MP3EI, Yudhoyono’s Unfinished Legacy

Sep 03, 2014

The Jakarta Globe. Jakarta. President Susilo Bambang Yudhoyono will have to entrust his flagship Masterplan for Acceleration and Expansion of Indonesia’s Economic Development, or MP3EI, to his successor, President-elect Joko Widodo.

The good news is that his administration had initiated 382 projects across the nation worth Rp 854 trillion ($72 billion) since the MP3EI was launched in May 2011.

The bad news is that it is way short of the Rp 4,000 trillion needed for infrastructure development in order to turn Indonesia into a high-income country by 2025, the stated objective of the program.

There is doubt, however, as to whether Joko’s administration will continue the MP3EI as there are indications that it may review the program.

The office of the Coordinating Minister for the Economy is hosting a three-day conference in Jakarta this week to discuss the impact of the program.

Classic issues

The government has only achieved roughly 41.9 percent of its objective of launching projects worth Rp 2,000 trillion by 2014, National Development Planning Minister Armida Alisjahbana said.

Armida added that an additional 132 MP3EI projects worth Rp 443.5 trillion may commence before the end of this year.

Furthermore, of the Rp 854 trillion worth of projects, only Rp 412 trillion went for hard infrastructure such as power plants, roads, railroads, ports and airports, Armida showed in her presentation on Wednesday.

“The problems are classic: Difficulties in land acquisition, conflicts over land use, unfinished regional spatial planning and a shortage of electricity supplies, especially in regions outside Java,” Armida said.

The funding for hard infrastructure also relied heavily on the government and state enterprises with each contributing 32 percent and 38 percent of the funding respectively. The private sector had only contributed 7 percent so far.

That shows despite the government’s efforts, investment in infrastructure project remains largely unattractive for the private sector.

Cash-strapped government

The bloated cost of energy subsidies was the main reason for the lack of substantial progress in infrastructure development, a panel comprised of bankers and economist said on the first day of the conference.

According to the 2015 draft state budget, the government will allocate up to Rp 363.5 trillion for fuel and electricity subsidies, which is 4 percent more than this year.

Fauzi Ichsan, the managing director of Standard Chartered Bank Indonesia, said the energy subsidy issue had to be addressed sooner rather than later.

“The longer we wait to take a decision, the higher fuel prices must be increased,” he said.

National Economic Committee member Raden Pardede said the reality was that state and regional budgets are not being used properly.

While Raden highlighted the bloated cost of energy subsidies, he said the large amounts spent on personnel was another cause for concern.

The government has allocated Rp 340 trillion for remuneration of civil servants in the draft state budget next year, up around 18 percent from this year.

“This overhead cost must be reduced. If I run a business and my overhead cost is larger than my investment, my business will go nowhere,” Raden added.

Under-leveraged assets

Indonesia needs at least Rp 6,600 trillion in infrastructure funding until 2020 in order to boost the nation’s per capita income to $10,000, according to Budi Gunadi Sadikin, president director of state-controlled Bank Mandiri, the country’s largest lender. Of this amount, domestic lenders are expected to contribute Rp 1,376 trillion.

The problem, according to Budi, is that domestic lenders have limited capacity to provide lending due to high loan-to-deposit ratios and moderate growth in third-party funds.

Muliaman Hadad, the chairman of the Financial Service Authority (OJK), said a reliance on the banking sector to finance infrastructure development was not ideal.

“Infrastructure development needs long-term funding, while most of the third-party funds at domestic lenders are short-term deposits. There’s a mismatch,” he added.

Mandiri’s Budi said the government should consider allowing infrastructure-rated state enterprises to raise more debt to finance infrastructure development.

“Indonesia’s state enterprises are under-leveraged,” he said.

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