Indonesia needs infrastructure. The Southeast Asian island nation lags behind other developing nations by 1.5 trillion USD in infrastructure assets according to the World Bank’s October 2017 Indonesia Economic Quarterly report. Indonesia ranks 62nd in the 2015-2016 World Economic Forum Global Competitiveness Report rankings for infrastructure, behind fellow ASEAN members, Singapore and Malaysia. According, when President Joko “Jokowi” Widodo was elected in 2014, he made infrastructure a key priority of his administration with a focus on obtaining energy, transportation, and water infrastructure investments.
President Joko Widodo is turning to both public and private investments to meet Indonesia’s infrastructure gap. China is an increasing presence in Indonesian investment deals, and even though Chinese-Indonesian relations are not completely rid of past suspicion and tension, mainly due to sovereignty disputes over the South China Sea, both nations are actively moving forward to strengthen their political and economic relations.
Indonesia is looking to China for investments and economic growth, while China knows the benefits of having good ties with Indonesia as a source of support for its new economic initiatives, like the Belt and Road Initiative, and as an ally nation in ASEAN.
China is Indonesia’s largest trading partner. In 2016, Indonesia exported 16.1 billion USD in goods to China and imported 32.1 billion USD, resulting in a trade deficit between the two nations. Still, Indonesia promotes Chinese sourced investments and is an ardent supporter of the Chinese-driven Asian Infrastructure Investment Bank as a way to develop the nation.
Promoting the AIIB has paid off, and President Widodo is beginning to fulfill his promise to increase infrastructure investments in Indonesia. The AIIB has approved three projects located in Indonesia, all of which focus on developing infrastructure, water, and energy capacities. In 2016, the AIIB approved a 216.5 million USD loan for a National Slum Upgrading project that will improve urban infrastructure and services. The bank has also approved a Regional Infrastructure Development fund that will finance investments for urban transport, water supply, and waste management in Indonesia. Finally, the AIIB is continuing investments in hydroelectric power with the Dam Operational Improvement and Safety Project Phase II, which will continue to improve Indonesia’s hydroelectric capacity, resilience, and management.
The AIIB is not the only source of Chinese-driven investments in Indonesia. In 2016, China beat out Japan in a bid to finance the Jakarta-Bandung line by offering guarantee-free loans to Indonesia while Japan wanted Indonesian Government funding. The 5.5 billion USD project is funded mainly by a loan from China and is being constructed by PT Kereta Cepat Indonesia China, joint venture between Indonesia state-owned enterprises and China Railway International. The rail line will be 150km long, connecting Jakarta to Banjung by 2019 and reducing travel time from three hours to 40 minutes.
The Jakarta-Bandung project has already faced numerous difficulties and construction delays, and there is skepticism that the project will be completed by 2019. Difficulties in constructing the Jakarta-Bandung railway reveals the regulatory burdens that the Indonesian government presents for infrastructure investments and development. Not only has land acquisition problems delayed the project, but China has halted the release of its loan to the project developer in response to the red-tape shrouding the project implementation. Still, Indonesian and Chinese authorities claim that financing is not a problem, and instead claim that the project has been halted because of Indonesia’s uncertainty over the necessity of a high-speed railway.
President Joko Widodo will likely rely on Chinese development finance in the future as he pursues his administration's infrastructure promises. For Indonesia, and similarly to other Southeast Asian nations, the benefit of China’s economic influence seems to outweigh the economic and geopolitical consequences that comes with an increased reliance on China. But with infrastructure investments as a priority domestic policy, Indonesia needs to simultaneously pursue policy reform that will allow for timely and sustainable infrastructure development and not stall massive infrastructure projects.