Private Firms Say Infrastructure Main Impediment to Indonesia’s Growth

December 14, 2011

By Erman Rahman

Indonesia’s economy could grow even faster than its current rate of around 6 percent, according to a statement made by Vice President Boediono last week, if the government and private sector worked together to overcome a major technical hurdle – infrastructure.

The collapse of one of Indonesia's longest bridges, above, on November 26 took the lives of more than 20 people. Despite concerns over technical problems, the local government did not allocate funds for repairs until this fiscal year. Wikimedia Commons: Katakutu.

And, it’s not just Boediono who feels this way: 38 percent of 12,391 private firms – mostly small and medium enterprises – surveyed in the 2011 Local Economic Governance Survey also named infrastructure constraints as their main impediment to growth. The Asia Foundation and Regional Autonomy Watch (KPPOD) have implemented four such surveys since 2007, covering 444 districts (90 percent of all districts in Indonesia). Of the nine aspects of local economic governance covered, infrastructure has consistently been identified as the most important factor.

Roads, water supply, and street lighting – all of which are managed by local governments in Indonesia – were considered to be in bad condition by more than 40 percent of firms surveyed. The most likely cause of this sobering statistic is the limited funds allocated for infrastructure development. In June 2011, Standard Chartered Bank estimated that less than 5 percent of the $145 billion worth of infrastructure projects earmarked at the beginning of President Yudhoyono’s first term in 2004 had been completed. Local government road budgets were, on average, only about one quarter of the amount needed for periodic maintenance according to a local budget study conducted by the Indonesian Forum for Budget Transparency (Fitra). Funds lost to corruption in procurement and implementation of infrastructure projects is another pressing issue.

The collapse of one of the longest bridges in Indonesia on November 26 – which took the lives of more than 20 people – is just one example of an expensive waste of public investment. The suspension bridge, which spanned 710 meters across the Mahakam River in East Kalimantan, connected the urban center of one of the richest districts in Indonesia, Kutai Kertanegara, with its hinterland. As was widely reported in the Indonesian media, five or six years after the bridge opened in 2001, several technical problems related to the bridge’s construction were identified. Despite these concerns, the local government did not allocate funds for repairs until this fiscal year. Regardless of the primary cause of the collapse, which is still being investigated, the lack of funds dedicated to maintenance indicates the inability of the local government to adequately manage its infrastructure.

But poor roads and bridges are not the only problems that small and medium enterprises say are obstacles to growth and success – interruptions to water and electricity supplies are also common complaints cited in the survey. On average, firms experienced blackouts about three times a week and interruptions to water supply almost twice a week. For firms operating outside of Java – in lesser-developed parts of Indonesia – conditions are even worse. Firms in Maluku reported an average of seven blackouts per week, while companies in East Java claimed to  experience electricity cuts only about twice a month. Accordingly, Maluku firms own three times more generators than those in East Java, adding significantly to their operating costs.

But it is not enough to focus on infrastructure development alone. The latest survey implemented by The Asia Foundation and KPPOD, which was funded by the Australian Agency for International Development (AusAID), found that 17 percent of the bylaws issued by local governments create negative economic impacts. For example, levies were imposed on producers of agriculture commodities who transport their goods across district borders. In addition to these unnecessary “legal” levies, firms must also make unofficial payments like “security charges” to mass organizations, police, and local government authorities. All of these extra transactions make businesses less competitive.

Private firms were impressed, however, with the large-scale establishment in the last five years of one-stop shops for business licensing – over 75 percent considered licensing process to be efficient and free from collusion and illegal levies. But the firms’ responses revealed that the time and money needed to obtain licenses exceeded the standards set by the national government – demonstrating that good public perception did not necessarily translate into good quality service.

The survey also pointed to a long-running dilemma in Indonesian development – the significant difference in the quality of economic governance between the highly populated regions of western Indonesia and the outer islands. Firms operating in western Indonesia, in municipalities, or on the major islands had more positive perceptions of local economic governance compared to those working in eastern Indonesia, in the districts, or on smaller islands.

With Indonesia’s growth potential forecasted as high as 8-9 percent per year, it’s possible that it could become one of the world’s top 10 economies by 2025. However, more strategic national investments coupled with a stronger emphasis on improving economic governance in the regions will be critical for Indonesia to continue outperforming its neighbors going forward.

Erman Rahman is the director for Local and Economic Governance in The Asia Foundation’s Indonesia office. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

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