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Indonesia Formalises Involvement in Asian Infrastructure Investment Bank

Indonesia hopes to secure funding for its infrastructure development programme but, in the absence of greater bureaucratic reform, it is unlikely to fully benefit from the promises of the China-led institution.

At a ceremony in Beijing on 29 June, officials representing the 57 founding members of the Asia Infrastructure Investment Bank (AIIB) gathered to sign the bank’s constitution. The document was drafted by prospective members in Singapore in May 2015. It is expected that the bank will be operational by the end of 2015.

Indonesia expressed its interest in joining the AIIB in November 2014 and has now committed US$672.1 million ($870.5 million) to it over the next five years, making it the eighth-largest shareholder in the organisation. The level of stakeholder investment was determined by the size of the country’s economy according to gross domestic product and purchasing power parity. As the eighth-largest shareholder, it has a concomitant share of voting power in the institution.

The Indonesian Finance Ministry hopes that the bank will be able to assist in overcoming the problems in funding infrastructure development within Indonesia. A record US$22 billion ($28.5 billion) was committed to infrastructure projects in this year’s budget. In a bid to demonstrate to private investors that the government was serious about the programme, a further US$3 billion ($3.9 billion) was directed to state-owned enterprises involved in infrastructure development. These efforts fall far short of the US$80 billion ($103.6 billion) that the government of President Joko “Jokowi” Widodo believes the country will need each year to improve its infrastructure development.

There is also a history of actual government spending falling far short of planned outlays, suggesting that the record figure could be overly optimistic. In the first six months of 2015, Indonesia has only spent US$1.7 billion of the allocated infrastructure development funds. According to the Jakarta Globe, progress has been slow because of copious amounts of red tape. Without further bureaucratic reform it will be difficult for Indonesia to reap the full benefits of the AIIB, especially as other developing South-East Asian countries will be competing for access to funds.

There are also signs that investors are beginning to question how serious the government is in furthering its infrastructure development programme. Indonesian construction companies, often referred to as the “Karyas” (“the Works”), listed on the Jakarta stock exchange have experienced strong growth over the past year as speculation abounded over Jokowi’s infrastructure plans. In recent weeks, however, the value of these stocks has declined as investors grow increasingly sceptical about his administration’s ability to secure funding for infrastructure development.

The recently released World Investment Report 2015 indicates that foreign direct investment into Indonesia increased by 20 per cent in 2014, compared to a year earlier. Most of this growth came from countries within East and South-East Asia. In the first quarter of 2015, China became the tenth-largest investor in Indonesia, marking the first time that the Middle Kingdom had broken into the ranks of the top ten foreign investors. As the AIIB is an institution that is led by its regional members, Asian states control 75 per cent of votes, so it makes sense for Indonesia to further engage the region.

Indonesia is also likely to benefit from the increased competition between China and Japan for influence in the region. While Tokyo has not categorically ruled out joining the AIIB, it remains unlikely to do so in the near future. Instead, Tokyo has opted to increase the level of funding it gives to Asian infrastructure development. Japanese Prime Minister Shinzo Abe recently announced a US$110 billion investment plan for “high-quality” infrastructure projects in Asia. Such a development will surely be welcomed by countries with an infrastructural deficit, such as Indonesia.

By joining the AIIB, Indonesia wishes to secure a line of funding that it hopes will assist it in developing the infrastructure that it so desperately requires. Without a commitment to reduce the levels of red tape that are currently holding back infrastructure projects, however, it will likely find that joining the AIIB will not solve the problems that its infrastructure development programme is experiencing.

Mervyn Piesse is a Research Analyst at the Indian Ocean Research Programme. This article was originally published on the Future Directions International (FDI) Blog on July 1, 2015. It is republished with permission.

Published July 2, 2015