The builder’s budget – The Edge Review

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At Jakarta's Tanjung Priok port (Photo: Simon Roughneen)

At Jakarta’s Tanjung Priok port (Photo: Simon Roughneen)

JAKARTA – Indonesia’s government has proposed boosting capital spending on infrastructure to Rp 290 trillion (US$23 billion) this year, a doubling of last year’s Rp139 billion that is intended to drive much-needed development across the archipelago.

The figure is contained in a proposed revision of the 2015 state budget put before legislators for approval at the end of last week. It is also a near 50 per cent increase on the Rp 196 trillion figure proposed in the draft budget tabled by former President Susilo Bambang Yudhoyono in August 2014, prior to his succession on October 20 by Joko Widodo, universally known as Jokowi.

This wedge of extra productive cash has been created by Jokowi’s near-elimination of longstanding and expensive fuel subsidies at the end of December. The revised budget sees the estimated cost of the fuel subsidies in 2015 drop from Rp276 trillion to Rp81 trillion.

Although the budget breakdown has not been revealed in detail, the proposed infrastructure outlay is already welcome news to farmers and business owners across Indonesia, who have long struggled with poor roads and unreliable power supply.

Aziz Pane, chairman of Indonesia’s Tyre Manufacturers Association, blames lagging investment in infrastructure for problems including inefficiencies and high costs in Indonesia’s rubber and other agricultural sectors.

“We need roads, we need harbors,” Pane said. “That is both for farmers getting raw material to producer, and for producer distributing later on.”

Indonesia is the world’s second-biggest rubber exporter, and other commodities such as oil, gas and palm oil make up seven out of the country’s top 10 exports.

Indonesia’s government is aiming to modernise the country’s economy and reduce reliance on primary commodity products – an ambition that requires the government to spend big on ports, rail, airports and power stations.

World Bank figures show that Indonesia is responsible for only 15 per cent of southeast Asia’s manufactured exports, despite having more than 40 per cent of the region’s population.

In contrast, Thailand, home to only 15 per cent of the 600 million people across the 10 nations that make up the Association of Southeast Asian Nations (ASEAN), accounts for a third of the region’s manufactured exports.

If Indonesia is to upgrade its infrastructure adequately by the close of the decade, the final bill could come to around US$500 billion over the next five years, government agencies estimate.

Jokowi has said that private sector investment, public-private partnerships as well as loans and grants from donor agencies will be needed to cover the expected outlay. The Asian Development Bank (ADB), the regional lender headquartered in Manila, said on January 13 that it would support Indonesia’s upgrade efforts following a meeting between Jokowi and ADB President Takehiko Nakao in Jakarta.

“Poor infrastructure is one of the main factors holding back the development of a competitive manufacturing sector in Indonesia. While it will take years to get the country’s infrastructure up to standard, [the extra spending] is clearly welcome news,” said Gareth Leather of Capital Economics, a London-based consultancy.

Indonesia’s generous fuel subsidies were popular with middle-class car owners but in recent years high oil prices meant they accounted for around a fifth of government spending – more than was allocated to infrastructure and social welfare combined.

Plummeting world oil prices in the past few months allowed Jokowi to abolish petrol subsidies altogether and drastically cap diesel subsidies with relatively little pain to consumers. This should in turn help bring down the budget deficit to under 2 per cent of GDP, given that Indonesia is a net oil importer.

However, the passing of the revised budget by lawmakers is not a given, as Jokowi can only count on a minority of representatives. Over half of lawmakers are loyal to a coalition headed by Prabowo Subianto, who was defeated by Jokowi in the July 2014 presidential election and who has since waged an on-off campaign to undermine the new president.

Prabowo pledged during his campaign to spend around US$60 billion per year on infrastructure if elected, so it may be awkward for even someone of the former general’s well-known chutzpah to oppose Jokowi’s spending proposals.

Indonesia is no stranger to political compromise and I suspect the budget will be passed once a certain amount of horse-trading has taken place. I think the key point to bear in mind is that increasing capital spending isn’t too controversial,” said Gareth Leather.

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