indonesia

as a positive sign that his administration was serious about reform and intent on delivering on
its commitment to reduce fuel subsidies to redirect government spending toward infrastructure
development, education, and healthcare. Aside from a few isolated protests, the overall reaction to
the price hike was relatively muted. In response to the fuel price increase, Bank Indonesia raised
its benchmark interest rate by 0.25 basis points to 7.75% in order to counter short-term inflationary
shocks. To cushion the impact of the fuel hike, the government provided low-income families with
several social protection cards, including the Indonesia Health Card, the Indonesia Smart Card,
and the Prosperous Family Card.
At the start of 2015, the government went even further and announced that effective immediately
it would implement a new fuel-pricing system that eliminated gasoline subsidies altogether and
capped the cost of diesel subsidies. This combined action by the Jokowi administration meant
a spending reduction of an estimated $18 billion, freeing up much needed fiscal space for
infrastructure development and social programs. 31 Yet although gasoline subsidies represented
the biggest burden on the budget, it is important that the government continue to reduce the
remaining subsidies on diesel products and electricity.
Lack of Infrastructure
Investment in infrastructure has not kept pace with economic growth and development.
Prior to the Asian financial crisis, Indonesia spent an average of 6% of GDP on infrastructure
development, but since 2000 spending has not exceeded 3% of GDP. 32
Provision of suitable infrastructure is critical for Indonesia to meet its energy goals. For
example, boosting production of renewable energy relies on large investments in the transmission
grid, while the establishment of a domestic gas market requires additional infrastructure in order
to transport gas from one side of the archipelago to the other (gas that might otherwise be destined
for export). The government has identified a number of priority projects, such as the Batang coal
power plant in Central Java, but these remain plagued by challenges relating to land acquisition
and delays or uncertainty around funding. 33
The Jokowi administration has publicly recognized the strategic importance of investing
in infrastructure development. By cutting fuel subsidies, the government was able to reallocate
funds in the revised 2015 state budget toward the development of ports, roads, power plants, and
dams. While this emphasis is important and welcome, the overall environment for infrastructure
development remains challenging. Although a few notable projects have moved forward, there
was not a huge uptick in spending in the first half of 2015 as had been expected. The Ministry of
Public Works recently reported that 90% of planned projects have been tendered, with contracts
signed for more than half of those. The ministry received approximately 40% of the government’s
2015 infrastructure budget of 290 trillion rupiah ($21.7 billion). 34 This places pressure on the
government to ensure that the drive to develop more infrastructure picks up steam in 2016.
16
NBR
31 There is some indication that now that global oil prices are beginning to recover, the Indonesian government is partially reintroducing the
subsidy, but this issue will require further investigation.
32 Jay K. Rosengard and Malcolm F. McPherson, The Sum Is Greater Than the Parts: Doubling Shared Prosperity in Indonesia through Local and
Global Integration (Jakarta: Harvard Kennedy School Indonesia Program and Gramedia Pustaka Utama), 2013, xxxi.
33 “How Not to Build a Power Plant: A Tale from Java Island,” Bloomberg Business, May 5, 2015, http://www.bloomberg.com/news/
articles/2015-05-04/how-not-to-build-a-power-plant-a-tale-from-java-island.
34 “Some Wins, Some Losses for Widodo in Indonesian Growth Campaign,” Bloomberg Business, June 29, 2015.
SPECIAL REPORT u DECEMBER 2015