Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences pot

Page 1 of 87 Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences June 2012 Prepared by Strategic Asia Page 2 of 87 Table of Contents The Concept of an Economic Corridor 12 Economic Corridors in Indonesia 12 Implementation Phases of the MP3EI 15 Barriers to Implementing the MP3EI 16 Public Communication and Awareness 17 Synergy with the RPJP and the RPJM 19 Regulatory Reform 21 Institutional Reform 23 Infrastructure 25 Regional Disparities 29 Human Resource Development 33 Financing and Attracting Private Sector Investment 35 Environmental Sustainability 38 Differing Perceived Opportunities and Barriers to Implementing the MP3EI at the National Level and in the Kalimantan and Bali- Nusa Tenggara Corridors. 43 Implementation Requirements and Recommendations for the MP3EI 47 International Experience of Implementing Economic Corridors 47 A Closer Look on East-West Economic Corridor of Greater Mekong Sub-region (GMS): Turning Infrastructure Corridors into Economic Corridors 47 The Indonesia-Malaysia-Thailand Growth Triangle 51 Roles of Stakeholders in the Implementation of the MP3EI 54 Current Structure of the KP3EI 55 Level of Preparedness 57 Sequencing 57 Recommendations for the Implementation of the MP3EI at the National Level 59 Implementation Recommendations in the Kalimantan Corridor 60 Implementation Recommendations for the Bali- Nusa Tenggara Corridor 61 Conclusions 62 REFERENCES 64 ANNEX 67 Page 3 of 87 Figures Figure 1 - MP3EI Economic Corridor Map 11 Figure 2 - Estimated Investment Required for the Main Economic Activities of the MP3EI 14 Figure 3 - Implementation Phases of MP3EI 15 Figure 4 - Barriers to Implementing MP3EI 16 Figure 5 - Infrastructure Projects Under Construction 28 Figure 6 - Total Projects and Total Investments in the MP3EI 29 Figure 7 - Regional Inequality in Indonesia 30 Figure 8 - Indications of Investment in 6 Economic Corridors 32 Figure 9 - Factors for Doing Business in Indonesia 36 Figure 10 - Perceived Opportunities at the National Level 43 Figure 11 - Perceived Barriers to Implementation at the National Level 43 Figure 12 - Perceived Opportunities in the Kalimantan Corridor 44 Figure 13 - Perceived Barriers to Implementing the Kalimantan Corridor 44 Figure 14 - Barriers in the Kalimantan Corridor broken down by frequency of mention: 45 Figure 15 - Perceived Opportunities in the Bali- Nusa Tenggara Corridor 45 Figure 16 - Perceived Barriers to Implementing the Bali- Nusa Tenggara Corridor 46 Figure 17 - Barriers in the Bali- Nusa Tenggara Corridor broken down by frequency of mention: 46 Figure 18 - EWEC Linkages to National Development Plans 50 Table Table 1 - The Economic Activities Promoted by the MP3EI per Corridor 13 Boxes Box 1 - Key Points from the Low Carbon Economy Knowledge Hubs 41 Box 2 : EWEC Flagship Projects 47 Box 3 IMT-GT Five Connectivity Corridors 51 Page 4 of 87 Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences 1 Executive Summary The Government of Indonesia announced the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) in May 2011. This has been followed by almost constant debate surrounding the feasibility and the implementation challenges likely to be faced by the MP3EI. The fact that such an overwhelming amount of interest has been generated about the MP3EI shows the willingness of stakeholders to take part in realising the success of the policy. It also demonstrates that not enough attention has been paid to implementation mechanisms and frameworks during the design phase of the MP3EI itself. The MP3EI is a very ambitious plan. It aims to propel Indonesia into the top ten economies and raise per capita from US$3000 to US$15,000 by 2025. The policy rests on three main pillars: establishing six economic corridors based on the comparative advantage of the different regions of Indonesia; promoting connectivity within Indonesia and the ASEAN region, as well as improving human resources and science and technology. Implementation of the MP3EI, however, is its Achilles heel. The MP3EI document itself dedicates a relatively short space to map out the implementation and monitoring of the policy. This ambitious policy needs a strong implementation strategy to ensure its success. At the national level, there are nine major barriers to the implementation of the MP3EI: a lack of socialisation and awareness; unclear synergy with the RPJMN (Indonesia’s long term development plan); needs for both regulatory and institutional reform; underdeveloped infrastructure; regional disparities; a need for human resource development; a lack of available national financing and disincentives to private investment and a perceived clash with committing to environmental sustainability. Barriers found for the Kalimantan and Bali- Nusa Tenggara Corridors are found to be different, although all stemming from a general theme at the national level. As such, recommendations for the implementation for the two regional corridors are not the same. This indicates that each of the six Corridors will be unique in their implementation strategy. Indeed, the MP3EI states that each corridor has its own theme based on the comparative advantage of that region. Furthermore, implementation relies on a number of factors such as levels of infrastructure, human resources, institutional capacity, amongst others. As such, it is likely that the implementation experiences from one Corridor cannot be copied to another. This suggests then, that the idea of using a pilot corridor should not be undertaken, but instead all six corridors be implemented simultaneously. Implementing the first phase of the MP3EI should 1 The UK Foreign and Commonwealth Office in Jakarta contracted PT. Strategic Asia Indonesia between August 2011 and April 2012 to undertake a project looking at the implementation barriers, requirements and recommendations for the MP3EI. Page 5 of 87 occur at the same time as the implementation of increased research and planning to develop human resources, invest in science and technology, developing basic infrastructure as well as a regulatory and institutional reform. General recommendations for the national level are: The first task is to create effective on the ground awareness and familiarity with the objectives, design and key stages of the Master Plan. At present, Government officials at the national level overall had a much better understanding on the meaning, opportunities and requirements for implementing the MP3EI as compared to the private sector and civil society. A clear set of expectations from different groups of stakeholders needs to be established, as now there is cross over in expectations of different stakeholders- particularly between the private sector and government officials. Increased available information for the private sector as well as inclusive public communication are the first steps in establishing a long term working relationship between the private sector and government to implement the MP3EI. A regulatory review to ensure that the MP3EI can be supported by laws and regulations which are streamlined through the regional and national level. MP3EI Working Units need to be established which coordinate regularly with the national level. These groups should involve a breadth of stakeholders and their targets and quarterly progress should be made available as public information. Improving basic infrastructure should be seen as a national government priority in order to attract private investment in commercial infrastructure. An Action Plan needs to be developed on looking at the short and long term needs of developing human resources in each of the six corridors. At the moment, it is not clear in the MP3EI where funding is to be sourced to establish training centers and other resources develop Indonesia’s man power. The MP3EI document lays out a breakdown for the infrastructure budget, but there is a lack of a breakdown of a budget for human resource development. An Action Plan needs to be established on the strategies when moving from an infrastructure to an economic corridor learning from the international experience. The national PPP framework needs to be reviewed, projects need to synergize between the national and regional level, with only feasible projects which are ready to commence advertised. The President also needs to take the lead at the national figurehead for the development of PPPs in Indonesia. Page 6 of 87 A review of the financing budgeted for the eastern parts of Indonesia needs to be carried out as eliminating regional disparities are a priority for the MP3EI but yet there is a lack of financing in eastern Indonesia which acts as a barrier to growth and also private investment. An important theme in the implementation of the Kalimantan Corridor was the perceived clash with efforts to become more environmentally sustainable. Connectivity was an important issue as at the moment there is a lack of sharing of information between Kalimantan’s four provinces, however this was much more of a prominent theme in the Bali- Nusa Tenggara Corridor since this corridor aims to pull together a series of islands. Eastern Indonesia also has more prominent issues in underdeveloped basic infrastructure and human resources, far much more than Kalimantan. As such, special attention should be given to the Bali- Nusa Tenggara Corridor as well as other eastern Corridors in constructing basic infrastructure with the overall aim to reduce regional disparities. In terms of sequencing, similar to the East- West Economic Corridor of the Greater Mekong Delta Sub- Region, the MP3EI has dedicated the first phase of the implementation process from 2011 to 2015 as solely in infrastructure investment. The purpose behind this is to increase the inter-corridor connectivity and set basic foundations for the second phase. The East West Economic Corridor found relative success in the infrastructure phase, and significant increased trade and investment flows as a result. However, difficulty was found in the move from an infrastructure corridor to an economic corridor. For the second phase of the MP3EI, covering the period from 2015 to 2020, attention needs to move further down to the regional level. After infrastructure corridors are established, the regional government should have a better awareness and ability to fulfil its roles. Increased responsibility at the regional level for implementing MP3EI would serve as a faster method of implementation rather than at the national level and each Corridor would be able to adapt to its local situation easily. The MP3EI should not be bound to a one size fits all policy, but the regions should have the capacity to implement the policy according to the different needs and abilities of each corridor. Page 7 of 87 Introduction Background The Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) is the government’s most prominent economic development policy in the last decade. This ambitious policy aims to leapfrog Indonesia into the ten biggest economies by 2025, by increasing GDP to US $4.5 trillion as well as by increasing GDP per capita income from US $3000 now to US $15,000. Under Presidential Regulation No. 32/2011, President Yudhoyono launched the MP3EI policy in May 2011 and the policy was supported by sectoral ministries, local governments and state- owned enterprises. The MP3EI has huge potential to develop economic growth through the promotion of six economic corridors: the Sumatra Economic Corridor, the Java Economic Corridor, the Kalimantan Economic Corridor, the Sulawesi Economic Corridor, the Bali- Nusa Tenggara Economic Corridor and the Papua- Kepulauan Maluku Economic Corridor. The MP3EI policy centres around three main strategies: to develop the six national economic corridors, to speed up the development of human resource capacity and national science and technology which will feed into the long term support of such accelerated economic development. The total investment required for the six corridors is Rp. 4,012 trillion. From this total, it is expected that the Sumatra Corridor will receive Rp. 714 trillion (18% of total investment), the Kalimantan Corridor will receive Rp. 945 (24% of total investment), the Java Corridor will receive Rp. 1,290 trillion (32% of total investment), the Sulawesi Corridor will receive Rp. 309 trillion (8% of total investment), the Bali-Nusa Tenggara Corridor will receive Rp. 133 trillion (3% of total investment) and lastly the Papua- Kepulauan Maluku Corridor will receive Rp. 622 trillion (15% of total investment). The Master Plan identifies eight primary programs and 22 primary activities as the focus of national development. The eight primary programs are: agriculture, mining, energy, industrial, marine, tourism, telecommunications and the development of strategic areas. The strategic initiative of the Master Plan is to encourage large-scale investment in 22 primary activities: shipping, textiles, food and beverages, steel, defence equipment, palm oil, rubber, cocoa, animal husbandry, timber, oil and gas, nickel, copper, bauxite, fisheries, tourism, food and agriculture, the Jabodetabek area, the Sunda Straits strategic area, transportation equipment, and information and communication technology. Fundamental to the MP3EI policy is the importance of promoting a new way of thinking- “Not Business as Usual”. This new ideology is to come from increased collaboration and inputs from national government, local governments, state-owned enterprises, private sector companies and local communities. The Indonesian Government has limited funds to finance development through its State Budget (APBN). According to the MP3EI, 44% of the total investment needed is expected to come from Page 8 of 87 the private sector and state-owned enterprises. Under the MP3EI, all existing regulatory frameworks must be evaluated, and strategic steps must be taken to revise and change regulations in order to attract such support from investors. Incentives will be implemented on tariffs, taxes, import duties, labor regulations, licensing and permits and land procurements. In order to achieve these goals, the central and local governments must build a stronger link within and beyond the centers of economic growth. Although the policy lays out a promising plan to advance Indonesia’s economy, it has often been noted that its Achilles heel is in the implementation stage. Others have noted that the Government’s previous large scale development acceleration programmes in Indonesia have not fulfilled their promises, such as the 2007 Presidential Instruction on real sector development acceleration and the 2010 Presidential Decree on acceleration of poverty reduction. 2 The Committee on Economic Development Acceleration and Expansion of Indonesia 2011-2025 (KP3EI) is an institution established by the President of the Republic of Indonesia on May 20, 2011 to coordinate the implementation of MP3EI. The Master Plan recognises that Indonesia must overcome a number of challenges: a failure to achieve value-added input in the agricultural and extractive industries; a developmental gap between western and eastern Indonesia; the lack of infrastructure support generally; a lack of connectivity between regions; inadequate quality of human resources and rapid urbanisation. The steps to realise the Master Plan include: bureaucratic reform, including the legislature and judiciary, tax reform and incentives, the creation of special economic zones in each of the corridors, improved shipping and airline capability (ports and airports) to promote connectivity, and increased high school and vocational training to improve human resources. Many elements in the plan are unique points of departure for Indonesia. For example, the Master Plan states that the Government bureaucracy will support the needs of business and provide equal treatment and fair opportunities for all businesses, Government loans will be used to finance investment instead of routine expenditures, such as subsidies and subsidies will be targeted at the disadvantaged rather than for goods, taxes will be on Indonesian sourced income and not worldwide income, taxes will be based on consumption rather than value added taxes, and employment regulations will be supportive of employers as well as employees. Evidence Used in the Study/Data Sources This paper highlights the key barriers to implementing the MP3EI policy and makes recommendations for successful implementation. Using an evidence-based approach, this paper makes reference to data collected during past meetings with stakeholders. Since this project has mainly looked at the implementation barriers and requirements at the national level and specifically at the Kalimantan and Bali- Nusa Tenggara Corridors, the bulk of the 2 Business Section, ‘I’m not optimistic with the MP3EI: economist’, The Jakarta Post, July 25 th 2011 Page 9 of 87 recommendations are made for national level as well as Corridor specific recommendations for the Kalimantan and Bali- Nusa Tenggara Corridors. Data has been collated from meetings and interviews with government officials, members of the private sector and of civil society from all of the six Economic Corridors as outlined in the MP3EI. PT Strategic Asia Indonesia facilitated four seminars, two at the regional level and two at the national level in order to gather opinions from a wide range of stakeholders. A market research company, the Polling Center, based in Jakarta, supported PT Strategic Asia Indonesia and undertook three rounds of interviews with project stakeholders. During the length of this project, the Strategic Asia team gathered data from a wide range of sources from across the Indonesian archipelago. Field trips took place in East and Central Kalimantan, Lombok, Bali, Aceh and Makassar in order to gather area specific data needed to supplement project research, as well as to gain support for two regional seminars which occured in Kalimantan on 6 th October 2011 and in Lombok on 6 th December 2011. Both seminars addressed the specific needs of the regions; the first addressing the Kalimantan Corridor and the second the Bali- Nusa Tenggara Corridor. In preparation for our two regional seminars, trips were made to Central and East Kalimantan for the first seminar and to Lombok and Bali for the second in order to meet key stakeholders, speakers and with the BAPPEDA offices in order to secure cooperation in co-hosting these events. Strategic Asia undertook meetings in Jakarta in preparation for the third and fourth seminar entitled ‘Climate Change Mitigation and the MP3EI’ and ‘Implementing the MP3EI on the National Level’. These seminars were both two day events and took place on the 8 th and 9 th of February 2012 and 14 th and 15 th March 2012, respectively. Apart from guests from Jakarta, both seminars also featured one international speaker from London and included participants from across Indonesia: Sumatra, Kalimantan, Sulawesi, Bali, Lombok and Papua. Strategic Asia also signed a contract with an Indonesian market research company, the Polling Center in August 2011. The Polling Center attended the Kalimantan, Lombok and the Climate Change Mitigation and MP3EI seminars to undertake one to one meetings with participants alongside the event. A broad range of stakeholders were interviewed, from government officials, members of the private sector, NGOs, Universities, research organizations, and the Donor community. A total of 18 interviews were conducted during the Kalimantan seminar and 20 additional interviews were conducted during the Lombok seminar. After the two regional seminars, the Polling Center conducted 38 interviews in Jakarta. Details of the interviewees can be found in the Annex of this report. During these three rounds of interviews, the Polling Center quantified data on the awareness of the MP3EI; views on perceived opportunities coming from the MP3EI; barriers and solutions for implementation; synergy with the RJPMN (the medium term development plan) and roles of stakeholders. Verbatim quotes from these stakeholders coming from interviews with the Polling Center can be found throughout this paper separated in text boxes. Page 10 of 87 Furthermore, focus group discussions were a large feature of this project. All four seminars were made up of a panel sessions with presentations as well as smaller breakout discussions with specific issues for discussion. The agendas, participant attendance lists and seminar summaries for all four seminars are provided in the Annex for further information. Alongside preparation for seminars, Strategic Asia staff also met with key stakeholders in Jakarta as part of collating and consolidating research. Extensive secondary research has also been ongoing throughout the life of this project. Data has been collected from government resources, secondary literature and Indonesian and international media. [...]...Figure 1 - MP3EI Economic Corridor Map Source: MP3EI p 46 The Six Economic Corridors 1 Sumatra Economic Corridor as a “Centre for Production and Processing of Natural Resources and As Nation’s Energy Reserves” 2 Java Economic Corridor as a “Driver for National Industry and Service Provision” 3 Kalimantan Economic Corridor as a “Centre for Production and Processing of National Mining and Energy Reserves”... Sulawesi Economic Corridor as a “Centre for Production and Processing of National Agricultural, Plantation, Fishery, Oil & Gas, and Mining” 5 Bali – Nusa Tenggara Economic Corridor as a “Gateway for Tourism and National Food Support” 6 Papua – Kepulauan Maluku Economic Corridor as a “Centre for Development of Food, Fisheries, Energy, and National Mining Page 11 of 87 The Concept of an Economic Corridor. .. connectivity and infrastructures links To facilitate the movement of goods and services across economic corridors, connectivity between regions should be developed to accelerate and expand economic development Connectivity infrastructures such as construction of transportation routes and information and communication technology (ICT) within and across the regions will reduce transportation and logistical... economic corridors into the global market Successful implementation of economic corridors requires strong political will with the placement of appropriate infrastructure as well as streamlined competitive regulations to facilitate the movement of goods and people Economic Corridors in Indonesia Growth centres, connectivity and infrastructure are the main building blocks of the Indonesian Economic Corridors... Corridors Economic growth centres will be developed through industrial clusters and special economic zones (SEZ) These economic hubs will be developed in each economic corridor in line with the local potentials and specialisations of each region For instance, the MP3EI identifies Kalimantan as an energy hub, Bali as a tourism hub and Sumatra as an agroindustry centre These different types of economic. .. benefits Economic corridors aim to attract investment and generate economic activities in a particular region in view of realising the economic development potential of a given region with essential features of lower distribution costs and improved land acquisition Physical links and logistics facilitation are key elements towards achieving these aims Physical connectivity between the centres of economic. .. of 87 The Action Plan, for successful implementation of the MP3EI, will be discussed later in this report This action plan has considered the international experience specifically from the Lower Mekong Delta Action Plan and the Indonesia-Malaysia-Thailand Growth Triangle Action Plan Barriers to Implementing the MP3EI Figure 4 - Barriers to Implementing MP3EI 1 Public Communication and Awareness 9 Clash... 100% whereas Thailand and Malaysia currently stand at approximately 90% ICT Indonesia currently stands at 109th place in the E-Government Index, whereas neighbours Malaysia, Singapore and Thailand stand at 32nd, 11th and 76th place, respectively A 2011 World Bank report found that increasing broadband connection by 10% results in a 1.12% increase in GDP per capita in developed countries and 1.38% in developing... RPJMN, and MP3EI: 2 Synergy with the RPJP and the RPJM Law No 25/2004 regarding the National Development Planning System mandated the integration of Indonesia’s long, medium term and annual development plans This also indicates that the Law acts as a legal umbrella for the implementation of development plans in order to guarantee the achievement of the country’s goals The National Long Term Development Plan. .. accelerated economic development Upon transformation of an infrastructure corridor to an economic corridor, determining and addressing potential skill mismatches is the key in generating job creation, higher economic productivity, competitiveness, and high growth in Indonesia Through the MP3EI, the present pool of human resources is anticipated to meet the needs of all sectors in relation to the main economic . Page 1 of 87 Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific Differences . Connectivity Corridors 51 Page 4 of 87 Implementing Indonesia’s Economic Master Plan (MP3EI): Challenges, Limitations and Corridor Specific