Economic Impact of Infrastructure Delivery
    Category: Column By : Raj Kannan Read : 231 Date : Monday, April 09, 2018 - 23:45:39

    As an advisory firm focused exclusively on infrastructure, we often help governments develop watershed economic and infrastructure programs aimed at increasing economic growth; but only rarely see the required political courage to implement such programs. A few years ago, I led a team of local and international infrastructure experts on a two-year study to analyze and benchmark eight different sectors within infrastructure in Indonesia, which was submitted for the development of RPJMN 2015-2019, the government’s five-year medium-term development plan. The then-incoming Joko Widodo administration adopted the study’s key components and issued the RPJMN 2015-2019 along with the NAWA CITA-9 Goals. Nawa Cita aimed to bring social equity to Indonesia via infrastructure projects, maritime connectivity, and reduced logistics costs, poverty and inequality. The Jokowi administration’s for-reaching infrastructure program totalled $342 billion—and like many I was sceptical.

    Fast forward three years—the Jokowi administration is currently managing over 280 projects under construction or completed, with a total combined value of $103 billion. These projects span energy, roads, railways, ports, airports, water and sewerage and IT. This level of infrastructure delivery is unprecedented here—except perhaps during the last decade before the end of the Suharto regime.

    Accordingly, six months ago we catalogued all projects under construction and completed, and assessed their impact when operational. This report “The Impact of Indonesia’s Infrastructure Delivery” was launched in late March. It presents empirical evidence on the impact of the government’s infrastructure capital expenditure on growth, inequality and poverty. The analysis was based on economic regression using a benchmark of 32 developing and emerging economies from the World Bank’s World Development Indicators database for the period 1990 to 2016.

    Among the key findings are that, since 2015, the government has completed 62 projects with an estimated of value $4.2 billion and, as of December 2017, there are over 224 projects under construction with an estimated value of $99.2 billion. Based on the above, the Jokowi administration’s aim of reaching 7% growth in the near-term is achievable. In fact, the report estimates that the completion of current projects would add 2.16 percentage points to GDP growth, thus raising the rate to 7.2% in 2023.

    The implementation of half the remaining priority projects, another $120 billion, from 2020 to 2023, would increase growth in 2030 to over 9%. The key assumption, however, is that the government continues to fund projects already under construction and that SOEs involved remain funded. On the bright side, the government recognizes the need for fresh capital and has introduced innovative funding schemes, including the historic issuance of Future Revenue Based Securities locally and rupiah-denominated Komodo bonds on the London Stock Exchange. The government is also finalizing new regulations to monetize some key infrastructure assets via a scheme called Limited Concession Schemes (LCS). LCS, as previous discussed, can generate fresh cash from the private sector infrastructure investors, without selling government assets. I believe the government’s infrastructure-led growth vision is on target.