Indonesia’s Masterplan for rapid growth-

 

Launched in May 2011, the Masterplan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Masterplan for Acceleration and Expansion of Indonesia Economic Development), or MP3EI, is an ambitious 15-year plan that aims to transform Indonesia into one of the top 10 economies within the next two decades. Specifically, the Indonesian government is seeking to increase Indonesia’s GDP sixfold to $4.5 trillion and quintuple its per capita income by 2025.

The plan focuses on large-scale infrastructure development to increase regional interconnectivity and production capacity, both in the manufacturing and services sectors. The main elements of this strategic approach are:

  • Development of six economic corridors;
  • Cultivation of industrial clusters and special economic zones, which utilise resources along the economic corridors; and
  • Enhancement of human capacity.

 

E. Ginting, deputy country director in Indonesia for the Asian Development Bank (ADB), sums up the objective of the plan as follows: “MP3EI aims to develop a more productive and inclusive Indonesia by accelerating infrastructure and human resource development.”

Drawing upon international examples and best practices, the development of projects will be undertaken through public-private partnerships (PPPs). Based on initial estimates, the setting up of the six economic corridors will entail an investment of Rp 4,000 trillion. As of December 2012, the Coordinating Ministry for Economic Affairs estimates that the total investment committed for MP3EI has reached Rp 623.9 trillion. Of this amount, state-owned enterprises have contributed Rp 123.89 trillion, followed by private firms with Rp 274.24 trillion. State budgets and a mix of sources have contributed another Rp 119.14 trillion. Finally, ADB has allocated Rp 2.8 trillion for MP3EI.

Interestingly, the central government’s contribution to the overall funding for the plan is likely to be only 10 per cent. While the private sector is expected to contribute 51 per cent for the same, the remaining would be mobilised from different sources by the state-owned enterprises involved in the projects. Ginting offered the rationale for this funding breakown: “The government needs to have a clear strategy on which project should be financed by which source. As private financing and PPP will usually come a bit slower, government should first develop basic infrastructure. Both government and private sources should be complementary to each other.”

Status update

According to the latest available estimates, 135 projects with a total investment of Rp 490 trillion have started since the launch of MP3EI in May 2011. During the first half of 2012, an investment of Rp 140 trillion was committed to 36 projects that constituted 65 per cent of the targeted 59 projects for 2012. These were 27 infrastructure projects (Rp 51 trillion) and nine social sector projects (Rp 89 trillion).

Preliminary budget estimates suggest that Rp 545 trillion will be disbursed for various projects under MP3EI in 2013. This amount will cover 82 infrastructure projects (estimated investment of Rp 143 trillion) and 64 social sector projects (aggregate investment of Rp 402 trillion). In terms of the economic corridors, the investment commitment will be divided as follows: Papua (Rp 204.5 trillion), Java (Rp 116 trillion), Kalimantan (Rp 109 trillion), Sumatra (Rp 61 trillion),Bali(Rp 43 trillion), and Sulawesi Rp 11 trillion.

Phases of implementation

The implementation of the plan will be divided into three phases. The first phase involves the establishment of an implementation committee that will design action plans and streamline regulations, licences, and incentives for various project components. Currently, the Coordinating Ministry of Economic Affairs is carrying out this function.

Under the second phase, steps will be taken to:

  • Accelerate long-term infrastructure development;
  • Develop innovation capabilities to boost competitiveness;
  • Improve economic governance practices in various areas; and
  • Encourage existing and new industries to add value to economic production.

 

The third and final phase will centre on the further enhancement of industrial activities so that companies can compete at the global level and employ high-level technologies to achieve sustainable development.

Overall, the plan seeks to fulfil development objectives on several fronts. It aims to encourage investment in 22 different industries including shipping, textiles, steel, oil and gas, fisheries, tourism, transportation, and information and communication technology (ICT). It is also expected to contribute to reducing the developmental inequality between eastern and westernIndonesia, support rapid urbanisation, and improve trade performance by enhancing transportation infrastructure.

Formidable challenges 

Although elaborate plans have been put on paper, implementation remains a key challenge. For the development of the economic corridors, the common difficulties encountered are in the areas of: land acquisition, public communication, local-level governance and mobilisation, environmental impact, and costs. To address these issues, the government plans to:

  • Reform the bureaucracy and governance practices;
  • Improve regulations across sectors and administrative levels;
  • Provide tax and financial incentives for attracting investment; and
  • Build capacity for addressing security concerns along the economic corridors.

 

Ginting reiterated the urgency for the aforementioned reforms: “The objective of MP3EI cannot be achieved with the business-as-usual approach. Therefore, reforms that have been implemented so far have to be accelerated. These reforms are in the areas of regulation, business climate, the financial sector, education, and governance, among others.”

Key to success: PPPs

Ultimately, the initiative seeks to achieve a long-term vision of economic growth, which has been highlighted in other planning documents such as the National Long Term Development Plan, 2005–2025. However, the focus of MP3EI is on infrastructure development in particular and industrial and services activities in general. Ginting highlighted the long-term objectives of MP3EI: “The outcome of MP3EI should be measured on the sustainability of its impact on poverty and the fairness of the growth process across islands of the country. Therefore, MP3EI will need to be fine-tuned along the way to ensure that its ultimate development objectives are achieved.”

Given the ambitious scope of the plan, private investment will play a crucial role in building the much-needed infrastructure. The government must thus give assurance  to the private sector about the security of its investments. In addition, it will have to convince state-owned enterprises and provincial government agencies to undertake the necessary structural changes which will be of benefit to them. Only through the active collaboration and participation of these stakeholders will Indonesia be able to realise its long-term vision.