JAKARTA: The key to unlocking the potential of the world’s largest archipelago is connecting more than 17,000 islands in South-East Asia with an extensive network of airports, trains and toll roads.
That was the grand vision of Indonesian President Joko Widodo when he took office a decade ago, earmarking almost $800 billion for an infrastructure-building push that’s dwarfed the outlay of far bigger economies.
But as Jokowi - as the president is more commonly known - finishes his final term in office, maturities are piling up, debt at state-run construction companies has jumped multifold and many projects are barely utilized.
Ahead of national elections next month, a sprawling airport on Indonesia’s largest island boasts an annual capacity that rivals Sydney’s gateway - yet hosts only a few flights a week. Steep ticket prices threaten ridership of South-East Asia’s first high-speed train, which is faster than Japan’s Shinkansen but still far from full.
In Sumatra, sections of a costly toll road have such little traffic that they’re populated by cattle or used for driving lessons. The next island over hosts arguably Indonesia’s most ambitious project: a new $34 billion capital city under construction in Borneo’s rainforests.
Until now, no foreign investor has stepped forward with funding. Opposition politicians, and even members of Jokowi’s party, have called the project a failure.
"I take my hat off to President Jokowi, who already knows that the project is not viable,” Rizal Ramli, an economist and former cabinet minister during the president’s first term, said in a recent interview. "No foreign investors are interested and yet he’s still touting it.”
Jokowi’s reputation as one of the world’s most popular leaders was forged partly through promises to modernize infrastructure in Indonesia, with its vast natural resources and massive mines. But state-run builders are increasingly feeling the strain from unmanageable debt loads. Last year, one official described the restructuring of the nation’s largest-listed construction firm as worse than a perfect storm: "It’s a perfect hell.”
Jokowi has defended his government’s blueprint, arguing that getting infrastructure right is critical for long term growth - and projects take time to blossom. Aggressive building is aimed at making Indonesia a high-income economy by 2045. Under his tenure, Jokowi has devoted 5% to 7% of gross domestic product on infrastructure, far outpacing the 1% that G-20 economies spent in 2022.
That’s produced 16 new airports, 18 new ports and over 2,000 kilometers (1,200 miles) of toll roads - all crucial projects, his government says, for smoothing out transport and trade of Indonesia’s major exports, including nickel, thermal coal and palm oil.
The projects are also about polishing the country’s global image. Indonesia, one of the world’s largest and most populous economies, has sought to lure foreign investors away from other parts of Asia. It recently applied for membership to the OECD, a group of developed nations working on trade issues, despite having a far lower GDP per capita than every other member.
Yet a potential trail of white elephants is a costly inheritance for Indonesia’s next government and could threaten the nation’s quest to emulate the growth trajectories of China and India. With projects falling flat and debt payments looming, political candidates and Indonesia’s 200 million voters are increasingly splintering over whether the country has built too much too quickly - and questioning when a return on investment will follow.
"Infrastructure will not deliver benefits immediately,” Jokowi said in a Bloomberg interview in September. "The choice is whether to build now or later. I choose to build now.”
Indonesia’s state-owned enterprises and finance ministries didn’t respond to requests for comment.
Beyond costs, Jokowi’s critics say many of his administration’s projects make little practical sense.
Consider Kertajati International Airport, which was built for 4.9 trillion rupiah ($310 million). The airport stretches across 1,800 hectares (4,400 acres) of land, has two runways to accommodate super-jumbo planes and boasts an annual capacity of 29 million passengers. It’s designed to serve Indonesia’s most populous province, West Java, where infrastructure is still lacking despite proximity to the capital, Jakarta.
But the airport also sits 100 kilometers from the region’s largest metropolis, Bandung, making accessibility an issue. With no public transport or major highways connecting Kertajati to Bandung, the travel distance between the two - about three hours drive - is roughly the same distance as simply embarking from Jakarta’s airport.
Since opening in 2018, Kertajati has sat mostly empty, with sporadic commercial flights to Kuala Lumpur and the occasional pilgrimage site. The airport is so deserted that couples use the space for wedding photoshoots.
The president’s build-at-all-costs attitude "would be correct only if the development follows good planning and calculation, which many of Jokowi’s infrastructure projects seem to skip,” said Sulfikar Amir, an infrastructure expert at Nanyang Technological University in Singapore. "It’s no surprise that some of the projects were completed but with low utilization rate.”
Kertajati scaled up operations in November to eight destinations, and airport authorities say a new toll road will boost its appeal. Even more flights may be added soon: Kertajati is positioning itself as the main gateway for Indonesia’s pilgrimage trips, according to Muhammad Singgih, the president of airport developer and operator PT Bandarudara Internasional Jawa Barat.
"We have to understand that the airport is a door,” Singgih said in an interview. "Growing an airport must be accompanied by the development of industries, economy and tourism in the area.” He targeted passenger capacity at 1.6 million in 2024 and 3.5 million in 2025 - far more than current usage of less than 200,000 passengers in 2023.
Still, some Indonesians are questioning the payoff of projects financed partly with public funds.
In North Sumatra, a 74-kilometer toll road is flanked by paddy fields and views of an active volcano. The highway cuts traveling time between two major towns. Yet average daily traffic remains stuck at 60% of the target for 2023 and the rate of financial return is only 5.53%, according to Tjahjo Purnomo, the corporate secretary of PT Hutama Karya, a state-run firm overseeing the project.
"The toll road is good to have, but it’s also fine not to have,” said Irwan Irman, a mechanic who uses the highway sporadically. "I don’t think it makes a massive difference.”
To be sure, some of Jokowi’s infrastructure projects have been widely regarded as successes, such as the Trans-Java toll road, which serves Indonesia’s main island. New transit trains have also helped with congestion on roads in Jakarta, one of the world’s largest megacities.
But footing the bill is increasingly a headache. Most projects fall under the purview of government-owned builders and operators. This has two benefits in Indonesia. First, they can invoke special legal and regulatory powers to speed up construction. And second, going this route has kept much of the spending off the state budget. Indonesia has a legal mandate to keep the deficit at just 3% of GDP.
In turn, the debt burden at Indonesia’s five major state-owned construction firms has grown dramatically. Total liabilities at these companies hit an all-time high of 295 trillion rupiah in 2020, according to available Bloomberg data going back to 2000. The debt pile stood near a record 287 trillion rupiah in 2022 - more than six times what it was when Jokowi took office.
This development model started showing signs of strain after an era of ultra-low interest rates came to an abrupt end in 2022 amid stubborn inflation, an unstable rupiah and China’s economic slowdown. Indonesia’s central bank has raised borrowing costs by 250 basis points since 2022 - its most aggressive tightening cycle in nearly two decades. Despite a rate pause in December, policymakers said any rate cuts will be off the table until the second half of 2024.
Builders must now contend with much steeper refinancing costs. Over 10 trillion rupiah in bonds and loans are due by the end of 2024. Indonesia’s next leader will also face another 30 trillion in maturities from 2025 to 2029. In contrast, the five builders announced a total net loss of nearly 6 trillion in 2022.
Without other sources of funding, "state-owned construction companies cannot maintain the current level of expenditure,” said Charles Evans, senior director for restructuring at the consulting firm Alvarez & Marsal Holdings LLC.
Two stretched builders - PT Waskita Karya and PT Wijaya Karya - are selling off assets and trying to defer repayment of their bonds, stoking concerns of contagion because their debt is largely held by state and regional banks.
Last year, Indonesian Finance Minister Sri Mulyani Indrawati said "infrastructure equality” for all citizens is important. But she nixed the idea of a quick bailout for builders, noting that the government must guard the state’s finances and prized investment-grade credit rating.
At the moment, funding is frozen except for priority projects. The government plans to inject 24.6 trillion rupiah of fresh capital into Hutama Karya and Wijaya Karya, for instance. Beyond that, state builders will be responsible for working out debt restructuring with creditors before the government comes in to recapitalize them.
The debt woes also raise fresh concerns about Jokowi’s bid to build Indonesia’s new capital.
Local tycoons started developing a complex in the city called Nusantara, but foreign investors have yet to sign binding agreements despite generous tax incentives. For now, it looks like the government will have to do the heavy lifting to bring Jokowi’s vision to life, with 40.6 trillion rupiah set aside in the 2024 state budget - a 39% increase from last year’s allocation.
Whether Indonesia’s next leaders continue funding the projects is a flash point in February’s national election. Two of the three candidates contesting - current Defense Minister Prabowo Subianto and former Central Java Governor Ganjar Pranowo - have pledged to continue developing the new capital. Former Jakarta Governor Anies Baswedan, however, isn’t keen.
Indonesia’s next leader will have a full plate, said Siwage Dharma Negara, a senior fellow at the ISEAS-Yusof Ishak Institute in Singapore. Many more projects are in the pipeline, and the sooner the government can assess which are worth their salt, the quicker it can cut losses, he said.
That’s the multibillion-dollar question for Jokowi’s successor after a decade of breakneck construction.
"The bill is coming,” Negara said. "Someone will have to pay for all of it.”
-- With assistance from Jin Wu and Fathiya Dahrul. -- ©2024 Bloomberg L.P.
