IN THE JOURNAL | POINT OF VIEW
The art of infrastructure diplomacy
July-September 2017
By: Eriz Wicaksono

When President Joko Widodo delivered a speech at the APEC summit in Beijing in 2014, his message was clear: it could not be a better time to invest in Indonesia. This alerted nations worldwide that, maybe, what he was saying was true. As the global economy slows, economic powerhouses around the world have been looking to create fresh investment opportunities. For its part, Indonesia has been in dire need of large investment to drive its development – especially in the infrastructure sector. This confluence of interests seemed to be the platform to bring the sides together.

The infrastructure gap

During a speech to kick off the Indonesian government’s tax amnesty program, in July 2016, President Joko reaffirmed that “we aren’t just serious about building infrastructure, we’re very, very serious.” This came as no surprise as he has always highlighted infrastructure development as a national priority.

Indonesia is believed to have the highest infrastructure investment gap among members of the Association of Southeast Asian Nations. The World Economic Forum’s Global Competitiveness Report 2016-2017 ranked the quality and supply of Indonesia’s infrastructure 60th out of 138 nations. This is not inspiring for a nation with big ambitions. For instance, among Southeast Asian countries, Indonesia is outranked by Malaysia (24) and Thailand (49). This is very concerning, especially when the report also stated that inadequate supply of infrastructure is the third-most problematic factor in doing business, just behind corruption and inefficient government bureaucracy. Indonesia’s lack of infrastructure is a bottleneck to foreign investment, while foreign investment is crucial to finance infrastructure development. It’s a vicious circle.

The previous Indonesian administration’s policy to subsidize energy is arguably why the government underspent on infrastructure. In 2014, spending on energy subsidies accounted for more than one-fifth of the state budget – three times the amount of infrastructure spending. Even now, with all the new funds allocated to infrastructure development, the gap is still enormous. The Joko administration laid out ambitious plans for $480 billion in infrastructure development between 2015 and 2019, but the government is certainly in no position to finance this itself. Even with the country breaking its own record each year for infrastructure development spending, the actual total state spending plan for 2015-2019 is roughly only $190 billion.

The public-private partnership (PPP) scheme has always been seen as the answer to the funding gap. To this extent, the government has tried to entice as many foreign investors as possible, especially through simplifying the process of doing business in Indonesia. To push infrastructure development along, the government established the Committee for Infrastructure Priorities Development Acceleration in 2014 to deliver projects in a swift manner, preferably through the PPP scheme. The creation of special economic zones with incentives for investors is also expected to stimulate infrastructure development across Indonesia’s regions.

This is why countries are pursuing “infrastructure diplomacy” in Indonesia. Not only does Indonesia have the largest economy and population in Southeast Asia, official government policy welcomes foreign investment. The concept of infrastructure diplomacy lies beyond the boundaries of just infrastructure financing, to the planning, construction and operation of the project itself. This spurs bilateral agreements and cross-border cooperation among companies. This phenomenon, however, is precisely what triggered criticism, albeit without solid proof, that President Joko’s government is siding with certain countries on infrastructure project tenders.

The Chinese alignment

Some have argued that President Joko and his team have shown indications of aligning with Beijing. Without much hesitation, Indonesia has supported China’s mega-project initiatives including One Belt, One Road and the Asian Infrastructure Investment Bank. The government seems to favor Beijing, such as when it accepted a Chinese bid to develop a high-speed train between Jakarta and Bandung, the capital of West Java Province, basically shutting the door on Japan after extensive negotiations.

That decision left many questions. Indonesia’s answer? It was purely a business decision made after careful analysis of the Chinese company’s business plan. However, many were convinced, especially when other large projects are currently being developed or under negotiation with Chinese companies. To add to this, since the start of his presidency three years ago, President Joko has met Chinese President Xi Jinping five times, including in Beijing in 2014, when the Chinese leader expressed interest in investing a staggering $63 billion in infrastructure and other projects in Indonesia.

Government supporters, however, argue that Indonesia’s interactions with China are only meant to treat Beijing as an equal among major economic powers. The potential of China-Indonesia relations has not been fully realized, and declining relations between China and other Southeast Asian nations as a result of the South China Sea dispute has made this increasingly important. China brings alternative sources of funding for Indonesia’s development. Unfortunately for some, the appearance of China as an alternative source of funding means that the infrastructure diplomacy rivalry will intensify. The establishment of the Asian Infrastructure Investment Bank has more than confirmed this, questioning the future status of other multilateral lenders such as the Asian Development Bank and World Bank.

Indonesia’s importance in the realm of infrastructure diplomacy was clear when multilateral infrastructure financing institutions appointed Indonesian officials to senior positions. In 2010, the US-led World Bank named Sri Mulyani as a managing director, a post she held for six years before being lured back last year to her former job as finance minister. In 2015, the Asian Development Bank appointed former deputy transportation minister Bambang Susantono as vice president for knowledge management and sustainable development – one of the ADB’s six vice presidents. And it took only a month from its formation in 2016 for the Asian Infrastructure Investment Bank to name Luky Eko Wuryanto, then Indonesia’s deputy minister for infrastructure acceleration and regional development at the coordinating ministry for economic affairs, the AIIB’s vice president and chief administration officer. The fact that Indonesia is in no position to be a great infrastructure investor, as it is too busy bridging its own infrastructure gap, indicates that these appointments were not based on each institution’s need for investors. Rather, the Indonesian officials chosen were deemed as highly qualified and capable of simplifying the channeling of investments into Indonesia – a key example of infrastructure diplomacy at play.

Remaining neutral

To the untrained eye, it may seem that President Joko’s administration favors Chinese companies. With better financial agreements, albeit with more terms and conditions, the flood of Chinese investment into Indonesia has somewhat disturbed the locals. However, through a squinted eye, the so-called special relationship between Indonesia and China may not be so special after all. Even when analysts called for Joko to abandon the previous administration’s foreign policy of “a million friends and zero enemies,” the president showed indications of being neutral – or at least trying to look neutral.

A good example, yet again, is the high-speed rail project. Indonesia is already planning a more ambitious Jakarta-Surabaya high-speed train. Given the great need for planning and financing for what could be Indonesia’s largest transportation project yet, the government could have gone back to the Indonesian-Chinese consortium doing the Jakarta-Bandung project.

It didn’t. Instead, it gave a head start to Japan, and even sent a proposal to the Japanese government to support the Jakarta-Surabaya rail project. This resulted in a formal agreement to open talks. That time, Jakarta gravitated toward Tokyo.

Despite repeatedly linking up with China, and now Japan, other countries are actively engaged in offering to partner in Indonesia’s infrastructure projects. Russia is one. The Russian approach is, however, different from that of China. The Chinese way of infrastructure diplomacy requires that the target nation not only agree to the investment capital, but also that Chinese companies and labor carry out the job. This reduces the costs for the host country, but at the loss of the transfer of technology and knowledge, and the use of local labor.

The Russian method is different. It declares to utilize Indonesian resources, both natural and human. This assures that local companies and local communities will be part of a project’s development, creating thousands of jobs and stimulating economic growth. The Blackspace group is operating in the regions of Sulawesi and Borneo, with its Indonesian headquarters in central Jakarta. This partnership will be a long road, but the elements of diplomacy are there.

Meanwhile, a high-profile visit by Saudi King Salman to Indonesia in March signaled his nation wanting a piece of the action. Among the agreements signed during King Salman’s nine-day trip was a $6 billion investment in the construction of an oil refinery in Central Java Province and $1 billion from the Saudi Fund for Development to build infrastructure. One other thing worth mentioning, although it’s still under discussion, is the development of halal tourism hubs in some of Indonesia’s best tourism destinations. Given Salman was the first Saudi king to visit Indonesia in 47 years, there was huge excitement among both the Indonesian public and national media, which labeled it as “historic.”

The verdict?

The Indonesian government is, officially, openly welcoming and actively promoting itself, which indicates that the country needs all the funds it can get and that its infrastructure gap is large. As such, assertions by critics that the Joko administration favors one country over another are misplaced. The government has repeatedly demonstrated that it is aligned with no one in particular and open to all.

The government seems to once again be taking a neutral stance in foreign affairs by balancing its relations with all countries, in particular because of the need to keep its own economy moving. At the end of the day, the nation that once had “a million friends, zero enemies” could still partner with any country that benefits Indonesia’s own interests, regardless of who they are and in what they believe.

 

Eriz Wicaksono is a junior expert at Indonesia’s Coordinating Ministry for Economic Affairs and a researcher at the University of Indonesia. The views expressed here are his own.     

 

 

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