The National Interest

Indonesia's growth quagmire

A self-reckoning with a history of economic nationalism: how Indonesia has to decide between control and growth.

An Indonesian military band performs for Indonesia’s President Joko Widodo and Singapore’s Prime Minister Lee Hsien Loong, to mark 50 years of bilateral relations between the two countries, at the Marina Bay Cruise Centre in Singapore, September 7, 2017

Despite President Jokowi’s ambitions to liberalize the economy and attract investment, Indonesia’s growth ambitions are imperiled by an entrenched preference for state control over key sectors of the economy. In many cases policymaking has followed a track well-worn in past decades, according to many well-placed figures interviewed by TBY. Despite significant momentum for change, it is this embedded bureaucratic opposition that may be the biggest barrier to a more dynamic economy that meets the needs of a fast-growing population.

A sprawling network of state-led companies, politically appointed ministers, and an embedded distrust of the private sector and foreign ownership have all conspired to slow the agenda of Indonesia’s reformist president Joko Widodo. When he was elected, the president promised to cut red tape, increase tax collection, and, most importantly, spend billions on infrastructure. The state, said candidate Jokowi, needed to allow the private sector to play a greater role in development. As clear as that agenda was on the day Jokowi was inaugurated, today Indonesia is struggling with important questions of nationhood that are often socially charged.

Across almost every sector of the economy, President Joko Widodo’s plans for infrastructure development depend on private-sector involvement. The electricity sector, where the government has particularly high targets, is striking. The Perusahaan Listrik Negara (PLN), the state-owned electricity monopoly, has a 2025 goal of 99% electrification across the archipelago. If this goal is to be met, the private sector will have to invest some USD78.2 billion through independent power purchasing agreements (IPPs) in that sector alone, according to PwC.

That figure is formidable, but more formidable is the fact that the PLN would be investing vastly less than the private sector. This would entail reduced state control and ownership of a key strategic sector, something that has almost never happened in Indonesia. To some observers, the state apparatus seems reluctant to allow this.

In early 2017 the Ministry of Energy and Mineral Resources released new regulations governing IPPs that sought to encourage exploration for natural gas, depress prices of renewably generated of electricity, and absolve the PLN of some of the fiscal risks of IPPs. Many industry players interviewed by TBY were concerned that the regulations would discourage investment, particularly in renewable energy. That remains to be seen, but the new regulations do little to liberalize the sector. Similar hesitation is apparent elsewhere.

Last month, the government announced that it had arrived at a deal with one of the world’s largest mining companies, Freeport McMorran, which operates Indonesia’s largest mine, the Grasberg mine in Papua. The government insisted that Freeport divest in order to allow 51% national ownership, and that it invest tens of millions in processing copper concentrate on site. Such demands have a long history in Indonesia, and while protecting the national interest is every nation’s right, the very public and drawn-out Grasberg mine dispute has done real damage to Indonesia’s image as a business destination.

In the oil and gas sector, exploration has practically ground to a halt. Under Susilo Bambang Yudhoyono, the previous president, the official plan was to re-nationalize production and exploration at all oil and gas fields once current production sharing agreements expired. That would mean the sector fell to the state-owned Pertamina, which suffers from chronic underinvestment and is widely believed to be incapable of maintaining rates of production that are already in decline.

This state of affairs was thrown into relief when Pertamina managed to drill only eight of a planned 19 wells in the Mahakam block, one of Indonesia’s largest natural gas fields. The field is currently shared with Total, the French multinational. Total is unlikely to renew its contract when it expires this December. As a result, the government has reportedly been dangling an increased stake of up to 39%, up from 30%. This is a something of landmark because it would mean that Pertamina lose its majority stake. However, Total has not responded to the offer.

Similar increases have been discussed in other projects, but even increased stakes have not resulted in breakthroughs. In an interview with TBY, the Minister of Energy and Natural Resources Ignasius Jonan blamed the decrease in exploration on the oil price, but also hinted that there was some flexibility in the government’s position: “There has been no cancelation of exploration. As long as the oil price is around USD50 then it is difficult to increase exploration and production unless the government wants to give up a lot more.” Without foreign participation, production and therefore government revenues are likely to see a significant drop in 2019.

In infrastructure,the story is similar. The government wants to build some USD450 billion worth of infrastructure by 2019, including 15 airports, six new refineries, and the aforementioned increase in power generation. Traditionally, state-owned enterprises have done much of the heavy lifting the sector to the extent that they are accused of special treatment. They also collectively contributed some USD6.52 billion to the government’s budget in the past fiscal year, but experts surveyed by TBY say Indonesia must leverage the private sector if such a vast project backlog is to be completed.

Today, projects in Indonesia are financed on balance sheets and not on credit that uses the project itself as collateral. That effectively limits the amount of financing available to the private sector and limits the risk any investor can take on the infrastructure sector. Most of Indonesia’s regional rivals have frameworks that allow 10-year project bonds and other instruments. According to industry players interviewed by TBY, this is one area that may be set to change. One key consultant described this time as one of “soul searching” among administration officials.

As well it should be. Indonesia is in the midst of an unprecedented opportunity. No president of Indonesia has promised so much and advocated so directly for it. The government now has to decide if control or growth is more important. If Jokowi is to be believed, he has already made his decision, but there are hundreds of officials who will have to make the same choice if ambitions are to become reality.