Rowing Between Two Reefs: Indonesia’s Infrastructure Investment Strategy

Last year, Indonesia-U.S. relations saw many highlights, from the visit of then U.S. Secretary of State Mike Pompeo to the extension of Generalized System of Preferences trade preferences for Indonesia. Among other issues, one thing that has not received as much attention was Washington’s support for infrastructure development in Indonesia.

In fact, the U.S. government, through International Development Finance Corporation (DFC) has recently emphasized U.S. commitment to support Indonesia in catalyzing private sector investment for Indonesian infrastructure development. This movement extends the pre-existing collaboration between Indonesia’s Ministry of Finance and the U.S. Treasury Department on infrastructure finance and market building. The DFC is expected to catalyze private capital and facilitate financial market growth in support of infrastructure investment.

There are four important areas of cooperation between the U.S. and Indonesia. First, it will explore the potential to crowd in institutional investors to develop more liquid infrastructure investments, particularly from elsewhere in Asia. Second, it aims to formulate and identify relevant tools to catalyze private sector investment in infrastructure. In this regard, this collaboration is expected to address the various policy, legal, regulatory, institutional, and market barriers that stand in the way of increased private sector investment. Third, it aims to promote innovation and sustainability by sharing relevant best practices. This area emphasizes the importance of sharing knowledge and experiences, especially on how to optimize capital markets as a source of financing, as well as how to create alternative scheme to mobilize private investment. Last but not least, the cooperation intends to explore technical collaboration programs, including project finance development and capital market expansion.

The four areas of cooperation are expected to assist Indonesia in promoting greater participation of private investors, both domestic and foreign, in the country’s future infrastructure development. This could also help Indonesia in promoting financial deepening by developing and expanding the local bond market.

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Obviously, the role of the private sector in infrastructure development is essential, given the huge investments required. At the global level, the Global Infrastructure Hub estimates that until 2040, the world needs approximately $94 trillion for infrastructure investment. At the regional level, the Asian Development Bank (B) calculates that Asia’s infrastructure needs for the 2016-2030 period to cost up to $26 trillion. In other words, this will require around $1.7 trillion in investment annually, while according to B, the current capacity of the region stands at $881 billion, around half of the required total.

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Unfortunately, the participation of private sector in infrastructure investment remains insignificant. According to the World Bank, private participation in infrastructure financing stood at $96.7 billion in 2019, some 3 percent less than the previous year. One of the contributors for this trend was the declining private investment in the energy sector, especially in Indonesia, China, India, and Turkey, the leading investment destinations in 2018.

In Indonesia’s context, it is estimated that Indonesian infrastructure needs during 2020-24 will cost approximately 6,445 trillion rupiah. of which private investment is expected to cover around 42 percent. Clearly, the private sector’s participation in infrastructure investments is crucial, especially to help in overcoming budget constraints. The need is even higher now, given that the government has had to address the COVID-19 pandemic and its impacts. And so, while infrastructure development is still at the top priority of the development agenda for the Indonesian government, its capacity to provide financing for this agenda may decrease.

Beyond the financial aspects, for the U.S., the collaboration in infrastructure investment is part of its efforts to support the Free and Open Indo-Pacific strategy, particularly through two infrastructure related initiatives: the Infrastructure Transaction and Assistance Network (ITAN), and the Enhancing Development and Growth through Energy (Asia EDGE). ITAN, which was announced in July 2018, is an initiative designed to help countries in the Indo-Pacific region attract private investment for quality infrastructure projects. Meanwhile, the Asia EDGE aims to enhance energy security, promote energy diversification and trade, and expand energy access across the Indo-Pacific region. Another U.S.-led initiative is Blue Dot Network. The network is a multi-stakeholder initiative aimed at creating collaborations between governments, the private sector, and civil society to promote a receptive and inclusive framework for high-quality global infrastructure development. Among the first proponents of this initiative were Australia and Japan, both close allies of the U.S. In particular, Japan has recently also signaled its interest in supporting Indonesian infrastructure development by participating in Indonesia’s newly announced Sovereign Wealth Fund.

Looking at this point, some may view that infrastructure has become a new competition arena for geopolitical agenda of the major powers, particularly the U.S. (plus its allies) and China. This is mainly because Indonesian government has also been developing close cooperation with China to enhance infrastructure development in recent years. Some are worried that Indonesia’s interests will be jeopardized due to the competition between the two giants.

Obviously, the Indonesian government had been working with the Chinese government on several initiatives as part of the Belt and Road Initiative (BRI). In May 2018, the two governments announced their commitment to synergize Indonesia’s vision of the Global Maritime Fulcrum with the BRI. Then, in October, the two sides signed an MoU on Jointly Promoting Cooperation on the Development of Regional Comprehensive Economic Corridors. In addition, both sides had also agreed on the Cooperation Plan on Promoting the Regional Comprehensive Economic Corridor. All of these commitments bring private sector participation into account.

In fact, there is insufficient evidence to say that Indonesia has been trapped into a geopolitical competition in which infrastructure initiatives have become a “battleground.” For instance, Indonesia’s decision to join the Asian Infrastructure Investment Bank, an institution backed by China, did not preclude Indonesia’s continued membership in the B, an institution led by Japan. Indonesia has been able to maintain a robust collaboration with both institutions.

Therefore, Indonesia’s recent cooperation with U.S. (and its allies) should be viewed as a complement to its existing collaboration on infrastructure development with other countries. Again, the Indonesian government needs to optimize any potential collaboration, given the fact that the country’s need for infrastructure investment remains large. In this regard, Indonesia’s foreign policy principle of being “independent and active” should be better reflected in its efforts to develop mutually beneficial relations with any countries willing to support its development agenda.

Eko NM Saputro is a senior policy analyst at the Centre for Bilateral and Regional Policy, Ministry of Finance. The opinions expressed in this article are his own.