Cancelation of Strategic Projects

KOMPAS/DIDIE SW

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Prime Minister Mahathir Mohamad’s decision to cancel the Malaysia-Singapore railway project in order to save Malaysia\'s economy has attracted much attention.

Even though several parties argue that the cancelation of this megaproject is based on Mahathir\'s political consideration to maintain Malaysia’s distance from Singapore, on the other hand it is judged appropriate to reduce the fiscal burden. Moreover, many say the project will not contribute to the economy at present or in the future, so Mahathir\'s decision has gained widespread support from the Malaysian people.

It is interesting to see that the Malaysian government\'s decision has also raised questions about the urgency of similar policies in Indonesia. Given the size of Indonesia\'s debt, why cannot we take the same policy steps? Has our debt burden reached a critical level and endangered the health of the economy so that the cancelation of strategic projects under President Joko “Jokowi” Widodo\'s leadership becomes indispensable?

Debt crisis

Actually, there is a fundamental difference between the debt crisis being faced by Malaysia and the current debt situation in our country. In absolute value, Indonesia\'s debt is greater. The value of Malaysian debt amounted to 1 trillion ringgit (Rp 3,600 trillion), while Indonesia\'s debt already reached Rp 4,136.5 trillion (as of March this year).

However, when comparing the value of the debt we need to look at the scale of the Indonesian economy, which is much larger than Malaysia’s. When comparing the total debt and gross domestic product (GDP), Malaysia\'s debt has reached almost 60 percent at present and even though the absolute value of Indonesia\'s debt is greater, the proportion of its debt is still around 29.8 percent.

Jokowi\'s government certainly has an argument in applying its debt policy, especially to finance infrastructure development to support growth and improve the competitiveness of our economy. The availability of infrastructure is indeed a major obstacle in the acceleration of development. For example, related to the decline in logistic costs, which is currently still at 23 percent of GDP, it is much higher than other developed countries where it ranges from 11 to 14 percent.

This makes our economy inefficient and unable to compete with other countries. Moreover, the distribution of development also relies on infrastructure development in all parts of Indonesia, especially in the eastern regions, border areas and other underdeveloped regions. As a consequence of the policy, massive infrastructure development currently has a major impact on Indonesia\'s rising domestic and foreign debts.

However, we cannot avoid the question: With the current unfavorable global economic phenomenon, does Indonesia not need to review the big projects like the steps being taken by Mahathir\'s government?

History shows that Indonesia actually applied a similar policy at the beginning of the Asian financial crisis in 1997. The crisis initially hit Thailand in July 1997 and it was predicted that it would expand to Indonesia. With the total debt of the country, which at that time reached Rp 538 trillion or almost 50 percent of GDP, Indonesia\'s economic condition was already becoming vulnerable. Therefore, in August 1997, the government decided to suspend or re-examine several strategic projects.

We at Bappenas were assigned to identify those projects. In September 1997, through Presidential Decree No. 39/1997, the government finally postponed the implementation of 156 projects or about 65 percent of the 241 priority projects, either directly implemented by the government, state-owned enterprises (SOE) projects or private projects that demanded government and SOE financial support.

The total value of the canceled projects was Rp 111.2 trillion or more than Rp 520 trillion today. The government\'s move to cancel the projects for the sake of fiscal efficiency gained a positive response from the markets and the public. The policy showed how the Indonesian government could read the situation clearly and take a firm stance when needed.

However, within next three months after the issuance of Presidential Decree No. 39/1997, 1997 Presidential Decree No. 47/1997 revoked the decision to delay the implementation of a number of national projects. However, Bappenas was not involved in the evaluation process.

The latter policy received a negative response from the market, which had a direct impact on the weakening of the rupiah. The same thing happened when the government closed down 16 troubled national banks, which were initially highly appreciated, but not too long after that it was revised again by reviving one of the banks, thereby immediately incurring harsh criticism from the public and a negative reaction from the market.

The decline in public confidence in the government\'s economic policy at that time had an impact on the political crisis, which eventually led to the reform era.

As soon as it entered a period of economic and political crisis, Indonesia’s economic recovery process during former president BJ Habibie\'s leadership gave the government a chance to continue with strategic projects, which were vital for development. Through Presidential Decree No. 15/2002, the government of Megawati Soekarnoputri decided to revoke Presidential Decree No. 39/1997 and resume several national projects, which had previously been stopped.

The policy was taken as an effort to support economic recovery. Several projects, which were previously included on the cancelation list of Presidential Decree No. 39/1997, finally continued under new leadership, such as the Kualanamu International Airport and Kanci-Pejagan toll road that were completed under the leadership of Susilo Bambang Yudhoyono (SBY) and the Seroja  and Semarang-Solo toll roads, which were completed under Jokowi. Several projects listed in the presidential decree are still in the preparation and construction phases, such as the Semarang-Demak and Medan-Kualanamu toll roads.

Valuable lessons

We need to reflect on the many valuable lessons learnt from the 1997 financial crisis. When facing an economic crisis, the state needs to be present by taking the right policy despite the difficulties, but the policy must be consistent in its implementation. Indonesia\'s experience in implementing inconsistent policies during the 1997 financial crisis should be a lesson for the current and future governments.

Indonesia also needs to be alert to any economic crisis that may occur at any time. As a small open economy, it will always be affected by global economic turmoil. Our current debt, which is still at a safe level, can turn into a greater burden if the global economic turmoil continues and we ourselves cannot afford to utilize the loan money effectively to achieve development goals and economic acceleration.

The development financing strategy through increasing domestic and foreign debts taken by Jokowi’s government needs consistency and discipline in their utilization.

As an additional note, with the various limitations and challenges being faced today, the government needs to be on alert in utilizing every single rupiah so that the development strategy is able to have a real impact on people\'s welfare. For example, the policy of the Presidential Instruction on Underdeveloped Villages, which were applied at the end of the 1990s, successfully lowered the poverty rate from 13 to 11 percent within three years, with total financing of only Rp 1.4 trillion.

Even though the challenges being faced by each government may be different, poverty alleviation programs still determine the target and effectiveness of measurable implementation. SBY implemented the National Community Empowerment Program (PNPM) at an annual cost of Rp 15 trillion and Jokowi the Village Fund policy that is reaching Rp 60 trillion per year. The policy has, however, been judged by many as not being effective enough to reduce poverty significantly.

Learning from the experience, the magnitude of the budget is no guarantee that a development program will be successful. Effective and focused utilization of funds with the support of a comprehensive policy framework becomes a more crucial factor to determine the success rather than just the provision of large budget allocations.

Ginandjar Kartasasmita, Former National Development Planning Minister/Head of Bappenas 1993 to1998