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Efficient railway connections are pivotal to unlock the full potential of Indonesia's emerging economy, as the focus of business and trade activity gradually shifts from the industrial heartland of West Java to far flung regions of the archipelago. Infrastructure development is the centrepiece of the government's long-term development roadmap, the so-called Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI). The aim is to catapult Indonesia into the ranks of developed economies by 2025, and there is a clear understanding that railroads play a crucial role in this plan, because costly logistics have in the past held back industrial projects. Rising budgetary spending and recent regulatory reforms should help to get projects off the ground quicker in the future. Authorities are banking on large scale private engagement, which spells opportunities for domestic and foreign investors.
In view of the MP3EI goals, the National Development Planning Agency (Bappenas) in April 2014 estimated the necessary investment into the country's infrastructure from 2015 through 2019 at $550.3 billion USD. Of this, the railway network requires $23.3 billion USD, significantly more than the projected need for airports ($15.2 billion USD) over the same five-year period (See Indonesia’s Aviation & Airports Sector). The $23.3 billion figure pertains to national transportation and does not even include the large investment deemed necessary for railways as part of urban public transport systems. Many of the railway projects outlined in MP3EI will be open to private-sector participation in the form of public-private partnerships (PPP) (See Indonesian Infrastructure: Tremendous PPP Opportunities).
Indonesia's railway infrastructure is considered better than other transportation systems. The World Economic Forum's Global Competitiveness Report 2014-2015 ranks Indonesia 41st (of 144 countries assessed) for the quality of railroads, which compares to Indonesia holding merely 72nd place for road infrastructure, 77th place for seaports and 64th place for air transportation infrastructure. Nevertheless, much of the country's almost 5,000 kilometres of operational track is in a state of disrepair or needs to be upgraded to accommodate present and future demand, while vast landmasses outside of Java have no rail services at all. There is general agreement that this situation is unacceptable, as Southeast Asia's largest economy undertakes projects to spread industrial development more evenly.
The need to transport Indonesia's abundant natural resources, such as coal, oil and crude palm oil is a forceful driver of railway development in Indonesia, and the urgency with which the government is pushing for domestic processing of metal minerals and other commodities is helping to open doors for foreign investors. As for passenger transportation, high-speed railways can potentially grab a significant market share currently held by airlines. Foreign investor involvement or interest is coming from Japan, Korea, China, India and Russia, among other countries.
A number of large-scale projects to upgrade rail links are in the construction or planning stage. Arguably the most urgent task is to improve connectivity between Indonesia's two largest cities, Jakarta and Surabaya, the capital of East Java. This is what a project to double-track railroads across Indonesia's most industrialized island aims to do by upgrading existing, mostly single-track lines. The project has fallen far behind schedule, mainly due to complicated negotiations for the government to acquire plots of land on eastern segments. While construction on the 727-km long northern Java route was completed in 2014, work on the longer southern route will not finish before 2018, according to Transportation Ministry planning as of February 2014. The $1-billion USD modernization of the northern route cuts journey times from around 12 hours to less than 9 hours and more than doubles the number of railway cars travelling on the route per day, thereby massively raising freight capacity. Further plans foresee that high-speed bullet trains will carry passengers between the two cities in three hours by 2022.
Similarly ambitious plans exist for other major islands. The trans-Sumatra project aims to upgrade and connect isolated networks to interconnect the provinces of Indonesia's westernmost landmass. Work is ongoing to double-track 370 kilometres between Palembang and Bandar Lampung as well as a 26-km line between Medan and Kuala Namu International Airport. Meanwhile in the east of the country, a ground-breaking ceremony in August 2014 formally launched construction of the 145-km Makassar–Pare Pare line, the first phase of the planned trans-Sulawesi network, Railway Gazette reported. The cost of the initial line was estimated at around $800 million, including rolling stock.
Another major rail project is a proposed high-speed link from Jakarta to the West Java capital of Bandung, some 140 km to the South East. Estimated to require some $6.7 billion USD of investment, the project is mulled to launch in 2016 and complete by 2020. A Japanese consortium has begun to conceptualize a rail link that could carry commuters between the cities in around 40 minutes using the Shinkansen bullet train, down from some three hours on the existing service.
One of the most pressing infrastructure concerns in the capital is worsening congestion between Jakarta and its main airport, Soekarno-Hatta International Airport, yet railway projects linking the two have been struggling to get off the ground. Currently, the airport is only connected by roads. State-owned railway company PT Kereta Api Indonesia (PT KAI) in July 2014 secured a 30-year concession right to serve a 33-km commuter service, construction for which is under way and which will connect the airport with Manggarai station in South Jakarta beginning in July 2015, according to the Transportation Ministry. In addition, a high-speed express service is planned to link Soekarno-Hatta International with Halim Perdanakusuma Airport in the south-east of the capital, which was only recently made available for scheduled commercial flights to accommodate inexorably rising demand for air travel. Construction for the PPP project, valued at a minimum of $2 billion USD, is expected to commence in 2015 and conclude in 2019. Numerous domestic and foreign companies have expressed interest in the tender.
Many other railway projects in Indonesia – both inter-city connections and urban mass rapid transit systems – are at various stages of planning. A host of airports and seaports will also need to be hooked up to the cities they serve, as aviation and maritime terminals are upgraded and many new ones are added (See Indonesia’s Shipping & Shipyard Industry). Unless these facilities are effectively integrated into the overland transportation system, the aspired reduction in logistics costs and spread of industrial development will prove largely unattainable. In addition, coal mines and other mines need to be linked to port terminals in Southern Sumatra and Kalimantan through dedicated railroads. Because they are based on solid long-term market demand, these projects by and large entail ample scope for commercial propositions. PT KAI's revenue increase of 20% in 2013 stands testament to the Indonesian railway market's growth potential.
Law No. 23/2007 on Railways allows private companies to build and operate public railway links, thus opening up to private investment what was formerly an industry almost fully controlled by monopolist PT KAI and other state-owned enterprises. The fact that companies have so far refrained from taking advantage of the new law is blamed to a large extent on complicated land acquisition procedures, which in the past could bring projects close to standstill even where the government is the buyer. In some cases other bureaucratic hurdles, such as environmental impact assessments, have also proven overly burdensome. In addition the PPP framework for a long time was considered insufficiently clear to offer a low-risk investment environment.
Recently, however, legal changes both to the land-acquisition process (See An Update on Indonesia’s Land Acquisition Law) and to the PPP framework, including financial guarantees have gone some way to improve the situation by streamlining processes, defining deadlines and providing greater clarity. If the former monopolist PT KAI can prove itself to be a flexible and congenial partner, Indonesian railway PPP projects could quickly become popular with foreign investors. That said, investors still need to apply for construction and operation permits at various levels of government, a process that can be cumbersome and time-consuming. It remains to be seen what impact the more liberalized law and improved PPP framework will have in practice, and whether implementing regulations need to be amended to attract more interest from private investors in public projects.
Railway passenger and cargo transportation has increased at 6-7% annually in recent years, and growth will in all likelihood receive an additional boost once new areas are connected. This should secure investment demand up and down the country for the coming decade and beyond – not just in building tracks and operating services, but also in the production and maintenance of rolling stock. Consulting services and feasibility studies are another area that should see growing opportunities for private engagement.
Global Business Guide Indonesia - 2014
Contribution to GDP: 4.19% (Q3 2015)
Existing Road Network: Paved 287,926 km, Total 508,000 km (2013)
Existing Toll Road Network: 840 km March 2016)
Active Railway Network: 4,814km (2016)
Number of Airports: 237; 35 with runway length >2,000 metres (2015)
Active Commercial Sea Ports: 121 (2016)
Main Government Bodies: Ministry of Transportation, BAPPENAS, Ministry of Public Works and Housing, Indonesia Toll Road Authority (BPJT).
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