INADEQUATE INFRASTRUCTURE REMAINS A STUMBLING BLOCK
So far problem over inadequate and poor condition of infrastructure has remained unsolved. Complaints have frequently heard from investors and prospective investors. The government already has many plans but has made no much headway to bring the plans to reality. The public works ministry has far from meeting its target in infrastructure development until the end of the third quarter of this year. Failure to implement plans is not always caused by fund being unavailable. Many projects could not be implemented as scheduled because of poor or delay in preparations. Financers such as the World Bank would not disburse loans if it is not clear how the fund to be spent. The government has acknowledged low rate of implementation of the state budget.
Until the end of October, 2010, spending by the public works ministry reached only Rp 20.83 trillion or 56.71% of the total budget of Rp 37.09 trillion for the year. Earlier Public Works Minister Djoko Kirmanto said spending by the ministry until the end of the third quarter would reach 76.82% of the total budget for the year and 93% by the end of the year.
The change in the ministry's share of the state budget in September from Rp 34.2 trillion to Rp 37.09 trillion was believed to be one of the reasons for the low rate of implementation.
Meanwhile, up to the end of the third quarter, completion of infrastructure projects reached only 66.65% falling short of the previously set target of 77.03%. The highest realization was recorded by urban and housing development directorate general, which reached 53.86% and the lowest, was recorded by the Toll Road Regulatory Body (BPJT) at 17.29%.
Land clearing or acquisition and weather anomaly are among the main factors delaying implementation of infrastructure projects. Despite the low performance until the third quarter, the public works ministry still expressed optimism realization would reach 93% of the target in spending and 100% in construction by the end of the year.
Among big infrastructure projects now being carried out by the ministry are Eastern and Central Trans Sumatra Highways, Northern and Southern Trans Java Highways, Western Sulawesi Highway and Trans Kalimantan Highway and Trans Papua Highway.
Slow development of toll roads
Beside highway development, work is also slow in the development of toll road projects. Realization is still far short of targets. The realization target set for toll road projects in the 2004 - 2009 period was 1,095 kilometers but realization was only 85 kilometers. The majority part is still under construction or preparations or in the process of land clearing. In the past decade, the total length of country's toll roads rose only from 568 km in 1999 to 693 km in 2009.
In 2010, work remained sluggish in the implementation of toll road project. The Public Works Ministry has even doubted that it could complete the process of land clearing for the 878 kilometer Trans Java toll road to be built in 2011 as until the third quarter of 2010, land clearing covered only 38%. The slow progress made in the land clearing was over protracted negotiations on land prices with land owners.
In addition to slow progress in land clearing, delay in he completion of infrastructure projects was also caused by financial difficulties faced by the Toll Road Corporation (BUJT). Meanwhile land owners and agents set much higher prices for their land. As a result the cost of land clearing for the 4,761 hectares of lands needed by he Trans-Java toll road surged 37% to Rp 6.72 trillion from earlier estimate of Rp 4.55 trillion as set in the contract signed by toll road developers.
Impact of limited infrastructure
The manufacturing industry is among the slowest sectors to recover from the slump because of poor and inadequate infrastructure. The manufacturing sector has remained in the doldrums after the monetary crisis in 1998. The recovery of the sector was slowed by power supply shortage, poor condition of road and port infrastructure. The condition resulted in higher production cost of manufactured goods weakening heir competitiveness.
Contraction has been recorded in the growth of the manufacturing industry as indicated by shrinking exports of manufactured commodities. Currently, primary commodities have tended to take the domination of the country's exports from the manufactured goods. The process of de-industrialization is feared to continue if no progress made to improve the infrastructure condition. The long term impact would be worse as the country could not continue to rely on primary commodities for export earning.
So far attempts have been made more in the demand aspect while there were not great efforts in supply aspects especially in the manufacturing industry to boost growth. The tendency is dangerous as imports could in long run dominate supply. Greater reliability on imports could lead to growing trade deficit, increase in inflation and decline in balance of payment surplus. Currently strong inflows of foreign capital keep surplus in the balance of payments, but the current account surplus is shrinking.
Aware of the long term impacts of the condition, the government has launched and planned ambitious infrastructure projects such as the first phase of crash program to build power plants with a total capacity of 10,000 megawatts to be completed this year to be followed with a second phase with the same capacity to be completed in 2014. The first phase of the program is expected to cope with power shortage in Java and Bali. The power shortage problem outside Java is expected to be sorted out after the completion of the second phase of the program. Realization of the program is expected to boost development of various economic sectors especially the manufacturing and construction sectors.
The infrastructure sector including construction sector has considerable contribution to the country's economic growth. In the third quarter of this year, the construction sector was the fifth largest contributor to the country's Gross Domestic Product (GDP) among nine major sectors. The construction sector contributed 10.3% to the GDP during that period. The manufacturing sector still accounted for the largest contribution of 24.4%. Therefore, high growth of the construction sector would contribute to jacking up the economic growth.
In the period of the first to third quarters of 2010, the construction sector grew 6.8% year-on-year. The growth rate represented an improvement compared with the previous two years, but was not enough to improve the infrastructure condition. Low growth of the construction sector was partly caused by delay in the disbursement of the state budget fund for government projects.
Efforts to boost the growth of infrastructure and construction sectors
The government has proposed an increase in development expenditure for infrastructure sector in 2011 state budget in a bid to accelerate development of the sector. The public works ministry's share of the state budget fund is raised to Rp 56.5 trillion in 2011 from Rp 35.2 trillion in 2010.
With the increase in the investment planned for infrastructure including under the public private partnership (PPP) scheme, the Association of Building Contractors (AKI) expressed optimism the construction sector would grow significantly in 2011.
Infrastructure sector including road, electricity and telecommunications is expected to be the main contributor to the growth of construction sector starting in 2011. The effects of the increase in the state budget on economic growth would be greater with the participation of the private sector.
The increase in the state budget, however, would be meaningless if the government remains slow in preparing projects to be financed with the state budget fund. Implementations of a number of government projects have been delayed because of slow in preparations or in fund disbursement.
In addition, the plans could be brought to reality if the government could maintain economic, political and social stability and guarantee legal certainty. No less important is a guarantee from the government that there would not be a problem in land clearing. Currently, a bill on land clearing is awaiting approval. A law on land clearing is expected to help speed up implementation of projects. Revisions of the old law proposed in the new bill calls include shorter time of negotiations from 120 days to 60 days and that consignation is set after 51% of the lands have been cleared previously after land clearing reached 75%.
If the bill is passed into law and its implementation regulations could be issued immediately, some of the hurdles delaying development of infrastructure projects would be removed.
Other big hurdles coming in the way of infrastructure development include high interest rate. High interest rates have discouraged many contractors from using bank loans. Currently there are around Rp400 trillion in approved construction credits in banks not withdrawn by borrowers.