Australia's Role in Indonesian Infrastructure Projects

29 Oct 2018
By Winona Wroe
Australia's Role in Indonesian Infrastructure Projects
Indonesia’s growing prominence in the Indo-Pacific region means that now more than ever Australia must expand the ways in which it engages with its closest Asian neighbour. One of the ways that Australia can improve their engagement is to increase efforts to close the huge infrastructure gap in Indonesia. Since President Jokowi was elected in 2014, he has made it a top priority to improve inclusive infrastructure development throughout the Indonesian archipelago. This increasing activity in the last few years means that Australia can ramp up its involvement, which can also contribute to regional economic integration and growth.

Australian engagement with Indonesian infrastructure

Since the Asian Financial Crisis of the late 1990s, Indonesian infrastructure has not been able to keep up with economic growth in the country, causing an infrastructure gap of a whopping US$1.5 trillion compared to other emerging economies.  Australia has already been taking part in bridging this gap through its development cooperation with Indonesia. This has helped Indonesia gain more effective outcomes from its own expenditure on infrastructure, and expanded the impact of Australia’s programs by leveraging funds from the private sector and other development partners.
Some of the development programs completed in the past include education improvement, electoral support, reducing impact of natural disasters, economic management, improving the health system, poverty reduction, and of course infrastructure development. The two most relevant of these programs include:
  • The Eastern Indonesia National Road Improvement Project (EINRIP), which supported 20 major road projects across nine provinces, as well as around 1,300 metres of fabricated steel bridge structures.
  • The Indonesia Infrastructure Initiative (IndII) which worked with the government of Indonesia (GOI) in addressing constraints to investment in infrastructure. The main areas of focus were water and sanitation, roads and transport, and cross-cutting policy and regulations.
Much of these past development projects continue today in different forms. The most obvious one is the Indonesia Australia Infrastructure Partnership (KIAT), which replaced IndII in 2017. KIAT’s overall goal is ‘sustainable and inclusive economic growth through improved access to infrastructure for all people’. It will continue to help improve the preparation of projects funded by the Indonesian government and various Multilateral Development Banks (MDBs). The primary areas of focus for KIAT are roads as well as water and sanitation projects; but it realises the importance of different sectors that are a priority and is therefore open to supporting these too. There is scope for increased collaboration between KIAT and investment banks. 

Another current program is the Multilateral Development Bank Infrastructure Assistance (MDB-IAP). In this, the Australian government partners with the Indonesian government, the World Bank and the ADB to support Indonesia’s efforts to improve infrastructure, ultimately allowing rapid, sustainable and inclusive development. It does this by providing institutional capacity strengthening, as well as project preparation for loans from the ADB or World Bank. This has shown to be an effective way for Australia to provide aid to Indonesia.

Options for Australia to expand engagement

Current Australian development assistance can only go so far to help bridge the infrastructure gap. The GOI also has limited funds and resources, so this led to President Jokowi actively seeking funding and expertise from other sources such as bilateral projects with other countries, as well as multilateral initiatives and investment banks. Australia can expand its efforts into the Indonesian projects under these initiatives to focus on infrastructure that will improve trade ties between Australia and Indonesia.

The Asian Infrastructure Investment Bank (AIIB) was established by China in 2016 as the first MDB solely focused on infrastructure financing (US$100 billion subscribed to it). Although it is a very new MDB with a large portion of membership from one country (China), it is multilateral and has a diverse regional membership. AIIB has also worked hard to develop more formal and transparent policies, collaborating closely with established MDBs to refine its institutions and provide finance for projects, including in Indonesia. Australia and Indonesia are both founding members of the AIIB, and so Australia could seek to involve itself in Indonesian infrastructure projects, including those under the Belt and Road Initiative (BRI), via the AIIB. This would ensure Australia’s standards for involvement are met.  

Another new initiative in the region is the Japan-led Partnership for Quality Infrastructure (PQI) which has a budget of US$200 billion. PQI works with other governments and multilateral organisations, with an emphasis on ‘quality infrastructure investment’ while promoting transparency and a rules-based order. Japan has a long history of partnering with Indonesian infrastructure and has built a good reputation through hard-earned experience over the years. This mixture of a good reputation in Indonesia as well as the rules and standards it promotes makes the PQI another good option for Australia to partner with in Indonesian infrastructure projects.

The newest player in this field is the International Development Finance Corporation (US-IDFC) led by the United States with a budget of US$60 billion. This is different to the others in that it focuses on facilitating private sector-led projects rather than government. As of October 2018, it is still in the institutional set-up phase with no projects having been launched, but there is huge potential for Australia to become involved. Earlier this year Australia, the US and Japan signed an MoU to “mobilise investment in projects that drive economic growth, create opportunities, and foster a free, open, inclusive and prosperous Indo-Pacific". Australia could potentially work on projects through this agreement whilst securing funds through the US-IDFC.

Diplomatic, economic and security implications

Australia, by expanding the ways it contributes to Indonesian infrastructure projects, will first and foremost be delivering on what was set out in the 2017 Foreign Policy Whitepaper: increasing Australia’s efforts to being a leading development partner for Southeast Asia, and ensuring regional infrastructure building is inclusive. Infrastructure development helps with Indonesia’s economic growth which in turn contributes to growth and stability in the wider region.

These efforts will also improve bilateral relations between Australia and Indonesia, especially in the currently low levels of trade and investment. The two countries do not have much trade complementarity, with the major exception being in agricultural trade. If Australia focuses on improving infrastructure that leads to better trading between the two countries, this would be good news for the relationship. The increased involvement of Australian businesses in infrastructure development projects would also drive up investment ties. Overall this will forge a more positive bilateral relationship.

Another consideration is regional security. Australia has high interests in keeping its region stable and secure. Since the enormous infrastructure gaps have become a prominent feature of the Asian region, the diverse array of initiatives discussed above have come into being. Most of these are led by great powers, so it is possible that strategic competition could escalate as the amount of these type of infrastructure projects increase, eventually leading to an ‘infrastructure Cold War’. Australia could prevent this from happening by actively involving itself in all the various initiatives to aid in institution building and encourage constructive competition.

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Winona Wroe
Winona Wroe
Winona Wroe is currently studying a Bachelor of Arts majoring in Chinese, Political Science and International Relations at The University of Western Australia. She is actively involved within the student-run Australia-China Youth Association committee and organises events for students interested in the Australia-China space.
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