Indonesia and China’s AIIB

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Indonesia and China’s AIIB

Jakarta views the bank as a key partner in addressing its infrastructure woes.

Indonesia and China’s AIIB

When the China-led Asian Infrastructure Investment Bank (AIIB) announced the approval of its first four loans last month, it was little surprise that Indonesia was among them. Under President Joko “Jokowi” Widodo, Southeast Asia’s largest economy has been ardently supporting the AIIB and boosting its relationship with China, viewing Beijing and its initiatives as a vital part of funding efforts to improve its barely functioning infrastructure.

Indonesia’s embrace of the AIIB is rooted in the country’s longstanding efforts to address its infrastructure crisis. Indonesia ranked a dismal 81st in the 2015-2016 World Economic Forum competitiveness rankings for infrastructure, significantly lagging behind its regional peers like Singapore, Malaysia, Thailand, and, embarrassingly, even Laos. These infrastructure problems have been a drag on economic growth, with Indonesia’s logistics costs estimated at a whopping 26 percent of the country’s GDP (as opposed to just 8 percent in Singapore or 14 percent in Malaysia).

Since coming to power in November 2014, Indonesian President Joko “Jokowi” Widodo has made infrastructure a key priority of his administration. He has outlined an ambitious plan to build ports, railways and roads to boost the country’s economic growth to 7 percent. The trouble, however, is how to finance them. The World Bank estimates that Indonesia will have a $600 billion infrastructure gap in the next five years, and the government’s budget for infrastructure was recently trimmed to 97 trillion rupiah ($7.4 billion) from 104 trillion rupiah, in part due to lower commodity prices and revenue shortfalls. Though officials say the budget will rise again next year, data from the Public Works Ministry indicates that the state budget can only finance about 40 percent of the 5,519 trillion rupiah for infrastructure investment in Jokowi’s first term.

One obvious solution, then, is to bring in more funds from the private sector as well as multilateral banks such as the World Bank, the Asian Development Bank, and the new Asian Infrastructure Investment Bank that China had initiated back in October 2014. Recognizing this, Jokowi has made infrastructure the central topic of discussion in his interactions with Chinese officials. In his first round of discussions with China at the Asia Pacific Economic Cooperation (APEC) summit in Beijing back in November 2014, which was also his first overseas trip, Jokowi bluntly told Chinese President Xi Jinping that he wanted Sino-Indonesian relations to materialize into “more concrete outcomes.” Since then, he has requested that Chinese state companies be more involved in infrastructure projects, and has called for measures to boost Chinese investment into the country more generally.

China, for its part, has been keen to oblige. Though Beijing is already Indonesia’s largest trading partner, it still lags behind in terms of investment. From a more strategic perspective, support for its new regional economic initiatives in general and good ties with Indonesia, a leader within the ten-member Association of Southeast Asian Nations (ASEAN), is also a boost for China’s diplomacy in the region.

While administration officials themselves admit that the infrastructure initiatives have been slow to take off, they point out that Indonesia’s relationship with the AIIB does offer some promise, especially since the approval process is insulated from the familiar domestic obstacles in the country. In June, Indonesia was included in the list of first recipients of AIIB loans. The AIIB agreed to pour $216.6 million in financing into a $1.743 billion project to improve access to urban infrastructure and services in slums in 154 cities in central and eastern Indonesia, a project co-financed with the World Bank.

That may just be the beginning. In an interview with Bloomberg in February, Jokowi said that he wanted a third of all funding from investors and state-owned companies to come from the AIIB. A month earlier, Indonesian Finance Minister Bambang Brodjonegoro told local media outlets that Indonesia would propose no less than six infrastructure projects for AIIB financing for 2016 and 2017 with combined costs exceeding $2 billion. Though he did not disclose the specific projects or their funding amounts, he said they would focus on priority areas such as energy, roads and water. An example, he said, would be the state electricity company PLN’s work to develop 10,000 megawatts of electricity across the country.

More generally, Indonesia continues to be an active supporter of the bank. Indonesian officials, including Brodjonegoro himself, repeatedly highlight that concerns like transparency or corruption ought to be viewed in perspective, especially given the potential for AIIB’s project approval process to be much faster one than that of other banks, with around half a year in the ADB and a year at the WB according to Brodjonegoro. Indonesia has also said that it is prepared to host an AIIB regional office when talks on opening more branches of the bank begin. Back in late 2014, Jokowi had suggested to China that Indonesia would be happy to host the headquarters of the bank.

Though the signs are encouraging, caution is warranted when assessing the future of Jakarta’s relationship with the AIIB and China more generally. It is still early days for the AIIB, and there is no telling how it will fare as a development bank relative to its competitors. And though China has been rising steadily as an investor in Indonesia – moving to a record tenth place this year according to figures by Indonesia’s Investment Coordinating Board (BKPM), BKPM personnel themselves are quick to point out that too often trade and investment pledges are not often actually followed through on.

More generally, some previous Chinese-backed infrastructure projects in Indonesia have given Beijing a bad name. Those familiar with Chinese involvement in Indonesian infrastructure continue to cite the cautionary tale of a 2005 deal initially reached between the two countries for Beijing to build eight power stations without government guarantees as being a case in point. Though this is being done via the AIIB as opposed to more directly with China, suspicions among some circles continue to remain.

On the Indonesian side, attracting more Chinese investment also is partly contingent on Jokowi carrying out much-needed reforms on foreign investment to create a more permissive regulatory environment, and his record thus far on this is at best mixed. Even AIIB-financed projects are implemented by Indonesian agencies, and they will thus operate in this same environment.

These issues notwithstanding, Indonesia’s embrace of the AIIB looks set to not only continue for the rest of Jokowi’s first term in office, but foreseeably become even tighter as well as he steps up his infrastructure drive.