How to Harness the Positive Potential of KKN: Explaining Variation in the Private Sector Provision of Public Goods in Indonesia

Abstract

This article argues that the two prevailing perspectives that explain private sector participation in infrastructure in developing countries – new institutional economics and the rent-seeking approach – cannot account for the evident variations within and across sectors in a given country. This study uses two cases from Indonesia's attempt to promote private investment in toll road construction to demonstrate that a firm-level analysis is adequate to the task. In particular, the specific incentive structure that a rent-seeker faces may explain whether positive or negative rent will be facilitated.

Acknowledgements

Research for this article was generously supported by the National University of Singapore's Academic Research Fund, Project R-108-000-033-112. I fully acknowledge Jeremy Menchik's influence on the argument presented here. Portia Reyes read the manuscript with exquisite care, and two anonymous reviewers for the Journal of Development Studies provided insightful comments. Usual disclaimers apply.

Notes

A map of the Trans Java Expressway can be viewed at http://www.skyscrapercity.com/showthread.php?t=567385&page=2.

1. On these features, see Infrastructure Development in East Asia and Pacific (1997: 8).

2. Starting in 1989, Malaysia had built 1127 kilometres by 1998.

3. By the end of 1998, roughly 92 per cent of the total length of Indonesia's tollways was found on Java.

4. In 1987 his eldest daughter, Siti Hardiyanti Rukmana – popularly known as Tutut – and her company, PT Citra Marga Nusaphala Persada (CMNP), tabbed north Jakarta's harbour toll road as her first possession. In 1990 CMNP then took control of the Ir. Wiyoto Wiyono Tollway, which connects Jakarta with its international airport. Tutut's youngest brother, Hutomo Mandala Putra – popularly known as Tommy – followed. His conglomerate, PT Humpuss, took control of the 74 kilometre tollway that ran from Java's western tip (Merak) to Jakarta's western suburbs (Tangerang).

5. Citra Lamtoro Gung Persada was the holding company of CMNP (see note 4 above).

6. This was the clarion call of the reform movement (reformasi) that helped bring Soeharto's New Order down.

7. In late 1997, Napan's worth was estimated at $1.2 billion, while Pribadi's personal fortune was close to $70 million (Williams, 1997).

8. Megawati has headed the Indonesian Democratic Party for Struggle.

9. Kotjo persistently fended off rumours that he was acting on behalf of Liem.

10. Edwin unsuccessfully pursued some of Kotjo's assets as the AFC first unfolded.

11. See Interra's website at http://www.interraresources.com/abtus_bod.asp.

12. Parallel happenings were occurring in Indonesia's power generation sector at the time (Wells and Ahmed, 2007).

13. Government regulation No 8/1990 (art 38). On Soeharto's children's participation, see note 4 above.

14. Bogor's ring road is officially not part of the Trans-Java Expressway.

15. One informant was formerly on the board of the Toll Road Regulatory Authority (interview, Jakarta, 29 April 2009); the other source acts as a senior advisor to the Public Works Department (interview, Jakarta, 10 July 2007).

16. Interestingly, the Minister of Housing and Regional Development was seemingly a bystander and did little to facilitate or prevent the deal.

17. By then the Public Works Ministry had supplanted The Housing and Regional Development Ministry.

18. The parent company of Saratogasedaya Utama is either the investment company Saratoga Investama Sedaya or the related private equity firm Saratoga Capital. At the time of this deal, Edwin Soeryadjaya and his family owned two-thirds of Saratoga Capital. The other third was owned by Edwin's younger business associate, Sandiaga Salahuddin Uno, popularly known as Sandy. Sandy has sat on the board of Interra Resources since 2003. From 2005–2008, he chaired the politically influential Indonesian Young Entrepreneurs Association.

19. When established BPJT had a staff of three, including its head, Hisnu Pawenang. By the end of 2005, the number rose to 20 (Interview, Hisnu Pawenang, Jakarta, 28 April 2009).

20. Although BPJT is supposed to be an independent regulatory agency, it was placed under the Minister of Public Works to keep it protected from Indonesia's notoriously ruthless contractors.

21. In November 2007 Jasa Marga was partially privatised; 30 per cent of its shares were offered to the public.

22. In mid-2007, $1 equalled roughly Rp. 9100 (http://www.onada.com).

23. Although it was announced in December 2008 that the revisions would be finalised in March or April 2009, sources in Jakarta in May told me that it was likely the final revisions would be postponed until after the July presidential elections. They were finalised in late January 2010.

24. See note 18 above.

25. On its quasi-independent status, see note 20 above.

26. Originally the performance bond was set at 5 per cent, but complaints from concessionaries resulted in lowering it to one.

27. Interview, Hisnu Pawewang, former BPJT head, Jakarta, 28 April 2009.

28. In September SMR resubmitted a business profile to BPJT's satisfaction. See Rahadiana (2007).

29. Also, Interview, Hisnu Pawewang, former BPJT head, 20 May 2009. It is possible that the discrepancy was done with intent to obfuscate future responsibility.

30. On the SMR annulling, see Rahadiana and Wijaya (2007).

31. In the end, it sold its shares of the telecommunications company Indosat to Qtel of Qatar in mid-2008.

32. Interview, Hisnu Pawewang, former BPJT head, 20 May 2009.

33. Here it is worth reiterating that 30 per cent of Jasa Marga's shares are publicly traded.

34. The sections were Pejagan-Pemalang, Pemalang-Batang, and Batang-Semarang.

35. Credit Suisse First Boston had provided financial backing for some of Bakrie's ventures in the past. Here it is worth emphasising that pledging loans is one thing, disbursing them another.

36. One would have to figure that the facilitation of Kalla's office in the abortive Jasa Marga deal would put it in an excellent position to pass very relevant information to Bakrie's camp. In the mean time, in April 2008 Bakrie Toll Road increased its stake in SMR from 35 to 60 per cent by buying out one of the original investors, PT Satria Cita Perkasa.

37. In June 2007 the two governments formed a 60:40 joint-venture called Trans Marga Jateng to build and operate the Semarang-Solo turnpike. Under Indonesia's post-Soeharto decentralisation programme, all matters pertaining to land have been devolved to regional governments. This includes land expropriation in the name of public interest (Presidential Decree 65/2006).

38. Interview, Aswan Sunoto, Chief Commercial Officer, PT Bakrie Toll Road, Jakarta, 30 April 2009.

39. See also the interview above (note 38).

40. A commissioner for Jasa Marga, Sumaryanto Widayatin, however, believes that SMR will default on its loans once this route becomes operational. He noted that Jasa Marga has been losing money for years on the adjacent Palimanan-Kanci turnpike and therefore foresees little change until the Cikampek-Palimanan section is built. Interview, Jakarta, 19 May 2009.

41. This paper does not seek to problematise the net social benefits of an integrative highway system across Java.

42. On the importance of firm-level difference, see also Wu and Malaluan (2008).

43. The latter held sway for decades, until a recent swing toward the former was advised (Brunetti and Weder, 1994).

44. On the prevalence of negative rent-seeking in Indonesia's road building business in general, see Olken (2007).