On the first day of the 20th World Economic Forum on East Asia, a plenary session chaired by Desi Anwar, an Indonesian senior journalist discussed infrastructure bottlenecks in developing countries (click here to read the summary of the session published by the WEF). The big question the session attempted to address was how to make infrastructure become a contributing factor to economic growth instead of growth barriers.
A review by Haryo Aswicahyono and Deni Friawan published by the Economic Research Institute on ASEAN and East Asia (ERIA) comprehensively looks at the current status of infrastructure development in Indonesia (see the review here). It is quite clear that Indonesia is dealing with a wide range of issues which lead to low investments in infrastructure development. These issues include monopoly power in various sectors which may lead to inefficiency, for example the management of ports by Indonesian Port Corporations (IPC), the supply of electricity by Perusahaan Listrik Negara (PLN) and the railway sector by PT Kereta Api; a vast area of Indonesia covering nearly two million square kilometers which consists of five main islands and about 30 small archipelagoes, totaling about 17,508 islands with a population of over 234 million people obviously indicates the huge challenge that the Indonesian government is dealing with to ensure equity in infrastructure development. Inequality in access to infrastructure and public services is not only experienced by rural communities but also those who live in urban areas. For example in regard to water services, there are about 85 million people living in the service areas of the water utilities, but only 35% of which are served.
Can decentralisation bring positive impacts on infrastructure development?
Under the laws, all public service delivery functions, except defense, foreign affairs, monetary and fiscal policies, trade affairs and legal system, have been delegated to the local governments since the launch of the decentralisation reform in 1999. Decentralisation poses huge challenges for policy coordination.
A view of India’s experience about infrastructure development presented by Ajit Gulabchand, Chairman and Managing Director, Hindustan Construction Company at the WEF (13/6/2011) provided some interesting lessons for Indonesia. He described that:
India is a mixed story. There are grand successes, but also utter failures.
One of the main problems that India is facing is local versus central governments work allocation. In India, the central and state governments are very strong, while city and other local governments do not have enough authority and autonomy – and they are the ones that implement infrastructure projects.
In a similar vein, Indonesia still has high uncertainty as to which level of government is responsible for the provision of various services despite a number of regulations to clarify this matter. In addition, local governments’ lack of capacity to generate income make them highly dependant on the central government’s transfers indicating that decentralisation does not necessarily improve equality in access to public services.
An important lesson from Ajit Gulabchand is the success of a national authority body which is based on a new model of public-private partnerships in India to develop infrastructure.
Before the partnership was established, India could only build 11 kilometres road per year. After it was established, India can now build 11 kilometres road per day!
Dominic Barton, Worldwide Managing Director of McKinsey & Company and a Co-Chair of the World Economic Forum on East Asia, added to the list of concerns of developing countries regarding the causes of infrastructure bottlenecks. The list includes regulatory complexity especially in regard to land acquisition, difficulties that governments of developing countries face to determine their priorities given the complexity of problems they’re dealing with, regulatory certainty. He viewed that there has been any country that can become best example to respond to infrastructure bottlenecks issues. However, Columbia and Chile set a good example in terms of how the governments invite participation of various stakeholders to plan a collective action working with the private sector to respond the issues.
It is worth noting that infrastructure alone is not a sufficient condition for economic growth. It is the complementarity between infrastructure development and other factors such as human capital that significantly affects the country’s economic growth. Yamauchi et. al (2011) article published by World Development suggests that:
Education and local road quality are complementary, mutually increasing non-agricultural labor supply and income in remote areas.
Given relatively low investments in infrastructure by the public sector, Indonesia should further its partnerships with foreign investors. Lack of infrastructure in Indonesia obviously provides unique market opportunities for foreign investors especially given that there are no significant barriers to trade and investment in the transport and infrastructure sector. The Australian Government through its AUSTRADE provides an excellent brief review of these potential opportunities. At the moment, inputs for the infrastructure sector in Indonesia are dominated by domestic supplies and imports from China.
Clearly, at times solving local issues requires global views.
*This article is prepared by Risti Permani.
Update on June 27:
This article is now published by the Jakarta Post