An Infrastructure Financing Scheme for Industrial Development

To achieve its vision of becoming a developed and prosperous economy in 2045, Indonesia focuses on expanding its regional development by developing its six economic corridors based on each corridor’s potential industries. Therefore, adequate infrastructure that improves regional connectivity and drives economic activities should be developed to help accelerate the industrial development in each economic corridor. This paper examines the financial feasibility of investing in industrial supporting infrastructure projects and develops financing and institutional schemes for the implementation of public-private partnerships to enhance the attractiveness of the projects for the private sector. The results of life-cycle cost analysis and system dynamics simulation show that with a required initial cost of USD 254 million and operation and maintenance (OM) cost of USD 224.29 million, the development is deemed financially feasible, generating a revenue of USD 872.38 million for a 40-year concession period. From the 45 cost-sharing scenarios investigated, the optimal internal rate of return (IRR) value of 15.62% was obtained, with the private sector covering 64.14% of the initial cost and 73.61% of the OM cost, as well as gaining 76.62% of the total revenue.

Financing scheme; Industrial development; Infrastructure projects; Public-private partnership

 As stated by President Joko Widodo in the Vision of Indonesia 2045, an optimistic goal to become a developed country and the fifth-largest economy in the world has been set for Indonesia when it marks its 100th anniversary of independence in 2045 (Negara and Ramayandi, 2020). To realize this vision, the government has committed to reforming its resource-based economy into an economy based on manufacturing and modern services by investing in equitable infrastructure regional development that is adequate and well-integrated (Tijaja and Faisal, 2014). The development is focused on increasing connectivity with economic growth centers and decreasing disparities among regions

The Master Plan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) was established by the government to achieve equitable regional development. In this master plan, Indonesia’s regions are divided into six economic corridors, which include the Sumatera Corridor, Java Corridor, Kalimantan Corridor, Sulawesi Corridor, Bali-Nusa Tenggara Corridor, and Papua-Maluku Corridor, with the integration of three essential elements: the development of six economic corridors, improvement of integrated connectivity, and acceleration of the human resource capacity and development of science and technology to support each corridor’s economic activities (Berawi et al., 2020).

Previous research has shown that economic growth is positively affected by the development of infrastructure assets (Komarova et al., 2014); a higher number of infrastructure assets as well as their higher quality can reduce income inequality (Calderón and Servén, 2004), which implies that infrastructure development has the potential to reduce poverty (López, 2003) effectively. These positive impacts can be attributed to the increased production capacity prompted by the provision of industrial infrastructure (e.g., factories and smelters) and the increased ease of mobility and transportation to distribute commodities and deliver services provided by transportation infrastructure, such as roads, ports, airports, and docks (Palei, 2015; Snieška and Bruneckiene, 2009).

Despite its positive impacts, infrastructure development requires a very high financial cost (Hansen et al., 2018). The Indonesian National Planning Agency/Bappenas (2020) estimated that the government could only cover 37% of the budget required to finance infrastructure development. Consequently, there is a financing gap that needs to be covered by other sources, for example, through partnership with the private sector, known as the public-private partnership (PPP) scheme.

Research on the industrial development conducted in these past few years shows that its acceleration could be achieved by considering the characteristics of competitiveness and the region's potential resources (Timmer et al., 2011). Several papers have also recommended investment in urban development and connectivity infrastructure to support industrial development, providing mobility and accessibility for humans and goods (Azolibe and Okonkwo, 2020; Zhang et al., 2021). However, these studies have not yet developed a project financing scheme.

One of the key strategies for Indonesia to achieve its vision of being a developed economy by 2045 is through infrastructure development and thereby improving connectivity in the economic corridors to facilitate economic activities. However, as the government experiences budget constraints for funding the required infrastructure development, the involvement of alternative financing sources through a partnership scheme involving the private sector is necessary. The optimal cost-sharing scenario of the PPP financing scheme for industrial infrastructure development in the six economic corridors in Indonesia proposed in this study generated an IRR of 15.62%, which demonstrates that the cost-sharing scheme provides a more optimal financing option with a higher IRR value and equitable allocation of responsibilities and risks.

An institutional scheme for project development was developed to adhere to the proposed financing scheme, which involves planning consultants, JICA, BAPPENAS, National Public Procurement Agency, financial institutions, IIGF, private companies, and state-owned enterprises as the operators of the industries. Synergy among these entities would be required to ensure that the infrastructure projects delivered through the PPP scheme could support Indonesia in realizing its economic development vision for the year 2045. This study encourages further research to consider the social benefits obtained from infrastructure development as a positive externality that increases a project’s financial feasibility.

    This research was supported by the Ministry of Research and Technology, Republic of Indonesia (NKB-2853/UN2.RST/HKP/05/00/2020).

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