Bizness Lounge: Widodo’s Next Hurdle: What Indonesia Can Tackle Post Fuel Revamp

Tuesday 13 January 2015

Widodo’s Next Hurdle: What Indonesia Can Tackle Post Fuel Revamp

By Chris Brummitt

The opening salvo in Indonesian President Joko Widodo’s bid to revitalize Southeast Asia’s biggest economy was a revamp of the country’s energy sector. His next hurdle is delivering the gains from the shake-up.
In his first three months in office, Jokowi, as the leader is known, freed up 230 trillion rupiah ($18 billion) of budget funds for development by scrapping gasoline subsidies and capping government aid on diesel. He also moved to plug revenue leaks and improve efficiency in the energy industry, changing the management of the state oil company as well as setting up an oil and gas reform team.
Bloomberg News asked economists and analysts what steps the
president should take in the coming months to show his commitment to restructuring the $868 billion economy, where growth has slowed to 5.01 percent, the weakest since the global financial crisis.

Starting work on infrastructure projects

Jokowi’s administration has promised to use savings from the fuel-subsidy reduction to boost spending on infrastructure such as transportation and other public works. Indonesia spent less than 4 percent of gross domestic product on infrastructure investment over the previous decade, according to a World Bank report last year, about half of what was needed.

Breaking ground on a major project in the next few months would be a powerful indication that the president means business, said Sarvesh Suri, Indonesia country manager for International Finance Corp., which as a member of the World Bank Group supports development by investing in and advising the private sector in emerging markets.
“Once the first few projects start getting implemented, that would be the biggest sign,” Suri said by telephone from Jakarta on Jan. 8.

Accelerate land acquisition

The government will establish a land bank that will be jointly managed by the finance, public works and transportation ministries to accelerate infrastructure projects, Finance Minister Bambang Brodjonegoro said last week.
Land acquisition “remained as the bottleneck in infrastructure developments,” said Wisnu Wardana, an economist at PT Bank CIMB Niaga in Jakarta. Jokowi needs to be “fully hands on and taking responsibility the same way he tackles fuel policy reform,” using ministries, local governments, state-owned enterprises and communicating to the public to curb opposition, he said.
The president should make use of new land acquisition rules for public-interest infrastructure development that took effect this month, which can accelerate the process for toll roads, airports and railroads, said Kevin O’Rourke, a political analyst who wrote “Reformasi: The Struggle for Power in Post-Soeharto Indonesia.”

Reform the bureaucracy, cut corruption

“Corruption and low law enforcement have been weighing the economy with high overhead costs,” said Wardana at PT Bank CIMB Niaga. Jokowi can improve the welfare of judicial officers to minimize incentive for wrongdoing, and pick a “pilot sector” in which he can eradicate corruption, the economist said.
The president needs to impose better oversight and accountability in the bureaucracy, instill meritocracy by introducing performance incentives, and remove conflicts of interest and opportunities for inducements, said O’Rourke.
“It would probably require a cabinet reshuffle in order to have ministers who would push it in each ministry,” O’Rourke said. “In practice, I suspect Widodo may focus for the next year or two on just trying to tinker around the edges of problems, applying common-sense solutions to the more egregious inefficiencies, while boosting tax collection and ramping up spending.”

One-stop shop for investors

The government pledged last quarter to streamline its permit process by combining ministry licenses in a one-stop service, moving permits from ministries such as mining, forestry and transport to the investment coordinating board. Jokowi in November told regional governors to set up one-stop permitting at the provincial level and gave them a one-year deadline to comply.
The national one-stop service will start on Jan. 15, Franky Sibarani, chairman of the investment board, said today. Investors can apply for permits online and the investment board will coordinate with ministries to get them. The government is targeting reducing the time to process all permits to seven days by 2019, Sibarani said.
Suri said the one-stop service would only be effective if it had the authority to directly approve investments, cutting out the need for companies to obtain permits from individual ministries as is currently the case.
Jokowi said in January that “never again” would it take five to six years to develop a power plant in Indonesia, according to remarks reported on the website of the investment coordinating board.

Improve government tender process

Jokowi has ordered agencies to complete all procurement for infrastructure projects this year by the end of March, the finance minister said last week. Previously most regional government tenders were conducted at the end of the year or not at all, resulting in rushed, poor quality works or delays, said Gundy Cahyadi, an economist at DBS Group Holdings Ltd. in Singapore.
“This plan is a good first step to try and change things around, but you can’t expect an instant success,” said Cahyadi. “The regional governments have quite a lot of authority, but they don’t have the capability to run things.”