air services in Indonesia have expanded rapidly. Over the period
1970–2013, both domestic and international services grew by around 10% per
year (table 4)—signiicantly faster than the economy. Indeed, developments in
the airline industry over the past ive decades provide useful lessons on competition policy for other parts of the infrastructure sector. For most of the irst three
decades, an inward-looking, protectionist approach inluenced Indonesian policy
towards regulation of the industry. The situation changed dramatically after the
1997–98 inancial crisis, when much more vigorous competition became the norm
in Southeast Asia.
Despite the restrictions on expansion imposed by the dominance of Garuda,
growth during the 1970s, beginning from a low base, was very rapid. Across
Indonesia, regional airline services improved markedly, greatly facilitating oficial and business travel and boosting tourism in well-known centres such as Bali
and Yogyakarta. In Yogyakarta, the number of lights to Jakarta operated by main
airlines expanded from four per week in 1968 to four per day in the late 1970s
(Hill and Mubyarto 1978). Throughout the decade, domestic passenger trafic
grew by around 20% per year (table 4).
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Infrastructure Policy in Indonesia, 1965–2015: A Survey
271
This burst of growth in domestic air travel slowed somewhat during the 1980s,
relecting a slowdown in the Indonesian economy and a reluctance by regulators to encourage competition in the industry. There was later a recovery into
the 1990s, until the 1997–98 inancial crisis led to a short but sharp contraction in
domestic and international air services in Indonesia.
The 1997–98 crisis forced reform in the industry, both in Indonesia and in other
parts of Southeast Asia (Damuri and Anas 2005). Deregulation and liberalisation allowed the entry of new, low-cost carrier irms such as Lion Air, Adam Air,
and Citilink (a Garuda subsidiary), which were soon competing vigorously and
transforming the airline business in Indonesia. Domestic passenger trafic, especially, began to expand rapidly. In the decade to 2013, the number of domestic
passengers grew by around 15% per year, rising from 18.1 million to 73.9 million.
Many of the main airline terminals across Indonesia are now packed for much
of the time. In Jakarta, in 2011, more than 51 million passengers passed through
Soekarno–Hatta airport, around 130% above the original capacity of 22 million
planned in 1985 (Jakarta Post, 3 Aug. 2012).
SHIPPING
The shipping industry, including ports, is part of Indonesia’s connectivity system. Three dimensions of connectivity are relevant in Indonesia’s water transport
industry: intra-island connectivity, interisland linkages, and international transport arrangements (Baird and Wihardja 2010, 159).
In some parts of the outer islands, water transport systems provide the most
important form of intra-island connectivity. In South Kalimantan, for example,
‘rivers and canals . . . are like roads and highways in Java’ (Partadireja 1970). In
Riau, a province in southern Sumatra, most of the towns and most of the population are located along 15 navigable rivers, so the local system carries large volumes of cargo and passengers.
Interisland and international shipping systems, which often rely on substantial port facilities, attract more attention from policymakers than do the smaller
intra-island links. In the late 1960s, the sailing time of ships was said to be greatly
limited because many ports were silted up, and it was reported that only 30% of
navigation buoys worked (Panglaykim, Penny, and Thalib 1968, 23).
As was the case in other parts of the infrastructure sector, the use of shipping
services recovered during the 1970s and strengthened during the latter part of
the 1980s and into the next decade (table 5). But the 1997–98 crisis and the subsequent prolonged slowdown had a severe impact on shipping. It was not until the
Indonesian economy began to return to higher rates of growth, around 2007, that
the level of activity in the industry showed a marked improvement.
Competition and regulation have been central topics of much of the policy discussion about shipping in Indonesia. In the late 1960s, costs, prices, and competition arrangements all contributed to high levels of ineficiency in the shipping
industry (both in the use of ships and in the ports). At the time, as in the succeeding decades, three issues were frequently mentioned as needing attention.
First, the levels of costs and prices in the industry were a subject of constant
comment (Ray 2003, 262). Domestic freight rates in Indonesia were very high: the
Peter McCawley
272
TABLE 5 Sea Cargo Handled in Ports, 1970–2012
Interisland
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Loaded
Foreign
Unloaded
Loaded
Unloaded
Total cargo (megatonnes)
1970
9.5
2012
312.6
11.9
327.7
21.6
488.2
4.4
69.6
Average annual growth (%)
1970–1975
8.1
1975–1980
7.7
1980–1985
12.8
1985–1990
13.4
1990–1995
20.8
1995–2000
–6.5
2000–2005
3.3
2005–2012
11.0
8.0
10.4
10.6
13.1
9.1
0.2
3.4
10.5
19.8
2.5
–1.9
14.8
3.8
1.4
2.6
17.2
15.9
3.6
7.6
10.4
22.8
–9.2
2.3
4.7
8.2
7.7
6.8
1970–2012
8.7
Sources: Data from BPS (1970–2013a)—see footnote 4. For selected years (2000–2004, 2007, 2008, and
2011), data were taken from the CEIC Indonesia Premium Database.
Note: Annual estimates for the years between 1970 and 1974 for interisland cargo were calculated by
projecting the GDP growth rate for 1975 backwards, and those for foreign cargo by projecting real
growth of exports and imports for 1975 backwards.
cost of shipping cement by sea from Gresik (near Surabaya) to Jakarta, for example, was higher than from Tokyo to Jakarta. Second, the competitive arrangements in the industry did not encourage orderly and eficient market conduct.
Sometimes there was unfair competition from non-commercial vessels such as
naval or other government-owned ships. At other times, nationalist and protectionist ideas restricted entry.5 Third, the shipping industry was hampered by poor
management and by the existence of a myriad of local payments that needed to
be made in the ports.
These ineficiencies in the ports, bureaucratic delays, and informal payments
are universally regarded as unacceptable but are apparently hard to overcome.
They remain major problems in the Indonesian shipping industry.
ELECTRIC POWER
In the early 1970s, much of Indonesia was still very poorly served with electricity
from the national electricity company, Perusahaan Listrik Negara (PLN). Across
the nation, a good deal of electricity was generated by the private sector, either
by the larger private manufacturing irms or large hotels (mainly for their own
5. In a discussion of Law 17/2008 on Shipping, Dick (2008, 404) surveyed the shipping
regulations and concluded that ‘the extra costs of ineficient Indonesian-lag ships have to
be borne as a tax on the nation’s trade’.
Infrastructure Policy in Indonesia, 1965–2015: A Survey
273
TABLE 6 Public Supply of Electricity Capacity and Output, 1970–2013
Capacity
(megawatts)
Output
(gigawatt hours)
657
47,223
2,084
213,750
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2013
14.3
14.8
17.1
10.1
10.4
8.7
–0.2
9.7
12.6
17.5
15.0
15.9
9.1
11.2
6.0
7.0
1970–2013
10.5
11.4
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
1970
2013
Source: Data from BPS (1970–2013a)—see footnote 4.
consumption) or by plantations and estates in some rural areas. All sorts of substitutes for a reliable public supply were used as well. In late 1972, when widespread
power cuts occurred more frequently in Jakarta than they do now, prices of candles, portable generators, kerosene, and pressure lamps rose by as much as 50%.
These increases affected many Jakarta citizens, most of whom at that time were
not even connected to the formal electricity supply.
Total installed capacity in the public electricity system in Indonesia in the late
1960s was less than 700 megawatts and production was less than 20 kilowatt
hours per person (compared with around 7,000 kilowatt hours per person in the
United States in 1970). In reality, more than 70 years after public supplies of electricity were irst introduced in Indonesia in the 1890s, only a small proportion of
the Indonesian population had access to electricity. During the 1970s, however,
the World Bank and the Asian Development Bank supported investments in
electric power projects, beginning from a modest base (Thompson and Manning
1974). Both capacity and output grew by around 15% per year during 1970–80
(table 6).
Investment in the expanding power industry was partly inanced out of domestic resources but often drew on international funding of one sort or another, such
as support provided by multilateral investment banks or export credits. The large,
600-megawatt Asahan power plant and aluminium smelter in North Sumatra,
opened by President Soeharto in 1982, involved a total investment of around $2
billion. The bulk of the inance was provided by a group of Japanese private companies and the Japanese government (75%), while the remaining funding was
provided by the Indonesian government (Ginting and Daroesman 1982, 68).
In addition to capacity and output growth in electric power during the 1980s,
there were two other developments in the industry. First, increasing attention
was given to rural electriication. Access to electricity in rural areas of Indonesia
was extremely low during the 1970s. A rural electriication program in Bali in the
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
274
Peter McCawley
1970s had proved successful (Bendesa and Sukarsa 1980, 48) and had encouraged
PLN to consider using similar approaches elsewhere. By the late 1970s, PLN and
other donors were actively supporting rural electriication programs in various
parts of Indonesia (McCawley 1978, 61).
Second, structural change was occurring within the industry. In the late 1980s,
as on many occasions since then, the Indonesian government pointed to the possibility of expanding the gas industry to support electricity production. But in
the event, this proved dificult: there was already an increasing reliance on coal
(Conroy and Drake 1990, 14). For example, the large, 4,000-megawatt electricity
plant at Paiton, in East Java, built during the 1990s, is coal-ired (Wells 2007).
The 1990s brought two further major changes in the industry’s operating environment. The irst was the announcement of ambitious plans to open the industry to private investment. By the late 1990s, more than 20 private companies had
expressed interest in building power stations, especially with an eye to providing
power to industrial consumers. Reporting on these developments, Soesastro and
Drysdale (1990, 29) noted that ‘similar schemes for private sector participation in
the development of infrastructure are also being considered in the management
of container terminals in a number of Indonesian ports’.
This emphasis on private investment came at a cost. Concerns about debt levels, especially levels of foreign private debt, soon became signiicant (Muir 1991,
3). In mid-1991, the governor of Bank Indonesia, the central bank, reported to parliament that the country’s offshore commercial loans in March of that year stood
at $16 billion, up by $10 billion from a year earlier. Concerns that the rising levels
of debt were related to doubtful investments in infrastructure were a harbinger of
the problems that would emerge in the power industry at the end of the decade
(Wells 2007).
In the 1990s, Van der Eng (1993, 26) noted that the government was looking
for large-scale investments from the private sector but that private-sector investment had not proceeded quickly, ‘because there is as yet no satisfactory outcome
to negotiations over pricing. . . . If the price PLN pays itself is too low, electricity
generation will not be proitable—and therefore not of interest—to private irms’.
Kristov (1995, 73) observed that ‘price has become a controversial issue—both the
retail price private producers would charge the public, and the wholesale price
at which they would sell in bulk to the state utility, PLN’. After a careful analysis,
Kristov concluded that the cost of supplying electric power during most of the
1980s was more than 40% higher than PLN’s average sales revenue.
The second major change to affect trends in the power industry during the decade was the 1997–98 Asian inancial crisis. The crisis caused a sharp depreciation
in the value of the rupiah, harming the revenue lows and balance sheets of many
companies across Indonesia. Nowhere was this more marked than in the power
industry; it became clear that the strategy of the early 1990s of relying on private
foreign investment to fund the expansion of power plants was seriously lawed
(Wells 2007).
The dificult experience during the 1997–98 crisis had a lasting inluence on the
approach of policymakers towards infrastructure policy during 2000–2010. On
coming to ofice in 2004, the administration of President Yudhoyono responded
to the infrastructure shortages in several ways, including by setting speciic targets for expansion for each industry. In the electric power industry, for example,
Infrastructure Policy in Indonesia, 1965–2015: A Survey
275
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
TABLE 7 Telephone Calls, 1970–2010
Domestic ixed line
(billion pulses)a
International
(million minutes)
1970
2010
400
8,200
1
2,362
Average annual growth (%)
1970–1975
1975–1980
1980–1985
1985–1990
1990–1995
1995–2000
2000–2005
2005–2010
17.6
32.0
8.8
13.4
22.3
–8.1
4.4
–14.2
23.8
22.7
20.9
27.7
21.4
10.6
8.9
35.2
7.8
21.1
1970–2010
Source: Data from BPS (1970–2013a)—see footnote 4. Estimates for 2001–4 are interpolated between
2000 and 2005, assuming a constant growth rate of 8.9% over the period.
a
Fixed-line telephony, excluding calls made via mobile telephone.
two 10,000-megawatt fast-track programs to expand generating capacity were
announced, the irst in 2006 and the second in 2010. This approach of setting targets, however, had limited success: there were delays, and both programs proceeded rather more slowly than expected.
TELECOMMUNICATIONS
Telecommunications has been one of the most dynamic industries in Indonesia
during the past 50 years. Developments in the industry have gone through four
distinct phases.
In the irst phase, during the 1970s and 1980s, telecommunication facilities expanded rapidly as new technologies, such as interisland microwave
systems and, from 1976, the Palapa communication satellites owned by
Telecommunications provider PT Indosat, were used to expand links across the
country, supplementing the overland and submarine cable systems. Supply long
struggled to keep up with demand. In the main urban areas, such as Jakarta
and Bandung, shortages of telecommunication facilities were acute (Grey 1984).
Nevertheless, the use of both domestic and international telephone connections
increased rapidly (table 7).
The second phase began in 1989, when private participation, through public–
private partnership arrangements, was permitted in the ixed-line industry, relecting the broad trend of encouraging private-sector participation in infrastructure
(Lee and Findlay 2005). In the event, this phase of market-oriented reform was
unsuccessful. The contract-based partnerships system provided only short-term
solutions for the acute lack of capacity.
Peter McCawley
276
TABLE 8 Households with Access to Telecommunications, by Technology, 2009–12 (%)
2009
2012
Fixed-line
telephone
Mobile
telephone
Internet
10
6
62
84
12
31
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Source: Data from BPS (1970–2013a)—see footnote 4.
A third period of reform began in 1999, when Law 36/1999 on Telecommunications established a revised framework for operations. A duopoly structure was
created in ixed-line operations, accompanied by a wider, pro-market approach.
These reforms acknowledged the importance of competition and of a sound regulatory regime, although there were still limits on market entry.
Under the revised framework, a fourth and very dynamic stage has emerged in
recent years. New telecommunication technologies have looded into Indonesia,
within a highly competitive market structure. Local irms such as Telkomsel,
Indosat, and Mobile-8 (Smartfren), supported by multinational companies such
as Samsung, LG, and Nokia, are now prominent in the market, offering all kinds
of discounts on mobile phones and advertising widely. Customers are moving
away from the old ixed-line system—table 7 shows that the use of domestic
ixed-line calls dropped sharply during 2005–10—and taking up mobile phones
with enthusiasm. Internet use has expanded rapidly as well (table 8).
These recent developments illustrate the gains that can be made in the infrastructure sector when an appropriate regulatory regime is established. Perhaps
the main lessons from the burst of growth in telecommunications in Indonesia
during the past decade are the importance of encouraging markets to work, of
facilitating the entry of new technology, and of attracting new investment. Careful
market design, relying on an effective regulatory regime, is needed to enable
capital-intensive infrastructure industries such as telecommunications to develop
quickly (Magiera 2011).
WATER, SANITATION, AND IRRIGATION
The management of water and sanitation remains one of the most pressing issues
in infrastructure policy in Indonesia. Yet it is extremely dificult to tackle the problems in the industry, because attention to cost recovery is often considered irrelevant (Asian Development Bank 2012, 8). The results are widespread. Access to
potable water from municipal water supplies is extremely limited, so elite consumers opt to rely largely on expensive bottled water. Frequent looding occurs
in both urban and rural areas during rainy seasons. Adequate public sanitation
services are almost non-existent in many parts of Indonesia. And irrigation policy
poses many challenges.
The 1970s saw some improvements in municipal water supply. However, as
was the case in other parts of the infrastructure sector, institutions in the formal
sector—such as modern hotels, large factories, and some elite residential establishments—relied little on the public system, preferring to install their own systems.
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
Infrastructure Policy in Indonesia, 1965–2015: A Survey
277
During the next few decades there were attempts to improve the public watersupply system by strengthening the extensive urban network of local watersupply establishments, or Perusahaan Daerah Air Minum, of which there were
more than 300. But these establishments were constrained by bureaucratic controls and by enforced low prices. Across Indonesia, much of the population opted
out of any relationship with the public system, choosing instead to rely on informal water suppliers and on natural supplies of water. In rural areas, even in small
towns, much of the population depended on springs and wells. This is hardly surprising, because simple local systems often provide better and more cost-effective
supplies of water than larger systems (Perkins 1994).
Attention to large-scale sanitation services has been similarly lacking for many
decades. Communities resist paying for services that they have come to expect
public agencies to provide for free. Government agencies have therefore found
it dificult to raise monies to fund public sewerage systems. In urban areas, private septic facilities are widely used, but their installation and maintenance are
poorly regulated. Serious externalities in the form of environmental and health
problems are liable to occur. Frequent looding during rainy seasons is another
major water-management issue. Every few years, large-scale looding in Jakarta
leaves up to 1 million people needing temporary refuge. Widespread looding
in other areas of Indonesia receives less publicity but imposes great social and
economic costs.
Managing irrigation and drainage systems has been vital to Indonesia’s agricultural economy since the 19th century. After independence in 1945, attempts
were made to expand the irrigation system but existing systems were neglected.
As Booth (1977, 50) noted, ‘the systems laid out by the colonial government during the prewar period fell into an almost unchecked decline between 1940 and
1968’. During the 1970s, agricultural development programs supported by foreign donors and the Indonesian government provided funding to rehabilitate and
expand irrigation networks, particularly in Java and Bali. The eficiency of irrigation systems depends crucially on the extent to which operation and maintenance
are extended downstream to the tertiary levels of the systems (Van der Eng 1996,
41, 156). Special attention was also given to the expansion of irrigation facilities
in the outer islands, to support the national transmigration programs being promoted at the time.
Signiicant efforts were made during the 1980s to expand the irrigation system. Between 1969 and 1994, irrigation systems serving 2.5 million hectares were
rehabilitated and 1.7 million hectares of new irrigation systems were developed.
However, inancing maintenance activities continued to be dificult. Around 60%
or more of operation and maintenance budgets were reported as having been
spent on staff costs, leaving little available for routine maintenance (Vermillion,
Lengkong, and Atmanto 2011, 2). More recently, since the 1990s, discussion about
investment priorities in the irrigation industry has been closely linked to plans for
food security. One view is that food security can be strengthened by the development of major food-growing areas in the outer islands. But the economic feasibility of large investments in new irrigation projects in the outer islands depends,
in turn, on the economic feasibility of new food estates outside Java. Under these
circumstances, the development of large irrigation projects of this kind is fraught
with uncertainty.
278
Peter McCawley
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
CONSIDERATIONS FOR INFRASTRUCTURE POLICY
It is clear from this survey of developments across the infrastructure sector during
the past ive decades that a wide range of issues need to be considered in formulating infrastructure policy in Indonesia (igure 1).
Demand
Policymakers in Indonesia have rarely been prepared to address community
expectations about the supply of infrastructure services. The idea that utilities
should not be run for proit but should instead serve the public underpins the
expectation of low prices for utilities. Populist political leaders have often encouraged consumers to expect that utility services (often referred to as a basic need)
be provided at subsidised prices. The sources of these subsidies are rarely directly
mentioned, but it seems clear that advocates of low prices believe that the subsidies should be paid for by the government, or by the (mostly) state-owned utilities providing the infrastructure services, or perhaps, in one way or another, by
the private sector.
Related to the idea that utilities should serve the public is the distinction
between the provision of services to small and large consumers. The market for
providing utility services to small consumers in Indonesia is very large. Many
authors writing in BIES about the infrastructure sector have referred to the various challenges of providing services to consumers in the small-scale and informal
economy (Dick 1975a, 1975b, 1981a, 1981b; McCawley 1978; Gibson 1986; Hughes
1986; Munasinghe 1988; Perkins 1994). However, the larger utilities in the formal
state-owned sector ind it very dificult to reach out to this market. Until formal
institutions such as the large state-owned utility enterprises can design programs
to reach out to the informal economy, they will continue to be seen as alien to the
needs of ordinary rakyat (people).
Supply
No single constraint holds back the supply of infrastructure in Indonesia. Rather,
numerous issues combine to constrain growth.
Finance
Investors and inancial specialists in Jakarta often say that money is not the problem
holding back infrastructure development in Indonesia. They argue that it is usually not dificult to raise funds for infrastructure activities in Indonesia—whether
from banks or from bond issuers—provided that the borrowers provide appropriate guarantees to the inanciers. They suggest that as long as technical problems,
such as those of project design and land access, and pricing arrangements are clariied in a satisfactory way, inance will be forthcoming from the markets.
In a detailed survey of Indonesia’s experience with private investment in the
power industry in the 1990s, Wells (2007) provides a more sceptical view. He traced
the processes between 1990 and 1997 by which PLN signed 26 agreements with
private investors for generation projects. The investments represented around
11,000 megawatts and provided at least $13 billion of investment. But when the
1997–98 crisis struck, those arrangements quickly ran into trouble, because PLN’s
revenue lows were in rupiah while its obligations were in US dollars. Extended
contract disputes broke out when PLN tried to renegotiate the terms of the deals
agreed to with foreign investors. Wells notes that the whole process of raising
Infrastructure Policy in Indonesia, 1965–2015: A Survey
279
Downloaded by [Universitas Maritim Raja Ali Haji] at 23:14 17 January 2016
private inance and entering into long-term arrangements with foreign investors
was dificult for PLN, and concludes that ‘private ownership of generating capacity is not the only possibility, nor should it be a goal in itself. . . . If Indonesia can
do no better in new arrangements, privatization is simply too costly. Borrowed
funds and state ownership, with all their problems, would be preferable’ (362).
Technical Issues
There is no doubt that there is a shortage of well-prepared and well-documented
projects in Indonesia available for investors to examine. This shortage became
clear around the time of several infrastructure summits during the period of the
Yudhoyono administration. The details of projects provided to potential investors at these summits were often very slim. In some cases, websites purporting to
provide data on large projects turned out to be blank. In the event, the response
to the summits was disappointing. Hardly any of the projects offered at the irst
summit were taken up, and at the second summit, ‘although potential investors
. . . generally showed wary optimism, most opted for a wait-and-see approach’
(Lindblad and Thee 2007, 26).
A lack of detailed project data was also apparent in the government’s master
plan for Indonesia’s economic development (Coordinating Ministry of Economic
Affairs and Bappenas 2011). The master plan provided a strategic framework for
infrastructure investment across Indonesia, with an emphasis on supporting the
development of economic corridors. It contained a pipeline of possible projects,
but detailed supporting project proposals were often not available in the implementing sectoral ministries.
A related technical issue concerns access to land. Policymakers in Indonesia
recognise that a lack of access often delays project construction. In recent years, a
range of steps have been taken to try to make it easier to obtain land for infrastructure development, including promulgating a new land law. Implementing the law
has proved dificult, however; legal clarity in obtaining access to land is often
lacking. Henderson, Kuncoro, and Nasution (1996) discussed land access in their
survey of development problems in Jabotabek (Jakarta, Bogor, Tangerang, and
Bekasi). They pointed to very poor land market institutions of â