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INFRASTRUCTURE POLICY IN INDONESIA,
1965–2015: A SURVEY
Peter McCawley
To cite this article: Peter McCawley (2015) INFRASTRUCTURE POLICY IN INDONESIA, 1965–2015: A SURVEY, Bulletin of Indonesian Economic Studies, 51:2, 263-285, DOI: 10.1080/00074918.2015.1061916
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ISSN 0007-4918 print/ISSN 1472-7234 online/15/000263-23 © 2015 Indonesia Project ANU http://dx.doi.org/10.1080/00074918.2015.1061916
Fifty Years of
BIES
INFRASTRUCTURE POLICY IN
INDONESIA, 1965–2015: A SURVEY
Peter McCawley
The Australian National University
This survey, irst, provides an overview of the main developments in the infrastruc
-ture sector in Indonesia during the past ive decades and, second, considers what the main policy and management bottlenecks in infrastructure appear to be. The over
-view of main developments indicates that, in broad terms, most parts of the sector have expanded considerably but that the needs remain acute for further expansion
and for attention to the maintenance of existing facilities. Demand for infrastructure is high, especially since the regulated prices set for infrastructure services are often
low. Access is often dificult, however, because of shortages of infrastructure, and quality is often unsatisfactory because of poor maintenance and indifferent man
-agement. These problems of access are exacerbated by the regulation of prices. This overview also points to the markedly different performances of industries in which pro-competitive policies have been applied and those in which more traditional policies of close regulation have restricted the operation of markets.
Keywords: infrastructure, regulation, law, prices, markets, land, inance JEL classiication: L51, L90, L97, L98
INTRODUCTION
Infrastructure plans and policies in Indonesia are a bewildering kaleidoscope of promises, underfulillment, delays, and outright cancellations. The various indus -tries (transport, power, water, telecommunications, and so on) within the sector
operate largely as silos, with little coordination between them; central, provincial, and district governments house a myriad of policymakers and regulatory agen
-cies; and, because engineers and oficials who believe in planning tend to domi
-nate policy-making circles, economic principles are often brushed aside in the
design of infrastructure policy.
This survey of infrastructure policy in Indonesia will draw in particular on
relevant material published in the Bulletin of Indonesian Economic Studies (BIES)
since its irst issue, in 1965. It will cover the main developments in the sector dur
-ing the past 50 years and discuss the main policy and management bottlenecks holding back growth in infrastructure in Indonesia. Two matters need to be noted
at the outset. First, infrastructure policy is currently a top concern for economic
policymakers—ministers and oficials alike—in Jakarta. President Joko Widodo, in his irst few months in ofice, announced major proposals for the infrastruc
-ture sector: he abruptly cancelled tentative but long-standing plans to build the large ($20 billion) Sunda Strait Bridge; he unveiled a number of projects to expand ports across Indonesia, consistent with his emphasis on the country’s maritime development; and he said he planned to add 30,000 megawatts of capacity to the generation industry. A range of other projects in other industries have been put
forward in recent months.
These announcements have raised expectations for a burst of activity in the
Indonesian infrastructure sector, while other events in the region have empha-sised the need to pay closer attention to infrastructure in developing countries
in Asia. The imminent establishment of China’s multilateral Asian Infrastructure Investment Bank, for example, has attracted strong international interest.
Second, few of the main issues in infrastructure policy that attract widespread
comment today are new. The basic problems were discussed in early issues of BIES, in its Survey of Recent Developments series. Yet it is striking how little pro
-gress has been made over the last 50 years in tackling these problems; the actual development of infrastructure has been signiicant yet insuficient.
FRAMEWORK
Infrastructure policy is complex. Senior policymakers in government need to avoid becoming too closely involved in the details of management; they should concentrate mainly on designing the overall frameworks for policy in each indus
-try. Perhaps the key challenge in inding the balance between these two consid
-erations is to design effective, industry-speciic regulatory arrangements.
It is useful to have a framework when evaluating infrastructure policy. As a irst step, it is helpful to deine infrastructure. This article uses a slightly amended version of the deinition suggested by Wharton (1967): infrastructure is the physi
-cal capital and the institutions or organisations, both public and privately owned, that provide economic services and have a signiicant effect, directly or indirectly, on the economic functioning of economic actors (both individuals and irms) but
are external to each actor.
Many factors inluence demand and supply for infrastructure (igure 1).1 The details vary from industry to industry, but on the demand side in Indonesia there are often several distinct markets for infrastructure services. On the one hand,
there is a demand from different types of consumers (household, industrial, com-mercial, and others) in the modern, formal sector of the economy. On the other hand, there is also a demand from small-scale consumers.2
On the supply side, a number of related but separate policy issues exist. Financial concerns naturally loom large for senior policymakers. Technical requirements,
1. The discussion here draws on an earlier article (McCawley 2010).
2. Small-scale consumers of infrastructure services are an important part of the overall
infrastructure market in Indonesia. However, they are generally neglected by large-scale, often state-owned suppliers in the formal sector (see McCawley 2010).
including access to land, often limit the options for the supply of services. Matters
of governance and internal management need close attention. Safeguards such as environmental and social standards affect community expectations. And there
are wider policy considerations as well, such as the overall framework of political,
regulatory, and legal issues within which infrastructure sectors must operate, and
the broad inancial and economic constraints—including pricing policies—set
down for infrastructure industries.
As igure 1 shows, it is inevitable that many issues in the infrastructure sector in Indonesia will be contested by many interest groups. On the demand side, larger consumers of infrastructure services in the formal sector can be expected to
press for increases in supply. Smaller consumers, many of whom are in the infor-mal economy, often resort to imaginative, ad-hoc measures to gain access to
infra-structure. On the supply side, there is a push-and-pull between policymakers and other actors involved in different sectors. Further, the regulatory framework in Indonesia is not well established. Institutional decisions—such as those of the
parliament, the executive, or the Constitutional Court, if not those of local govern-ments—can cause much uncertainty for actors in infrastructure operations.
POST-INDEPENDENCE
There was relatively little growth in the infrastructure sector during the 1950s and
into the 1960s. The previous decades of the 1930s and 1940s had, of course, been dificult ones. Important parts of Java had been well served by the transport and
FIGURE 1 Framework of Policy Issues in the Indonesian Infrastructure Sector
Demand Supply
Household
Industrial
Commercial
Financial issues
Governance & management
Environmental issues
Maintenance & sustainability Price
Subsidy issues
Internal resources (prices)
Private Public
Technical issues Engineering Land
Domestic Foreign
Domestic Foreign
Othera
Overall political, regulatory, & legal issues for the sector
Source: McCawley (2010).
a Includes social and government consumers, for example.
other communications sectors at the beginning of the 20th century,3 but services
in the railways and most other parts of the transport industry steadily declined in
the following decades. By the late 1950s, the dilapidated transport network added considerably to the costs of transporting rice and to the losses within the market
-ing network. A good deal of rice was transported through simple infrastructure systems (carts, carrying-poles, and bicycles) on unsealed tracks. Trains and trucks
carried food supplies to the main cities in Java, while in Sumatra and Kalimantan
considerable use was made of waterways (Mears 1961).
To be sure, President Sukarno had on various occasions announced major infra -structure plans during the 1950s and 1960s. But too often, as on many occasions
since then, ambitious infrastructure plans were not supported with the resources needed. By the beginning of the New Order period, most infrastructure across the nation had long been neglected.
ROADS AND MOTOR TRANSPORT
In the early 1970s, a revolution in road transport began. As the road network grew, and as the economy became more open to foreign investment and imports, a remarkable structural transformation in the road transport system began to occur. Traditional forms of public transport, such as the becak (trishaw) and dokar
(horse-cart), found it hard to compete with the swelling numbers of buses and small pick-up trucks (often called ‘colts’) appearing on the roads (Booth and McCawley 1981, 8). Indonesian consumers also quickly took to the use of light motorcycles produced by well-known Japanese suppliers such as Yamaha, Honda, and Suzuki. Into the mid-1980s, the numbers of both trucks and motorcycles on Indonesian roads grew by well over 12% per year, signiicantly faster than the economy and the population (table 1).4
These developments were transformative of what is now called ‘connectivity’ in Indonesia. The cost and convenience of both local journeys and long-distance intercity travel improved dramatically. Workers from previously isolated rural areas in Java, such as Gunung Kidul, in Yogyakarta, increasingly took up con
-struction jobs as far aield as Jakarta or even South Sumatra (Dick 1981b, 88).
Circumstances in the outer islands, however, were varied. In some places, rapid
changes took place. In North Sumatra, for example, the road system improved
greatly during the 1970s (Ginting and Daroesman 1982, 71). But in other places, especially in eastern Indonesia, there was less improvement.
3. In a survey of competition between the railways and other modes of transport at the time, Dick (2000, 187) observes that Java, by 1900, already had ‘a sophisticated agro-industrial economy integrated by overlapping networks of telegraphs, telephones, rail
-ways, narrow-gauge tramways and good roads. Nowhere in Southeast Asia could boast better infrastructure. Elsewhere in East Asia, only Japan could compare’.
4. The tables in this article draw on various editions of Statistik Indonesia (BPS 1970–2013a),
whose data are not always consistent or complete. All possible care has been taken to en
-sure accuracy of data in this article. In a few cases, to bridge gaps, extrapolation has been necessary to prepare a full data series. The data shown in the tables are taken to relect the rising demand for better infrastructure in Indonesia.
TABLE 1 Motor Vehicles and Economic Change in Indonesia, 1970–2013
1970 239 24 103 440 292 116 2,513
2013 11,485 2,286 5,615 84,732 2,769 249 11,121
Average annual growth (%)
1970–1975 9.9 7.8 14.0 22.1 6.7 2.3 4.2
1975–1980 10.8 19.7 19.3 17.5 7.2 2.4 4.6
1980–1985 9.2 21.4 12.3 12.4 3.1 2.1 0.9
1985–1990 5.8 15.6 3.9 4.9 7.1 1.8 5.2
1990–1995 9.9 8.0 5.5 8.3 7.8 1.5 6.2
1995–2000 7.6 –0.7 5.0 8.4 0.5 1.5 –1.0
2000–2005 12.6 12.2 11.3 16.1 4.7 1.5 3.2
2005–2013 9.7 8.6 8.5 14.6 5.9 1.5 4.4
1970–2013 9.4 11.2 9.8 13.0 5.4 1.8 3.5
Sources: Data on registered motor vehicles from BPS (1970–2013a)—see footnote 4. Data on GDP and population from Van der Eng (2010), updated to 2013 with data from national accounts and from BPS
(2013b).
The rapid expansion of oil production since the late 1960s and the rise of oil
prices during the 1970s yielded a signiicant increase in public revenue. Around the same time, Indonesia’s increasing export earnings qualiied it for additional
foreign loans. Both revenue sources helped fund road and infrastructure pro-grams in the 1970s and 1980s. Throughout the 1980s, real investment in roads
continued to grow at a strong rate of around 7% per year (table 2).
Faced with a tightening iscal situation at the end of the 1980s, policymak
-ers began looking for other ways to inance infrastructure spending. A growing acceptance of the need to mobilise private-sector investment was relected in poli -cies on roads and other main parts of the infrastructure sector. Throughout the
1990s, arrangements such as management contracts and joint ventures between state enterprises and large private irms were entered into for such projects as toll-roads, which involved build–own–transfer and build–own–operate contracts. Partnerships of this kind did not always go smoothly, however, and tendering processes sometimes lacked transparency (Hill 1996, 185).
Investment in roads fell sharply after the 1997–98 Asian inancial crisis. Between
the mid-1970s and the mid-1980s, real investment in local roads at the district
level (relected in the length of roads) had grown by almost 10% per year. Between
1995 and 2005, it slumped to less than 2% per year. One of the much-discussed
features of this slowdown in investment has been the increasing trafic congestion in Java, and especially in Jakarta (Thee and Negara 2010, 304). Demand for road
space in Indonesia has grown much more rapidly than supply. The total length
of roads across the country between 1970 and 2013 grew by slightly more than 4% per year (table 2). In the same period, the number of motor vehicles grew by
around 12% per year. Greater reliance on railways, particularly in Java, would
seem to be urgently needed in the coming decades.
RAIL TRANSPORT
By the beginning of the 1970s, the rail industry had suffered from decades of neglect. The main central railway stations in Jakarta—such as downtown Kota, Gambir, Pasar Senen, and Jatinegara—were chaotic, while the trains themselves were badly maintained. In Central Java, it was reported that the railways were
required to maintain uneconomic routes for social reasons and that revenues
had continued to decline ‘mostly owing to non-payment of fares by the military’
(Partadireja 1969, 39).
In the outer islands, the neglect of the rail industry was, if possible, even more marked. In West Sumatra’s railway system, passenger trafic had declined sharply
in the late 1960s, and more than half of the passenger equipment was more than 70 years old (Esmara 1971, 51). In Aceh, most of the locomotives, which were
wood-ired, were more than 80 years old. The railway had been running at a large
loss for many years (Boediono and Hasan 1974, 50). It ceased operations, in effect, in the early 1970s.
During the next several decades, the industry had mixed fortunes. After a
sharp decline in passenger trafic in the early part of the 1970s, there was a recov -ery and then a generally steady growth in demand. Over the period 1970–2013,
total passenger trafic—almost all of which was in Java—increased at the modest but sustained rate of 3.5% per year (table 3).
TABLE 2 Length of Roads, 1970–2013
State Province District Total
Length of roads (’000 kilometres)
1970 10.2 22.7 51.4 84.3
2013 38.6 53.6 410.5 502.7
Average annual growth (%)
1970–1975 2.1 4.4 4.9 4.4
1975–1980 1.9 3.7 9.0 6.9
1980–1985 0.2 2.9 9.2 7.2
1985–1990 10.0 –0.1 8.1 6.8
1990–1995 3.5 –0.4 2.9 2.5
1995–2000 1.9 4.2 1.3 1.7
2000–2005 5.6 –3.0 1.4 1.2
2005–2013 1.4 3.7 3.9 3.6
1970–2013 3.1 2.0 5.0 4.2
Source: Data from BPS (1970–2013a)—see footnote 4.
The recovery of passenger trafic relected ongoing attempts to improve the overall management of the rail system. These efforts became especially noticeable after the decision was taken in the early 1970s to electrify the system in parts of Java. Main railway stations across Java became much better organised and main
-tained. Nevertheless, despite signiicant improvements, major problems remain. One is the inancial challenge facing state-owned PT Kereta Api Indonesia (KAI).
Prices for railway services, especially passenger travel, are still very low and do
not cover the full costs. PT KAI must therefore rely on uncertain subsidies from the central government. It is dificult for PT KAI to increase tariffs, because of the universal expectation in Indonesia that railway services be provided at low cost, and because of cut-throat competition from operators of high-risk bus and truck transport. These operators often do not cover the full costs of their use of
the road system (Jakarta Post, 29 Sept. 2010, 8 Dec. 2011). Another challenge is the urgent need to fund large investments in other parts of the railway system, most
of which is still badly neglected. Many of the main lines in Java remain single track, and most are in need of repair. The main line in the eastern part of East Java, from Surabaya to Banyuwangi, is still single track, for example.
Looking ahead, it would seem that a resurgence of the rail industry is needed. Signiicant plans for increased investments were listed in the government’s 2011 master plan for Indonesia’s economic development (Coordinating Ministry of Economic Affairs and Bappenas 2011). In Java, road-trafic density often seems close to breaking point, and in parts of the outer islands there is a growing need
for expanded rail services to transport goods, especially coal, to ports for export or for use in Java.
TABLE 3 Railway Trafic, 1970–2013
Passengers (million) Freight (’000 tonnes)
Java Sumatra Total Java Sumatra Total
1970 46.0 4.0 50.0 2.7 1.3 4.0
2013 211.3 4.0 215.3 8.3 18.5 26.8
Average annual growth (%)
1970–1975 –15.3 –9.0 –14.8 0.0 1.5 0.5
1975–1980 13.7 8.7 13.2 2.1 6.3 3.6
1980–1985 3.0 –6.6 2.2 1.3 13.0 6.5
1985–1990 4.9 –3.2 4.5 8.9 16.8 13.3
1990–1995 20.5 1.7 19.9 4.5 7.3 6.2
1995–2000 5.8 9.3 5.8 –0.7 4.7 2.9
2000–2005 –4.6 –4.5 –4.6 –5.7 –1.1 –2.4
2005–2013 4.5 3.2 4.5 8.3 4.6 5.6
1970–2013 3.6 0.0 3.5 2.6 6.4 4.5
Sources: Data from BPS (1970–2013a)—see footnote 4. GDP and population data from Van der Eng
(2010), updated to 2013 with data from national accounts and from BPS (2013b).
AIR TRANSPORT
Like other parts of the infrastructure sector in Indonesia, at the end of the 1960s the
airline industry was in a neglected state. The state-owned PT Garuda Indonesia Airways had a near-monopoly in the main domestic routes, and international
car-riers did not see Indonesia as an encouraging market. Prospects for the industry began to pick up quickly, however, as overall economic conditions improved. In
recent decades, air services in Indonesia have expanded rapidly. Over the period
1970–2013, both domestic and international services grew by around 10% per year (table 4)—signiicantly faster than the economy. Indeed, developments in the airline industry over the past ive decades provide useful lessons on competi
-tion policy for other parts of the infrastructure sector. For most of the irst three decades, an inward-looking, protectionist approach inluenced Indonesian policy
towards regulation of the industry. The situation changed dramatically after the
1997–98 inancial crisis, when much more vigorous competition became the norm
in Southeast Asia.
Despite the restrictions on expansion imposed by the dominance of Garuda, growth during the 1970s, beginning from a low base, was very rapid. Across Indonesia, regional airline services improved markedly, greatly facilitating ofi
-cial and business travel and boosting tourism in well-known centres such as Bali and Yogyakarta. In Yogyakarta, the number of lights to Jakarta operated by main airlines expanded from four per week in 1968 to four per day in the late 1970s (Hill and Mubyarto 1978). Throughout the decade, domestic passenger trafic grew by around 20% per year (table 4).
TABLE 4 Air Trafic, 1970–2013
Domestic International
Source: Data from BPS (1970–2013a)—see footnote 4.
This burst of growth in domestic air travel slowed somewhat during the 1980s, relecting a slowdown in the Indonesian economy and a reluctance by regula -tors to encourage competition in the industry. There was later a recovery into
the 1990s, until the 1997–98 inancial crisis led to a short but sharp contraction in
domestic and international air services in Indonesia.
The 1997–98 crisis forced reform in the industry, both in Indonesia and in other parts of Southeast Asia (Damuri and Anas 2005). Deregulation and liberalisa
-tion allowed the entry of new, low-cost carrier irms such as Lion Air, Adam Air, and Citilink (a Garuda subsidiary), which were soon competing vigorously and transforming the airline business in Indonesia. Domestic passenger trafic, espe
-cially, began to expand rapidly. In the decade to 2013, the number of domestic passengers grew by around 15% per year, rising from 18.1 million to 73.9 million. Many of the main airline terminals across Indonesia are now packed for much of the time. In Jakarta, in 2011, more than 51 million passengers passed through Soekarno–Hatta airport, around 130% above the original capacity of 22 million
planned in 1985 (Jakarta Post, 3 Aug. 2012).
SHIPPING
The shipping industry, including ports, is part of Indonesia’s connectivity sys
-tem. Three dimensions of connectivity are relevant in Indonesia’s water transport industry: intra-island connectivity, interisland linkages, and international trans -port arrangements (Baird and Wihardja 2010, 159).
In some parts of the outer islands, water transport systems provide the most important form of intra-island connectivity. In South Kalimantan, for example,
‘rivers and canals . . . are like roads and highways in Java’ (Partadireja 1970). In
Riau, a province in southern Sumatra, most of the towns and most of the
popula-tion are located along 15 navigable rivers, so the local system carries large vol -umes of cargo and passengers.
Interisland and international shipping systems, which often rely on substan
-tial port facilities, attract more attention from policymakers than do the smaller intra-island links. In the late 1960s, the sailing time of ships was said to be greatly limited because many ports were silted up, and it was reported that only 30% of navigation buoys worked (Panglaykim, Penny, and Thalib 1968, 23).
As was the case in other parts of the infrastructure sector, the use of shipping services recovered during the 1970s and strengthened during the latter part of
the 1980s and into the next decade (table 5). But the 1997–98 crisis and the subse -quent prolonged slowdown had a severe impact on shipping. It was not until the
Indonesian economy began to return to higher rates of growth, around 2007, that the level of activity in the industry showed a marked improvement.
Competition and regulation have been central topics of much of the policy dis
-cussion about shipping in Indonesia. In the late 1960s, costs, prices, and competi
-tion arrangements all contributed to high levels of ineficiency in the shipping industry (both in the use of ships and in the ports). At the time, as in the succeed -ing decades, three issues were frequently mentioned as need-ing attention.
First, the levels of costs and prices in the industry were a subject of constant
comment (Ray 2003, 262). Domestic freight rates in Indonesia were very high: the
cost of shipping cement by sea from Gresik (near Surabaya) to Jakarta, for exam
-ple, was higher than from Tokyo to Jakarta. Second, the competitive arrange
-ments in the industry did not encourage orderly and eficient market conduct.
Sometimes there was unfair competition from non-commercial vessels such as naval or other government-owned ships. At other times, nationalist and protec-tionist ideas restricted entry.5 Third, the shipping industry was hampered by poor management and by the existence of a myriad of local payments that needed to be made in the ports.
These ineficiencies in the ports, bureaucratic delays, and informal payments are universally regarded as unacceptable but are apparently hard to overcome. They remain major problems in the Indonesian shipping industry.
ELECTRIC POWER
In the early 1970s, much of Indonesia was still very poorly served with electricity
from the national electricity company, Perusahaan Listrik Negara(PLN). Across
the nation, a good deal of electricity was generated by the private sector, either by the larger private manufacturing irms or large hotels (mainly for their own
5. In a discussion of Law 17/2008 on Shipping, Dick (2008, 404) surveyed the shipping regulations and concluded that ‘the extra costs of ineficient Indonesian-lag ships have to be borne as a tax on the nation’s trade’.
TABLE 5 Sea Cargo Handled in Ports, 1970–2012
Interisland Foreign
Loaded Unloaded Loaded Unloaded
Total cargo (megatonnes)
1970 9.5 11.9 21.6 4.4
2012 312.6 327.7 488.2 69.6
Average annual growth (%)
1970–1975 8.1 8.0 19.8 15.9
1975–1980 7.7 10.4 2.5 3.6
1980–1985 12.8 10.6 –1.9 7.6
1985–1990 13.4 13.1 14.8 10.4
1990–1995 20.8 9.1 3.8 22.8
1995–2000 –6.5 0.2 1.4 –9.2
2000–2005 3.3 3.4 2.6 2.3
2005–2012 11.0 10.5 17.2 4.7
1970–2012 8.7 8.2 7.7 6.8
Sources: Data from BPS (1970–2013a)—see footnote 4. For selected years (2000–2004, 2007, 2008, and
2011), data were taken from the CEIC Indonesia Premium Database.
Note: Annual estimates for the years between 1970 and 1974 for interisland cargo were calculated by
projecting the GDP growth rate for 1975 backwards, and those for foreign cargo by projecting real growth of exports and imports for 1975 backwards.
consumption) or by plantations and estates in some rural areas. All sorts of substi
-tutes for a reliable public supply were used as well. In late 1972, when widespread power cuts occurred more frequently in Jakarta than they do now, prices of can
-dles, portable generators, kerosene, and pressure lamps rose by as much as 50%. These increases affected many Jakarta citizens, most of whom at that time were
not even connected to the formal electricity supply.
Total installed capacity in the public electricity system in Indonesia in the late 1960s was less than 700 megawatts and production was less than 20 kilowatt hours per person (compared with around 7,000 kilowatt hours per person in the United States in 1970). In reality, more than 70 years after public supplies of elec
-tricity were irst introduced in Indonesia in the 1890s, only a small proportion of
the Indonesian population had access to electricity. During the 1970s, however,
the World Bank and the Asian Development Bank supported investments in electric power projects, beginning from a modest base (Thompson and Manning 1974). Both capacity and output grew by around 15% per year during 1970–80 (table 6).
Investment in the expanding power industry was partly inanced out of domes
-tic resources but often drew on international funding of one sort or another, such as support provided by multilateral investment banks or export credits. The large,
600-megawatt Asahan power plant and aluminium smelter in North Sumatra,
opened by President Soeharto in 1982, involved a total investment of around $2 billion. The bulk of the inance was provided by a group of Japanese private com -panies and the Japanese government (75%), while the remaining funding was
provided by the Indonesian government (Ginting and Daroesman 1982, 68).
In addition to capacity and output growth in electric power during the 1980s, there were two other developments in the industry. First, increasing attention
was given to rural electriication. Access to electricity in rural areas of Indonesia was extremely low during the 1970s. A rural electriication program in Bali in the
TABLE 6 Public Supply of Electricity Capacity and Output, 1970–2013
Capacity (megawatts)
Output (gigawatt hours)
1970 657 2,084
2013 47,223 213,750
Average annual growth (%)
1970–1975 14.3 12.6
1975–1980 14.8 17.5
1980–1985 17.1 15.0
1985–1990 10.1 15.9
1990–1995 10.4 9.1
1995–2000 8.7 11.2
2000–2005 –0.2 6.0
2005–2013 9.7 7.0
1970–2013 10.5 11.4
Source: Data from BPS (1970–2013a)—see footnote 4.
1970s had proved successful (Bendesa and Sukarsa 1980, 48) and had encouraged
PLN to consider using similar approaches elsewhere. By the late 1970s, PLN and
other donors were actively supporting rural electriication programs in various parts of Indonesia (McCawley 1978, 61).
Second, structural change was occurring within the industry. In the late 1980s, as on many occasions since then, the Indonesian government pointed to the
pos-sibility of expanding the gas industry to support electricity production. But in the event, this proved dificult: there was already an increasing reliance on coal (Conroy and Drake 1990, 14). For example, the large, 4,000-megawatt electricity plant at Paiton, in East Java, built during the 1990s, is coal-ired (Wells 2007).
The 1990s brought two further major changes in the industry’s operating envi
-ronment. The irst was the announcement of ambitious plans to open the indus -try to private investment. By the late 1990s, more than 20 private companies had
expressed interest in building power stations, especially with an eye to providing
power to industrial consumers. Reporting on these developments, Soesastro and Drysdale (1990, 29) noted that ‘similar schemes for private sector participation in
the development of infrastructure are also being considered in the management of container terminals in a number of Indonesian ports’.
This emphasis on private investment came at a cost. Concerns about debt lev
-els, especially levels of foreign private debt, soon became signiicant (Muir 1991, 3). In mid-1991, the governor of Bank Indonesia, the central bank, reported to par
-liament that the country’s offshore commercial loans in March of that year stood at $16 billion, up by $10 billion from a year earlier. Concerns that the rising levels of debt were related to doubtful investments in infrastructure were a harbinger of the problems that would emerge in the power industry at the end of the decade
(Wells 2007).
In the 1990s, Van der Eng (1993, 26) noted that the government was looking for large-scale investments from the private sector but that private-sector invest
-ment had not proceeded quickly, ‘because there is as yet no satisfactory outcome
to negotiations over pricing. . . . If the price PLN pays itself is too low, electricity
generation will not be proitable—and therefore not of interest—to private irms’. Kristov (1995, 73) observed that ‘price has become a controversial issue—both the retail price private producers would charge the public, and the wholesale price at which they would sell in bulk to the state utility, PLN’. After a careful analysis,
Kristov concluded that the cost of supplying electric power during most of the
1980s was more than 40% higher than PLN’s average sales revenue.
The second major change to affect trends in the power industry during the
dec-ade was the 1997–98 Asian inancial crisis. The crisis caused a sharp depreciation in the value of the rupiah, harming the revenue lows and balance sheets of many companies across Indonesia. Nowhere was this more marked than in the power industry; it became clear that the strategy of the early 1990s of relying on private foreign investment to fund the expansion of power plants was seriously lawed
(Wells 2007).
The dificult experience during the 1997–98 crisis had a lasting inluence on the approach of policymakers towards infrastructure policy during 2000–2010. On coming to ofice in 2004, the administration of President Yudhoyono responded to the infrastructure shortages in several ways, including by setting speciic tar -gets for expansion for each industry. In the electric power industry, for example,
two 10,000-megawatt fast-track programs to expand generating capacity were announced, the irst in 2006 and the second in 2010. This approach of setting tar
-gets, however, had limited success: there were delays, and both programs pro -ceeded rather more slowly than expected.
TELECOMMUNICATIONS
Telecommunications has been one of the most dynamic industries in Indonesia
during the past 50 years. Developments in the industry have gone through four distinct phases.
In the irst phase, during the 1970s and 1980s, telecommunication facili -ties expanded rapidly as new technologies, such as interisland microwave
systems and, from 1976, the Palapa communication satellites owned by Telecommunications provider PT Indosat, were used to expand links across the country, supplementing the overland and submarine cable systems. Supply long struggled to keep up with demand. In the main urban areas, such as Jakarta
and Bandung, shortages of telecommunication facilities were acute (Grey 1984).
Nevertheless, the use of both domestic and international telephone connections increased rapidly (table 7).
The second phase began in 1989, when private participation, through public– private partnership arrangements, was permitted in the ixed-line industry, relect
-ing the broad trend of encourag-ing private-sector participation in infrastructure (Lee and Findlay 2005). In the event, this phase of market-oriented reform was unsuccessful. The contract-based partnerships system provided only short-term solutions for the acute lack of capacity.
TABLE 7 Telephone Calls, 1970–2010
Domestic ixed line
(billion pulses)a (million minutes)International
1970 400 1
2010 8,200 2,362
Average annual growth (%)
1970–1975 17.6 23.8
1975–1980 32.0 22.7
1980–1985 8.8 20.9
1985–1990 13.4 27.7
1990–1995 22.3 21.4
1995–2000 –8.1 10.6
2000–2005 4.4 8.9
2005–2010 –14.2 35.2
1970–2010 7.8 21.1
Source: Data from BPS (1970–2013a)—see footnote 4. Estimates for 2001–4 are interpolated between 2000 and 2005, assuming a constant growth rate of 8.9% over the period.
aFixed-line telephony, excluding calls made via mobile telephone.
A third period of reform began in 1999, when Law 36/1999 on Tele communica
-tions established a revised framework for opera-tions. A duopoly structure was created in ixed-line operations, accompanied by a wider, pro-market approach. These reforms acknowledged the importance of competition and of a sound regu
-latory regime, although there were still limits on market entry.
Under the revised framework, a fourth and very dynamic stage has emerged in recent years. New telecommunication technologies have looded into Indonesia, within a highly competitive market structure. Local irms such as Telkomsel, Indosat, and Mobile-8 (Smartfren), supported by multinational companies such as Samsung, LG, and Nokia, are now prominent in the market, offering all kinds of discounts on mobile phones and advertising widely. Customers are moving away from the old ixed-line system—table 7 shows that the use of domestic ixed-line calls dropped sharply during 2005–10—and taking up mobile phones with enthusiasm. Internet use has expanded rapidly as well (table 8).
These recent developments illustrate the gains that can be made in the infra
-structure sector when an appropriate regulatory regime is established. Perhaps the main lessons from the burst of growth in telecommunications in Indonesia during the past decade are the importance of encouraging markets to work, of
facilitating the entry of new technology, and of attracting new investment. Careful
market design, relying on an effective regulatory regime, is needed to enable
capital-intensive infrastructure industries such as telecommunications to develop
quickly (Magiera 2011).
WATER, SANITATION, AND IRRIGATION
The management of water and sanitation remains one of the most pressing issues
in infrastructure policy in Indonesia. Yet it is extremely dificult to tackle the prob
-lems in the industry, because attention to cost recovery is often considered irrel
-evant (Asian Development Bank 2012, 8). The results are widespread. Access to potable water from municipal water supplies is extremely limited, so elite con
-sumers opt to rely largely on expensive bottled water. Frequent looding occurs in both urban and rural areas during rainy seasons. Adequate public sanitation
services are almost non-existent in many parts of Indonesia. And irrigation policy poses many challenges.
The 1970s saw some improvements in municipal water supply. However, as was the case in other parts of the infrastructure sector, institutions in the formal
sector—such as modern hotels, large factories, and some elite residential establish
-ments—relied little on the public system, preferring to install their own systems.
TABLE 8 Households with Access to Telecommunications, by Technology, 2009–12 (%)
Fixed-line telephone
Mobile
telephone Internet
2009 10 62 12
2012 6 84 31
Source: Data from BPS (1970–2013a)—see footnote 4.
During the next few decades there were attempts to improve the public supply system by strengthening the extensive urban network of local water-supply establishments, or Perusahaan Daerah Air Minum, of which there were more than 300. But these establishments were constrained by bureaucratic con
-trols and by enforced low prices. Across Indonesia, much of the population opted out of any relationship with the public system, choosing instead to rely on infor -mal water suppliers and on natural supplies of water. In rural areas, even in s-mall towns, much of the population depended on springs and wells. This is hardly
sur-prising, because simple local systems often provide better and more cost-effective supplies of water than larger systems (Perkins 1994).
Attention to large-scale sanitation services has been similarly lacking for many
decades. Communities resist paying for services that they have come to expect
public agencies to provide for free. Government agencies have therefore found it dificult to raise monies to fund public sewerage systems. In urban areas, pri
-vate septic facilities are widely used, but their installation and maintenance are
poorly regulated. Serious externalities in the form of environmental and health
problems are liable to occur. Frequent looding during rainy seasons is another major water-management issue. Every few years, large-scale looding in Jakarta leaves up to 1 million people needing temporary refuge. Widespread looding in other areas of Indonesia receives less publicity but imposes great social and
economic costs.
Managing irrigation and drainage systems has been vital to Indonesia’s agri -cultural economy since the 19th century. After independence in 1945, attempts
were made to expand the irrigation system but existing systems were neglected. As Booth (1977, 50) noted, ‘the systems laid out by the colonial government dur
-ing the prewar period fell into an almost unchecked decline between 1940 and 1968’. During the 1970s, agricultural development programs supported by for
-eign donors and the Indonesian government provided funding to rehabilitate and expand irrigation networks, particularly in Java and Bali. The eficiency of irriga -tion systems depends crucially on the extent to which opera-tion and maintenance are extended downstream to the tertiary levels of the systems (Van der Eng 1996, 41, 156). Special attention was also given to the expansion of irrigation facilities
in the outer islands, to support the national transmigration programs being pro -moted at the time.
Signiicant efforts were made during the 1980s to expand the irrigation sys -tem. Between 1969 and 1994, irrigation systems serving 2.5 million hectares were
rehabilitated and 1.7 million hectares of new irrigation systems were developed. However, inancing maintenance activities continued to be dificult. Around 60% or more of operation and maintenance budgets were reported as having been spent on staff costs, leaving little available for routine maintenance (Vermillion, Lengkong, and Atmanto 2011, 2). More recently, since the 1990s, discussion about investment priorities in the irrigation industry has been closely linked to plans for food security. One view is that food security can be strengthened by the develop
-ment of major food-growing areas in the outer islands. But the economic feasibil -ity of large investments in new irrigation projects in the outer islands depends,
in turn, on the economic feasibility of new food estates outside Java. Under these circumstances, the development of large irrigation projects of this kind is fraught
with uncertainty.
CONSIDERATIONS FOR INFRASTRUCTURE POLICY
It is clear from this survey of developments across the infrastructure sector during
the past ive decades that a wide range of issues need to be considered in formu
-lating infrastructure policy in Indonesia (igure 1).
Demand
Policymakers in Indonesia have rarely been prepared to address community expectations about the supply of infrastructure services. The idea that utilities should not be run for proit but should instead serve the public underpins the
expectation of low prices for utilities. Populist political leaders have often
encour-aged consumers to expect that utility services (often referred to as a basic need) be provided at subsidised prices. The sources of these subsidies are rarely directly mentioned, but it seems clear that advocates of low prices believe that the subsi
-dies should be paid for by the government, or by the (mostly) state-owned utili
-ties providing the infrastructure services, or perhaps, in one way or another, by
the private sector.
Related to the idea that utilities should serve the public is the distinction between the provision of services to small and large consumers. The market for providing utility services to small consumers in Indonesia is very large. Many
authors writing in BIES about the infrastructure sector have referred to the vari -ous challenges of providing services to consumers in the small-scale and informal
economy (Dick 1975a, 1975b, 1981a, 1981b; McCawley 1978; Gibson 1986; Hughes 1986; Munasinghe 1988; Perkins 1994). However, the larger utilities in the formal state-owned sector ind it very dificult to reach out to this market. Until formal
institutions such as the large state-owned utility enterprises can design programs
to reach out to the informal economy, they will continue to be seen as alien to the
needs of ordinary rakyat (people).
Supply
No single constraint holds back the supply of infrastructure in Indonesia. Rather, numerous issues combine to constrain growth.
Finance
Investors and inancial specialists in Jakarta often say that money is not the problem holding back infrastructure development in Indonesia. They argue that it is usu
-ally not dificult to raise funds for infrastructure activities in Indonesia—whether from banks or from bond issuers—provided that the borrowers provide appropri
-ate guarantees to the inanciers. They suggest that as long as technical problems,
such as those of project design and land access, and pricing arrangements are
clari-ied in a satisfactory way, inance will be forthcoming from the markets.
In a detailed survey of Indonesia’s experience with private investment in the
power industry in the 1990s, Wells (2007) provides a more sceptical view. He traced
the processes between 1990 and 1997 by which PLN signed 26 agreements with
private investors for generation projects. The investments represented around
11,000 megawatts and provided at least $13 billion of investment. But when the 1997–98 crisis struck, those arrangements quickly ran into trouble, because PLN’s revenue lows were in rupiah while its obligations were in US dollars. Extended contract disputes broke out when PLN tried to renegotiate the terms of the deals
agreed to with foreign investors. Wells notes that the whole process of raising
private inance and entering into long-term arrangements with foreign investors was dificult for PLN, and concludes that ‘private ownership of generating capac
-ity is not the only possibil-ity, nor should it be a goal in itself. . . . If Indonesia can do no better in new arrangements, privatization is simply too costly. Borrowed funds and state ownership, with all their problems, would be preferable’ (362).
Technical Issues
There is no doubt that there is a shortage of well-prepared and well-documented projects in Indonesia available for investors to examine. This shortage became
clear around the time of several infrastructure summits during the period of the Yudhoyono administration. The details of projects provided to potential
inves-tors at these summits were often very slim. In some cases, websites purporting to provide data on large projects turned out to be blank. In the event, the response to the summits was disappointing. Hardly any of the projects offered at the irst summit were taken up, and at the second summit, ‘although potential investors . . . generally showed wary optimism, most opted for a wait-and-see approach’ (Lindblad and Thee 2007, 26).
A lack of detailed project data was also apparent in the government’s master plan for Indonesia’s economic development (Coordinating Ministry of Economic Affairs and Bappenas 2011). The master plan provided a strategic framework for
infrastructure investment across Indonesia, with an emphasis on supporting the
development of economic corridors. It contained a pipeline of possible projects, but detailed supporting project proposals were often not available in the imple -menting sectoral ministries.
A related technical issue concerns access to land. Policymakers in Indonesia recognise that a lack of access often delays project construction. In recent years, a range of steps have been taken to try to make it easier to obtain land for infrastruc -ture development, including promulgating a new land law. Implementing the law
has proved dificult, however; legal clarity in obtaining access to land is often lacking. Henderson, Kuncoro, and Nasution (1996) discussed land access in their survey of development problems in Jabotabek (Jakarta, Bogor, Tangerang, and Bekasi). They pointed to very poor land market institutions of ‘weakly deined property rights, particularly for traditional low income residents’ and ‘complete lack of active land use planning’ (71) as major problems.
It seems clear that uncertain land titling is a major disincentive for investors.
Investors are unlikely to be ready to commit large sums of money to long-term
investment in projects when legal titles to the land for the projects are unclear.
Governance and Management
It is well known that there are sometimes problems of governance and manage
-ment in the utility industry in Indonesia. Managers of utilities sometimes come
under strong political pressure, and in recent years some prominent senior
man-agers of state-owned utilities have been found guilty of corrupt practices. These problems have attracted regular comment in BIES, both in the Survey of Recent Developments series and in other articles (see, for example, Mardjana 1995).
Other, more detailed aspects of project implementation and organisation
have prevented projects from getting underway. Thompson and Manning (1974,
72), for example, reported that procurement was one of the most serious issues
the World Bank faced in implementing projects in Indonesia in the early 1970s.
Obstacles such as uncertain tax provisions for contractors, poor coordination between government agencies, sudden changes in import and customs proce
-dures, and inlexible budget procedures for Indonesian government agencies all
hindered projects.
Dick (1985, 111) emphasised a different set of management issues when he pointed
to the need for improvements in the organisation and regulation of the shipping industry. He argued that there was too often a tendency to invest purely in
physi-cal capital in ports rather than consider how both organisational and regulatory practices could be improved. Political leaders and senior oficials often favoured improvements in physical capital because these changes were visible and could be pointed to as tangible signs of achievement. Improvements in organisation, how
-ever, required time and patience, and were less likely to yield easy-to-see beneits. Dick also noted that the regulatory processes in the industry were often protec -tionist and discouraged the types of structural reform that would increase
produc-tivity. He concluded that ‘a more eficient interisland shipping industry therefore requires not so much the commitment of more resources but better organisation to improve the utilisation of existing resources’ (113). More recently, Ray (2003, 262) noted that the shipping industry in Indonesia continued to be hampered by low levels of eficiency in ports, caused by a lack of competition.
Environmental and Social Issues
In principle, there are strong arguments for giving more emphasis to environmen-tal and social issues in plans to expand the infrastructure sector. In practice,
how-ever, these issues have often received relatively little attention in oficial circles.
One of the most important dilemmas facing energy planners in Indonesia is to
what extent the country should aim to rely on coal for energy security (Narjoko
and Jotzo 2007, 163). On the one hand, coal is currently the cheapest option for generating electricity. Also, the processes for the construction and management of
coal plants are well known and relatively easy to implement. On the other hand, coal brings a range of environmental problems. The coal used in Indonesia for power generation is usually of a low grade—the cheapest but most polluting fuel available. Further, some of the mined coal reserves are in protected forests. Over
time, power plants using this coal would worsen air pollution and emit much
larger amounts of carbon dioxide than other power-supply options.
Narjoko and Jotzo suggested that the main alternatives to the use of coal for baseload power generation in Indonesia are geothermal and nuclear. But increased reliance on either of these would pose problems as well. Careful decisions will be
needed on the sources of electric power as the demand for energy grows.
Regulatory Matters
Regulation refers to the ‘rules of the game’ (aturan main) that set guidelines for activities within a sector or an industry. The main regulations affecting the infra-structure sector in Indonesia are political and informal pressures, legal and regu-latory arrangements, and pricing controls.
Political and Informal Pressures
The literature on the interrelation between the infrastructure sector and politics
in Indonesia is relatively scarce. Davidson (2015) recently discussed aspects of
political factors inluencing the roads industry, but this topic has not been a focus
of studies in BIES. Dick (1985, 113) analysed the role of lobby groups in the ship
-ping industry, expressing concern about the results for eficiency. One of the main shipping lobby groups, the Indonesian National Shipowners Association, had pushed during the late 1970s and early 1980s to preserve the ‘rights’ of pribumi (indigenous Indonesian) companies while giving no support to the expansion of strong and progressive (often non-pribumi-owned) companies. The regulatory
systems in the shipping industry therefore tended to discourage the most efi
-cient irms from expanding while helping the least efi-cient irms to remain in business.
Legal and Regulatory Arrangements
Many laws, regulations, and, especially, ministerial decisions apply to the infra -structure sector, and, as is the case in other parts of the Indonesian legal system,
their implementation is fraught with dificulty and confusion. In 2004, for exam
-ple, the newly established Constitutional Court took it upon itself to issue a deci -sion on the constitutional legality of matters in the electric power industry.
The dificulties with the Constitutional Court arose following the enactment of Law 20/2002 on Electricity, which gave the government the authority to liberalise the power industry and allow the entry of private irms. A group consisting of labour workers, former PLN employees, and NGO representatives who opposed the unbundling of PLN’s generation, transmission, and distribution operations
challenged the legality of the new law. They argued that the law violated Article 33 of the Constitution, which provides that ‘economic sectors which are important
to the state and crucial for the welfare of the people are controlled by the state and must be developed to give the maximum beneit to the people’. Following hearings, the Constitutional Court annulled the new law in December 2004 and reinstated Law 15/1985 on Electricity (Soesastro and Atje 2005, 24–25; Butt and Lindsey 2008, 248). With the annulment, PLN again became the sole electricity distributor, while also acting as the regulator.
The unexpected intervention of the Constitutional Court in the electric power
industry immediately increased the regulatory risks in many sectors of the econ -omy. The use, in particular, of the vaguely worded Article 33 of the Constitution to underpin the judgement greatly widened the opportunities for special-interest groups to oppose reforms that might reduce the role of the state in any particular sector. Soesastro and Atje (2005, 30) concluded that ‘the potential implications of
this for the future of the Indonesian economy are far-reaching’.
The sympathy for economic nationalism which appears to underpin rulings of
this kind has distinct anti-market tones. Many observers have noted that there is a strong preference in Indonesia for state control of key sectors. Soesastro and Atje, for example, said, ‘The state should indeed be seen as custodian of Indonesia’s natural resources, but there is no reason why it should not exercise this function indirectly, through supervision and regulation’ (30).
Pricing Controls
The regulation of pricing in the infrastructure sector is widespread in Indonesia. The overall effect is to impose widespread price suppression, which has many
consequences for both demand and supply. This approach has extremely impor
-tant implications for the management of the sector, and for the inancial lows
through the sector.
Expectations that regulated utility prices will be kept low are widely held by the public, having been encouraged by populist political leaders ever since inde
-pendence in 1945. But senior economic advisers in government argue that irm ceilings are needed on the budgetary costs of subsidies. In practice, faced with dificult political and economic trade-offs, policymakers swing back and forth in their views (and their resolve). At times, when subsidies have become so large as to be a signiicant burden on the national budget or on state-owned utilities, poli
-cymakers have expressed their intention to reduce subsidies. Familiar arguments are rehearsed: that the burden of the subsidies on the budget is too large and that, in any case, the subsidies are undesirable because the beneits do not reach the poor. Sometimes policymakers have been successful in increasing prices for a period, although the real impact of the increases has usually been eroded over time. And sometimes policymakers have increased prices, only to reduce them again in the face of public pressure.
The public-policy debate is missing a clear and direct explanation to the
Indonesian people that—one way or another—it is they, the consumers of infra-structure services, who must pay the costs of supplying these services. There are various ways of paying: directly, through systems of user charges, or indirectly,
through combinations of taxation charges.
Much of the debate also fails to discuss the overall implications of price suppres -sion in infrastructure. This topic features in many articles in BIES, from its earliest
issues: McCawley (1970) and Kristov (1995) focused on electricity prices; Booth (1977, 58) discussed water charges for irrigation; Dick (1981a, 1981b) raised the topic in articles on urban public transport; and Conroy and Drake (1990, 15–16), Muir (1991, 23), Soesastro and Atje (2005, 27–29), and Kong and Ramayandi (2008,
16) carefully dissected energy and pricing issues.
CONCLUSION
This survey set out, irst, to provide an overview of the main developments in the infrastructure sector in Indonesia during the past ive decades, and second, to consider what the main policy and management bottlenecks in infrastructure appear to be.
The overview of main developments indicates that, in broad terms, most parts of the sector have expanded considerably but that the needs remain acute for fur -ther expansion and for attention to the maintenance of existing facilities. Demand for infrastructure is high, especially since the regulated prices set for
infrastruc-ture services are often low. But access can be dificult because of shortages of infra
-structure, and quality is often unsatisfactory because of poor maintenance and indifferent management. These problems of access are exacerbated by the regula
-tion of prices; suppressed prices limit the inancial capacity of the public utilities and discourage irms in the private sector from investing in infrastructure. This overview also points to the markedly different performances of the industries in which pro-competitive policies have been applied (air transport, telecommunica -tions, and roads and motor transport) and those in which more traditional
poli-cies of close regulation have restricted the operations of markets (rail transport,
shipping, electric power, and water, sanitation, and irrigation).
In many ways, the policy and management bottlenecks in the infrastructure sector are a microcosm of the problems of the overall management of government
in Indonesia. It is dificult to coordinate policy across the silos of the infrastruc
-ture sector; it is hard for the private and public sectors to work together; clearer
rules of the game and more effective regulatory arrangements are needed. None
of these problems are new in Indonesia, neither within infrastructure itself nor within the public sector overall.
Many of these problems hampered the government in the 1950s and 1960s.
They continue to do so today. Boediono (2005) discussed the central issues of
public-sector management in Indonesia when he emphasised the importance in
government of having a clear strategy, of implementing the strategy in a consist-ent way, and of needing to strengthen law enforcemconsist-ent. Boediono was writing
about the overall management of the economy, but these principles also identify the steps that need to be taken to strengthen infrastructure policy more specii -cally in Indonesia.
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