Indonesia targets crumbling roads to boost economy

A bridge collapse on Nov. 26 in northern Indonesia was the latest blow to the country's international competitiveness at a time when investors are increasingly looking to take advantage of strong growth in Southeast Asia's largest economy. An investigation is underway into the cause of the collapse, which sent cars, motorbikes, and a public bus tumbling into the murky Mahakam river, killing at least 21 people, but analysts say poor construction and maintenance, and insufficient use of materials are partly to blame.

Woefully inadequate infrastructure is one of the biggest challenges facing Indonesia, say investors, who often complain that a lack of roads and inefficient shipping networks hold up business. 

“At least 30 percent of a company’s production costs go to transportation,” says Latif Adam, an economist at the Indonesian Institute of Sciences, a government research center. He notes that the global average is closer to 10 percent.

Rampant corruption, legal uncertainties, and bureaucratic delays also threaten to undermine foreign investment at a time when Indonesia is banking on private financing to support around half of the $200 billion it has committed to infrastructure development.

As of October, officials in the capital, Jakarta, had spent only 30 percent of their annual infrastructure budget. They're now scrambling to use the rest before year’s end, says Mr. Adam, who worries that rush jobs could lead to more incidents like the bridge collapse.

Building connective infrastructure for a nation comprised of 17,500 islands has its challenges, but Franz Drees-Gross, the World Bank’s manager for sustainable development, which covers infrastructure, says legal constraints – including rigid tariff structures that constrain public utilities' budgets – pose some of the biggest problems.

As a result, Indonesia’s combined power generation is less than South Africa’s, which has roughly 200 million fewer people. Piped water supply, which only reaches half the population, is dropping. Road coverage relative to land mass is among the lowest in Southeast Asia. In Jakarta, the capital, only 2 percent of the population has access to septic facilities.

“You expect that in a post-conflict country, but not a place like Indonesia,” says Mr. Dress-Gross.

Indonesia's transition

Since former President Suharto stepped down in 1998, Indonesia has rapidly transitioned from a centralized, authoritarian country to a relatively stable, democratic one.

But that transition coincided with the 1997-98 Asian financial crisis, when infrastructure spending dropped from around 8 percent of gross domestic product to a measly 2 percent. It hit 3 percent in 2010, similar to what the US spends, but far below emerging market giant China, which is investing around 9 percent. 

Adam says at least 5 percent of GDP should go toward infrastructure development in an economy that is seeking breakneck growth like Indonesia. 

With economies in the US and Europe faltering, Indonesia has emerged as a relative beacon of stability, thanks largely to its natural resource wealth and strong domestic consumption. Investment is now at a record-high $20 billion, with growth for 2011 expected to reach 6.4 percent. 

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