Insights on Government Infrastructure Spend and Growth in Indonesia for 2021
Erlangga A.
International Advisor for Development Finance, Policy and Strategy Development
If we use a Crystal Ball Method by first establishing the macroenvironmental factors; we will illustrate the development constraints faced and will provide a context towards how current policy directions best fit to relax these constraints.
On the subject of the Government's policy approach on infrastructure spend for 2021 it seems that Indonesia is at the right track and needs all the support it can get to be able to drive economic recovery. The caveat is that project pipeline development and delivery capabilities needs to be strengthened for existing bankable projects to be eligible for innovative sources of financing. This approach can help lead the way towards economic recovery in the short-run and when consistently implemented may help the country break the middle-income trap in the long-run.
In this article, consistent with the crystal ball method, we look at the global trends and how covid-19 pandemic adds another dimension. Then we look at the appropriate measures taken by the Government and what cautionary tales good practices can help with advising towards the most optimal results within the development constraints identified.
7 Global Trends on Infrastructure Spend
Macro-environmental Mega-trends identified since 2017-2018:
1. Tilt to Asia
2. Rapid Rate of Urbanization
3. Developing Asia needs to play catch-up in closing its infrastructure gap
4. Catch-up requires more active private sector partnerships in infrastructure investment
5. Environment, Social, and Gender (ESG) become more important as part of climate-change adaptation and inclusive economic outcomes expected out of investments in infrastructure
a. Energy transition to renewables as well as infrastructure to support circular economy such as waste to energy are examples of infrastructures that resonate well with ESG
b. Infrastructure for all: infrastructure development and public facility should include gender and social equality, which include vulnerable people and people with disability’s special needs.
6. Technological advancements support trend towards global supply chain connected, carbon-neutral digital economies.
7. Hyper-connectivity affects both digital and mass-transport and creates a free flow of movement and ideas;
In addition, closing the infrastructure gap is a necessary foundation if an economy wishes to scale-up from a middle-income economy into a higher-income economy. The longer term horizon still necessitates Indonesia to accelerate its infrastructure development if it wants to break out of the middle-income trap. As of June 2020, Indonesia's infrastructure stock is at 53 percent of its GDP in comparison to the higher-income economy standard of 70 percent of the GDP according to the World Economic Forum (WEF).
Overall, these broad trends will continue with no signs of abating although COVID-19 in 2020 has made some adjustments. COVID-19 has shifted government focus in FY2020 from infrastructure spend into public health and has necessitated in the shifting of business model to cater for public health protocols to prevent it’s spread. Strategic national priority infrastructure projects not in construction phase are under review and some made on-hold in FY2020.
COVID-19 Effect
The pandemic has caused the deepest global recession since the Second World War. Moreover, all of the developing economies of Asia are expected to contract in 2020, something that has never happened since the 1960s. The recession paired with public health crises affects all countries in the world and its recovery requires concerted effort in both the developed and developing nations.
Continued stimulus for economic recovery in FY 2021. FY2021 will put the pressure for Governments to provide necessary stimulus to drive economic recovery in tandem with vaccine procurement and dissemination. Economic recovery will use government stimulus to spur growth and a significant chunk of the stimulus are to be invested in infrastructure development that lagged in FY2020. On February 27, 2021 the G-20 Finance Ministers and Central Bank Governors have pledged to continue to provide necessary fiscal and monetary stimulus to help drive global economic growth and even out its recovery.
Quality infrastructure development to lead the economic recovery from COVID-19. A robust economic recovery must include investments in infrastructure that helps create longer-term sustainable social and economic returns as well as helping the economy become more resilient to disruptions, including the pandemic. High quality infrastructure can positively affect economic output in the short-run via the construction and employment effects it creates during its initial life cycle. However, the International Monetary Fund (IMF) cautions that up to one-third of infrastructure spending are wasted due to inefficiencies and as such, strong frameworks throughout the entire infrastructure project life-cycle from project identification, preparation, start-up, operation, and asset transfer need to be in place and this defines what and why quality infrastructure is needed.
Governments need strong frameworks to plan, allocate, and implement quality public infrastructure. Infrastructure investments per se should not be treated as a panacea or a quick fix to stimulate economic recovery particularly if it cuts corners on quality assurance aspects to shorten lead-times and overly focuses on grandiose national-level projects, or both. Such an approach will be myopic and will only generate strong economic outcomes in the short-run due to construction and employment but may become a significant waste of public investment in the longer run due to underutilization or worse, cause negative externalities that incur additional costs to the public budget.
Quality infrastructure can be delivered if proper due diligence and front-loaded planning help ensure that its economic and social benefits are appropriate to the beneficiaries in the localities that it serves and having long-term resilience towards disruptions. As such, to help de-risk and create quality infrastructure strong frameworks and best practices need to be adopted, such as the ‘precinct approach’ where proper utility of the infrastructure is assured based on addressing specific needs of the localities and are ideally projects that are ‘shovel ready’. Here are some best practices that help ensure quality infrastructure done in 3 Phases:
PHASE 1: Respond by Minimizing Disruptions
· Minimizing demand-side disruptions particularly in basic services (education, water, and sanitation), healthcare, telecommunications, and logistics infrastructure
· Minimizing supply-side disruptions to industry. Private sector can play role in addressing crisis-induced disruptions to the supply side such as food security and or develop local manufacturing facilities to get closer to the target markets.
PHASE 2: Recover better by Focusing on Existing Pipelines
· Instead of large, new and eye-catching projects, the initial focus of expenditure should start with existing assets or those already in the pipeline.
· Priority should also be given to maintenance and upgrades to existing infrastructure and asset recycling.
PHASE 3: Prepare for Future Economic Needs and Disruptions through Prioritization
· The pandemic experience creates priority on infrastructure that reduces the impact of future economic shocks by ensuring upcoming economic recovery initiatives embrace a sustainable and resilient future
· It is important that investments are guided by sound principles around project prioritization, funding, market design and delivery. This means significant preparatory work needs to start now for these future projects considering the broad macro-environmental global trends that is identified since before COVID-19. These include energy transition into renewables, circular economy infrastructure, digital economy infrastructure, mass transportation systems and transit oriented development, and logistics and supply-chain related infrastructure.
Development funding for infrastructure is increasingly leaning upon alternative investments particularly private sector partnerships to secure project finance. Funding the above phases has a different dynamic due to the pandemic. The already significant infrastructure development gap identified pre-COVID-19 is now wider as there was a lull in FY2020 when budgets were refocused from infra to fight the pandemic. The widening of the gap between the investment needs and the current investment levels is exacerbated as governments had to take in more public debts to compensate for taxation revenue shortfall triggered by COVID-19 for stabilization efforts in 2020. Taxation revenue shortfall in FY2020 reflects the drop in domestic consumption. As a result, governments particularly in Developing Asia needs to create robust project pipelines that offer de-risked bankable projects that are attractive to investors.
Trends in Indonesia’s Infrastructure Spend 2021
Budget set and deregulation for better investment climate continues. Three main events occurred in Q1 2021, the first is on the earmark of IDR 417.8 trillion for infrastructure development in the FY2021 public budget. The second is on the follow-up Presidential Regulations aimed at improving investment climate in Indonesia as mandated by the Omnibus Law issued in 2020, in December 2020 – January 2021 these were issued to effectively establish the Indonesian Investment Authority (INA). The process of making Indonesian infrastructure more investment friendly continues through ongoing deregulation initiated by the Omnibus Law.
The third is on the establishment of INA is an independent and professionally managed Sovereign Wealth Fund (SWF) investment management agency that is tasked to assist the financing of quality infrastructure projects via Indonesia’s first SWF. INA aims to help canvass assets under management domestically and internationally at USD200 billion in 2 years. It will prioritize in financing domestic infrastructure development from existing pipelines particularly toll-roads, port and airports and the securitization of existing toll-road assets.
Strengthened vehicles to support infrastructure development. The INA will be a strong actor that will help push forward the more commercial infrastructure projects. Whereas existing Special Mission Vehicles (SMVs) under the Ministry of Finance, such as PT Sarana Multi Infrastruktur (PT SMI) has its role expanded as a domestic development bank overseeing infrastructure projects with significant social impacts such as those that promote inclusive economic growth led by local governments, and connectivity towards the outlying and remote regions of Indonesia. Infrastructure is expected to be the key sector to receive stimulus and help drive national economic recovery starting in 2021.
PT SMI has been assigned to among others help deliver certain portions of the stimulus packages for national economic recovery (PEN), which is coordinated with the dissemination of the vaccine. The budget for the stimulus has been increased 20.6 percent (YoY) to IDR 699.4 trillion equivalent to USD 48.36 billion. With prudent macroeconomic management, OECD has lauded the Government of Indonesia over its balancing of fiscal consolidation while continuing stimulus.
Prospects of a refreshed construction sector supported by stimulus. With the SWF and PEN, reliance from project assignments to State Owned Enterprises (SOEs) and pure public budget (APBN) can be reduced gradually. Before COVID-19, the construction SOEs were relied upon to mobilize investments to start construction but as they too bear the brunt of the pandemic economic downturn in 2020, the presence of fresh financing to drive infrastructure project development mean that infrastructure development can be sustained in 2021 via stimulus.
The construction SOEs are able to consolidate their finances with the presence of infrastructure stimulus support in light of an already outstretched APBN. The Ministry of SOEs are also in the process of creating Industry-wide or Sector Holdings to help consolidate SOE finances and help improve their professionalism and competitiveness and ultimately their ability to attract capital market investments.
Priority Infrastructure Sectors and Projects Identified for Q1-2 delivery. The Ministry of Public Works and Housing (MPWH) have identified 25 Public-Private Partnership (PPP) priority projects for 2021 that is open for with a required budget of IDR278.35 trillion.
The lion’s share both in number and value of project is focused on expanding connectivity through the Toll-road network and bridges, other significant sectors include water and sanitation infrastructure including dams and public housing. Most of these projects will commence in Q1 2021. Meanwhile the Ministry’s own infrastructure program this year with the budget of IDR149.8 trillion has its main objectives to support economic recovery and creating jobs.
Concluding Observations
• Indonesia’s policy and practice on infrastructure spend for 2021 is consistent with good practices. Such as efforts to deliver quality infrastructure that ensures the most optimized economic outcomes in support of national economic recovery with stimulus and prudent macroeconomic management. It will require close advisory and consulting support to strengthen and execute the strong frameworks required.
• Delivering quality infrastructure would require professional and competitive construction services industry and any efforts to assist consolidation in the industry such as the development of an SOE construction holding company needs to be supported with strong financial advisory.
Note: the information made in the article is the author's own through desk studies as referred in the reference section. It does not represent Deloitte's official views. I also acknowledge that some of the contents were my personal take on discussions inspired by Deloitte Government and Public Services Industry Webinars I help moderate between October 2020 - March 2021 as well as individual discussions with other Deloitte colleagues. Any faults or errors or omission are the authors own and the utmost care is taken to not deliberately misrepresent any parties. I apologize for any shortcomings and am open for constructive inputs.
References
https://www2.deloitte.com/global/en/pages/about-deloitte/articles/tilt-to-asia.html
https://www2.deloitte.com/nz/en/pages/2020-government-budget/articles/infrastructure.html
https://www2.deloitte.com/us/en/pages/risk/articles/infrastructure-investment-funding.html
https://www.adb.org/sites/default/files/institutional-document/640096/cps-ino-2020-2024.pdf
https://www.worldbank.org/en/country/indonesia/publication/indonesia-public-expenditure-review
Indonesia plans $2b sukuk issue to fund infrastructure projects - Business - The Jakarta Post
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Seasoned legal professional with experience in commercial legal related to Energy and Infrastructure, M&A, Project Finance, and Restructuring
3yExcellent Mas Bro