Regulation & Governance (2010) 4, 465–484 doi:10.1111/j.1748-5991.2010.01092.

Driving growth: Regulatory reform and

expressways in Indonesia rego_1092 465..484

Jamie S. Davidson
Department of Political Science, National University of Singapore, Singapore

Abstract
This article uses the case study of Indonesian governments’ attempts to construct a 1,000 kilometer
toll road through the densest parts of Java to shed light on how governments with a checkered past
of enforcing contracts and protecting private property rights go about establishing the requisite
regulatory framework to attract private investment for infrastructure. While regulatory reform has
taken place in Indonesia, vested interests and power will keep the country’s political economy from
taking on World Bank-promoted best practice characteristics. Programs that promote private
sector participation in infrastructure need to be reconsidered where the main ingredients for these
programs’ success exist in small measures.
Keywords: governance, highway, Indonesia, infrastructure, regulatory reform.

1. Introduction
Specification of the quantitative relationship between growth and infrastructure has
perplexed economists since the late 1980s. Early empirical articles – notably Aschauer
(1989) – showed a robust and positive relationship. These findings, however, were later
criticized on a number of accounts. One was the inability to control for reverse causality;
that is, infrastructure stock may be a result, rather than a cause, of growth (Gramlich
1994). Subsequent modeling has grown in its sophistication and, while contrasting con-
clusions persist, a recent state-of-the-field report finds an “increasing consensus around
the notion that infrastructure generally matters for growth and production costs,
although its impact seems higher at lower levels of income” (Estache & Fay 2007, p. 6). If
this is the case, how are developing countries supposed to go about achieving the goal of
improved infrastructure?
Broadly speaking, two routes of infrastructure provision have been available to low
income countries. One is the developmental state model, to which most scholars attribute
East Asia’s astounding economic growth. In brief, this model is characterized by collabo-
rative government–business relations, dense policy networks, visionary leadership, and,
crucially, state-led mobilization and direction of resources. In East Asia, states targeted
particular sectors – for example, by giving them subsidies, tax credits, or access to cheap
capital – to create impressive export industrialization regimes (Haggard 1990). Less
celebrated has been the fact that these features contributed significantly to the building of

Correspondence: Jamie S. Davidson, Department of Political Science, National University of

Singapore, Block AS 1, Level 4, 11 Arts Link, Singapore 117570. Email: poldjs@nus.edu.sg
Accepted for publication 10 October 2010.

© 2010 Blackwell Publishing Asia Pty Ltd

J. S. Davidson Regulatory reform and expressways in Indonesia

high quality domestic infrastructures, which in turn helped transform these low income
countries into prosperous states (Mody 1997).
The influence of the developmental state model, notwithstanding its successes, has
in large part been eroded. For some, its fundamentals rested on a peculiar combination
of historical contingencies and contextual factors that made its export impractical.
Neither do many pretend that low income countries today have the capacity to build
the strong state institutions that underpin the model. Finally, given its positive view on
state intervention, it remains at odds with the pro-market ideology of The World Bank
and the International Monetary Fund (IMF), whose clout in the developing world is
unmistakable.
To achieve their mantra of privatization, liberalization, and deregulation, interna-
tional financial organizations (IFIs) have promoted a neoliberal model: in infrastructure
provision, it is commonly referred to as a best practice approach. In essence, it is a set of
policy guidelines putatively predicated on global success stories that, it is proposed, other
developing countries should adopt and apply. A core feature of this approach is private
sector participation (PSP). During neoliberalism’s heyday in the 1980s and 1990s, this
perspective saw the state as a provider for an environment of law and order in which
property rights and contracts could be enforced reliably. Since the great market failures
that characterized the 1997–1998 Asian Financial Crisis, the strategy has undergone some
revision. One adjustment has been the increasing attention paid to building institutional
capacity to regulate market transactions effectively. This includes the implementation of
so-called second-generation reforms with accountability and transparency; in other
words, the creation of good governance. That said, in infrastructure provision, the best
practice model lays great emphasis on engaging the private sector, inducing competition,
and allowing for cost-recovery tariffs.
Although in some respects the best practice model is a normative and thus an
unobtainable ideal, its active promotion by IFIs makes it relevant for developing coun-
tries. This is especially so for Indonesia. Since the 1998 downfall of its long-time authori-
tarian ruler, Soeharto, the country has embarked on wide-ranging IFI-led reform and
best practice programs aimed at liberalizing (but also re-regulating) its economy. More
than a decade on, and some six years after The World Bank declared Indonesia to be
post-crisis (The World Bank 2004, p. 1), how well has PSP in infrastructure fared? The
answer is not well. Consider this fact: despite concerted efforts, fewer than 250 kilometers
of expressways have been built in Indonesia since 1999, roughly 25 kilometers per year.
This article questions the efficacy of promoting PSP best practice programs in coun-
tries that lack key ingredients for their success. Broadly speaking, the main impediments
to the successful implementation of the broader liberalization of Indonesia’s economy are
interconnected and well known. They are ably summed up by the following: weak state
institutions captured by predatory elite interests (Robison & Hadiz 2004), ineffective
bureaucratic implementation and business–government relations that vacillate from col-
lusive to antagonistic (Hamilton-Hart 2007), an incapacitated rule of law (Lev 2005), and
an uncertain investment climate (Lindblad & Thee 2007) – in all, a record of poor
economic governance (McLeod 2005a).
These broad-based factors accurately depict current conditions in Indonesia, but it is
equally useful to narrow our view to see how these obstacles manifest themselves in key
sectors. In other words, analytically we need greater specification of the underlying
factors that are bedeviling PSP best practice projects in infrastructure (Vives et al. 2006).
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To do so, following in the footsteps of Wells and Ahmed’s historically informed and
careful look at Indonesia’s power sector (Wells & Ahmed 2007), this article focuses on
one infrastructure subsector, namely, expressway construction. Few sectors were as pub-
licly associated with the cronyism of Soeharto’s New Order regime (1966–1998) as was
the highway industry. Meanwhile, officials are betting that the completion of a roughly
1,000 kilometer, end-to-end expressway across the northern coast of the island of Java –
the country’s demographic and industrial center – will be a key component of sustain-
able, future growth.
This article is not a conventional transport study, however. It presents neither an
econometric model to assess the efficiency of building what is known as the Trans-Java
Expressway, nor an economic geography approach to determine the reaction of firms,
and their investment and location decisions in light of the toll road. And while only one
sector is investigated, the article does suggest that efforts to liberalize Indonesia’s highway
industry can shed critical light on the liberalization of the country’s economy and offer
general lessons on reforms in the highway sector in developing countries.
I spotlight three problems that have flummoxed best practice reforms in Indonesia’s
tollway sector and that are causing the Expressway’s construction to proceed at a glacial
pace. Each of these problems is underappreciated by the best practice literature. One has
been the government’s difficulty in acquiring the public right of way. Land laws are weak
and incoherent, while central government officials, in charge of highway policy, and local
government officials, in charge of appropriating the land, share incompatible incentive
structures. This latter attribute is an unintended consequence of Indonesia’s current
program of decentralization. Inter-ministerial dissension has also played its part, ham-
pering efforts to utilize state funds allocated for land appropriation.
The second problem has been mobilizing adequate capital. For years concession
holders balked at committing money to their respective sections. Some sought rent in the
selling of their licenses; others genuinely lacked financial resources. Domestic banks –
state and private alike – held skeptical views of concessionaire or state commitment to the
megaproject. Both of these issues are of utmost importance in highway construction,
although the best practice literature tends to take the state’s ability to clear the necessary
land for granted. It further assumes that sufficient private capital will be forthcoming
once the proper regulatory framework has been put in place.
The third concern throws the limitations of the best practice literature into stark
relief. A detailed case study of the struggle to complete the Trans-Java Expressway illus-
trates the path-dependent properties of institutionalizing a new regulatory regime. In
contrast to the best practice literature’s propensity to emphasize choice in the selection of
policy and design, it is shown how the inevitable constraints of historical legacies and
social conflict weigh heavily on policymakers and other key actors. These “stakeholders”
are not unencumbered players free to choose and apply a range of policy options and
practices. They are restrained by the fields of power in which they are embedded.
This article – whose research is based on domestic press reports and interviews
conducted in Indonesia with concessionaires, bankers, officials in the Toll Road Regula-
tory Agency, parliamentarians, financial analysts, consumer advocates, landowners
affected by the proposed Expressway, and others – is structured as follows. After surveying
the best practice literature and its rationale for promoting PSP in infrastructure, it
highlights Indonesia’s post-1997–1998 economic predicaments by paying attention to
the country’s declining infrastructure stock. Situating the struggles behind the Express-
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J. S. Davidson Regulatory reform and expressways in Indonesia

way’s construction in their broader political and developmental context follows. I empha-
size how the legacies of rentier capitalism under the New Order have bequeathed specific
problems in toll road development to post-Soeharto administrations. The next section
underscores how the latter have sought to reform the sector along best practice lines,
highlighted by a mixture of liberalizing and regulatory measures. Two subsequent sec-
tions focus on the problems mentioned above, land acquisition and financial capacity. I
conclude by offering some general lessons learned from this case study on institutional-
izing regulatory regimes, specifically for toll roads, where “weak local conditions” prevail
(Vives et al. 2006).

2. Why PSP, and how?

State-led provision of infrastructure was once a feature of mainstream development
policy in developing countries with resource-challenged private sectors. Due to certain
factors – the Cold War for one – a number of these states had access to capital, often in
the form of aid packages. Accordingly, it was believed that state-owned enterprises (SOEs)
– institutions insulated from profit-making pressures – would absorb the costs of build-
ing infrastructure to jumpstart subsequent private investment and productive economic
activity.
Starting in the 1980s with the rise of neoliberalism, IFIs shifted emphasis onto the
private sector. The latter, driven by profit motives, was deemed particularly able to bring
efficiencies and effectiveness to bear on capital-intensive projects, in contrast to the
inefficiencies and corruption that characterized SOEs. A notable component of the
so-called Washington Consensus, which promoted the liberalization and deregulation of
economies, was the privatization of these very same SOEs that once provided for infra-
structure in developing countries.
Private sector participation (PSP) in infrastructure in the developing world peaked in
the mid-1990s, a period characterized by rapid growth and cheap money. It looked as if
the flow of private capital into the developing world would expand indefinitely (Daliami
& Leipziger 1998) – until trouble struck. First was the Asian Financial Crisis starting in
1997, followed by the 2001 debacle in Argentina. These meltdowns made foreign investors
wary of assuming substantial risk in politically sensitive infrastructure sectors. The crises
also piqued the frustration of consumers and politicians fueled by unmet (and perhaps
unrealistic) expectations of PSP. Investment figures accordingly plummeted (Estache
2006). There is evidence of a gradual rebound, however. World Bank data show a rise in
PSP road projects from 2005–2008 (Izaguirre & Jett 2009).
A major proponent of this shift toward increased private investment in infrastructure
has been, from the start, The World Bank. Its abundant reports on the subject of PSP
describe it as a normative, economic, and political good. The benefits touted are mani-
fold: PSP lessens the debt burdens and budget pressures of governments, who in turn can
shift savings to other welfare-enhancing priorities; it boosts long-term private (domestic
and foreign) investment, while contributing to sustained economic growth; it promotes
efficiency by better aligning costs and benefits, while allocating risk among stakeholders
appropriately; it leads to lower tariffs in the long term due to competition, while improv-
ing access and service provision, especially for the poor; and it facilitates institutional
reform and technological innovation.
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Regulatory reform and expressways in Indonesia J. S. Davidson

The experiences of the 1997–1998 Asian Financial Crisis provided fodder for The
World Bank to attack the development state model; it was deemed that the crisis exposed
the model’s vulnerabilities. Decades of easily attained high growth rates, it was suggested,
fostered complacency, overconfidence, and lack of discipline. Regarding infrastructure,
inadequate monitoring and oversight mechanisms, little strategic planning, and over-
guaranteed government contracts figured prominently in the critique. In all, it was seen
that cooperative state–business relationships that underpinned this model had degener-
ated into collusive partnerships where production and capital accumulation took a back
seat to rent-seeking and speculation (Asian Development Bank 2000).
How then should governments right their ships and implement best practice reforms
to boost private sector participation? At the outset, it should be noted that despite
associations of World Bank policies with neoliberalism, in infrastructure this connection
works awkwardly at best; we are not concerned with a thin version of neoliberalism that
opposes most forms of state intervention. Instead, at issue is a mix of liberalization and
regulatory measures.1 Given the natural monopoly properties of infrastructure projects
and the need for coordination given infrastructure’s network-like attributes, some form
of regulation has always been recognized. The preferred vehicle through which private
sector involvement takes place is the public–private partnership (PPP). Specification of
the proper role of the state in PPPs lies at the heart of the best practice literature.
There is not enough space for this article to comprehensively cover the literature’s
recommendations to enhance PSP in infrastructure, although a general outline can be
sketched. Initial steps involve coordinated, strategic planning alongside the creation of a
transparent legal and regulatory framework conducive to private investment. Establish-
ment of the framework begins with statutory liberalization, which may include the
loosening of laws on foreign investment and ownership to the setting of rule-based, and
hence predictable, pricing mechanisms (Asian Development Bank 2000). Regulatory
frameworks should specify what level of government – central or regional, for example –
has the authority to grant concessions, while duration and performance standards require
specification (Beato 1997). Concessions should be awarded by open bidding to provide
for “in market” as well as “for market” competition (Guasch 2004), and governments
should improve their risk analysis to assess when to offer guarantees (Irwin 2007). In
particular, this concerns notoriously fickle attempts at traffic forecasting. The over-
guaranteeing of contracts has doomed private expressway programs; the Mexican debacle
is exemplary (Gómez-Ibáñez & Meyer 1993).
In addition to liberalizing measures, of late the best practice literature has exhibited
a parallel emphasis on institutional reform, also known as the second generation of
reforms. Given the inability of judiciaries in developing countries to enforce contracts
and property rights impartially, the establishment of an independent regulatory agency as
an alternative mechanism is favored (Kessides 2005). Such agencies are putatively autono-
mous, apolitical institutions staffed by technocrats and run according to rule-based
procedures. The hope is that they can guard against political interference and industry
capture and thereby help prevent catastrophic market failures like that of the 1997–1998
Asian Financial Crisis for instance.
A prominent feature of the best practice literature is its emphasis on the design of
mechanisms in the institutionalization of a regulatory regime that will enhance PSP. But
the assumed flexibility policymakers possess in choosing mechanisms and policies in part
renders this literature impracticable. While these works do call attention to the politically
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J. S. Davidson Regulatory reform and expressways in Indonesia

Figure 1 The Trans-Java Expressway, BPJT (2006).

sensitive nature of infrastructure, especially regarding pricing and concomitant populist

pressures to keep tariffs from being “readjusted,” these same works tend to ignore broader
questions of political economy that infuse the entire decisionmaking and institution-
building process. Institutions and their makers are situated in fields of power and history
that cannot simply be “fixed” by policy prescriptions. It is precisely these attributes that
often explain why best practice options are neither chosen nor implemented. Vives et al.
(2006) exemplifies this emphasis on choice. Breaking public–private partnerships into
their constituent parts is without doubt a key step in assessing the viability of infrastruc-
ture projects in developing countries. But how free are policymakers and investors to mix
and match among 14 different project modalities with six different financial tools,
keeping in mind eight primary local conditions (Vives et al. 2006, p. 6, fig. 1)? This
technical approach, while useful, is limited in what it can achieve in the face of stubborn
fields of power and politics. The latter attributes, not always the policies or mechanisms
chosen, are what account for the poor performance of PSP in infrastructure in developing
countries, not always the policies or mechanisms chosen.

3. Indonesia’s deteriorating infrastructure

No country was hit harder by the 1997–1998 Asian Financial Crisis than Indonesia. In
1998, its economy contracted some 13 percent and according to one leading economist,
its “recession was so severe that it took about five years for GDP [gross domestic product]
to return to the level it had attained prior to the downturn” (McLeod 2005b, p. 31). The
crisis threw millions of people into poverty, but also helped throw out the country’s
long-serving authoritarian ruler, Soeharto, and his New Order regime. In its stead, a
chaotic yet exhilarating period of democratization was ushered in. This period has been
characterized by noteworthy reforms in the political architecture of the state; for example,
the holding of regular, competitive elections, including the direct election of the execu-
tive, from the president to mayors. This early reform period was also marked by presi-
dential instability. Having had one president for more than three decades, Indonesia
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Regulatory reform and expressways in Indonesia J. S. Davidson

suddenly had three within less than two years. Such rapid turnover hampered attempts at
full economic recovery, as did the capture of market reforms by social and political
predatory interests linked to the New Order (Robison & Hadiz 2004).
Yet the country has benefitted from relative political stability of late – for instance, the
current president, Susilo Bambang Yudhoyono, was the first post-Soeharto president to
complete a five-year term (2004–2009). In mid-2009, he won re-election. This stability
has in turn has bolstered the country’s economy. Prior to the most recent global eco-
nomic slowdown, annual growth rates averaged around six percent and in large part were
attributable to strong consumer demand (Narjoko & Jotzo 2007). The concern about the
sustainability of an economy propped up by consumer spending (Basri 2004) remains a
valid one. Doubts exist that such an economy can generate adequate employment growth
to absorb the millions of annual new entrants into the country’s labor force. Conven-
tional wisdom has held that without the successful implementation of significant insti-
tutional and structural reforms, the government’s goal of achieving growth rates of seven
to eight percent will go unrealized. Following the advice of the IMF and The World Bank,
successive post-Soeharto governments have made notable strides in the promotion of
market-friendly reforms – at least on paper. In reality, results have missed their mark.
Large-scale, capital-intensive projects were among the first casualties of the Asian
Financial Crisis, and years later, public and private spending on infrastructure has
remained worrisomely below precrisis levels (The World Bank 2007). Indonesia’s infra-
structure ranking in world surveys has plummeted. To accelerate (or even sustain) eco-
nomic and employment figures, it was estimated that some US$65 billion in investment
in infrastructure over five years (2006–2010) would be required (Asian Development
Bank 2006). Given the enormity of this figure and attempts to steer a course of fiscal
austerity, it was of little surprise that post-Soeharto governments turned to the private
sector for help.
How they have done so is the focus of this article. In particular, it explores how these
administrations have sought to solve this problem – the promotion of PSP in the provi-
sion of infrastructure – through the prism of a megaproject, a temptation to which many
governments succumb (Flyvbjerg et al. 2003). Government officials profess that the con-
struction of the Trans-Java Expressway is critical to spurring and sustaining growth.
There is widespread belief that its construction – or at least the some 680 kilometers
between the country’s two main urban and industrial centers, Jakarta and Surabaya –
possesses crucial multiplier effects that will not only jumpstart investment in infrastruc-
ture but also boost the island’s manufacturing competitiveness by driving the price of
goods and services down. Fear in government circles of “falling behind” India, China, and
Vietnam is pervasive. The Trans-Java Expressway’s construction, it is also hoped, will
create thousands of jobs, thereby helping to alleviate the country’s worsening poverty.
Presently, traveling from Jakarta to Surabaya along congested, accident-prone, two-to-
four lane roads takes more than 24 hours. It is expected that a limited access expressway
would cut the travel time in half. The current estimated cost of this megaproject is US$5.5
billion. Actual costs are expected to exceed this figure.

4. Soeharto’s toll road legacy

The obstacles post-Soeharto administrations have faced in jumpstarting the Trans-Java
Expressway have been formidable, some of which were not of their making. For a start,
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they have had to contend with the stigma associated with this sector in Indonesia. It
typified the abuse of power and corrupt government–business relations under Soeharto’s
New Order, captured by the politically powerful slogan “corruption, collusion and nepo-
tism” (for which the Indonesian acronym is KKN). This was the rallying cry of the
widespread democratic movement, fueled by the economic crisis, that helped topple
Soeharto in May 1998. Charges in part centered on the prominent involvement of com-
panies owned by or linked to his children.
During Soeharto’s reign, toll road building – concentrated in and around the nation’s
capital, Jakarta – came to be a family affair. It did not start out this way. Opened in 1978,
the country’s first tollway connected Jakarta with its southern suburbs; it was operated by
a state-owned enterprise named Jasa Marga. In the early 1980s, however, Soeharto’s
children were becoming major economic actors, advantaged by their father’s authorita-
tive presence and the embedded patronage that dominated the country’s economy. They
won lucrative state contracts and joined ventures with their father’s cronies (Robison &
Hadiz 2004, ch. 3). By the late 1980s, they set their sights on Jakarta’s lucrative tollways.
The eldest daughter, Siti Hardiyanti Rukmana – popularly known as Tutut – and her
company, PT Citra Marga Nusaphala Persada (CMNP), tabbed north Jakarta’s harbor
tollway as her first possession. CMNP took a 75 percent stake in the toll road; Jasa Marga
was allotted the remainder. Tutut’s youngest brother, popularly known as Tommy, fol-
lowed. His conglomerate, PT Humpuss, controlled the 74 kilometer toll road that ran
from Java’s western tip (Merak) to Jakarta’s western suburbs (Tangerang).
In the early 1990s, with the interests of Soeharto’s children cemented in the sector, the
government “subsequently decided that all toll roads should be developed by the private
sector, but stopped short of requiring competitive solicitation and selection” (The World
Bank 2004, p. 61). Soeharto began to distribute concessions for a tollway designed to
traverse Java’s north coast – the most densely populated corridor of the world’s most
densely populated island. Some 18 separate concessions were distributed; the bidding was
largely ceremonial. The average distance of each turnpike was 63 kilometers (the median
was 43). The high number of short concessions in part can be explained by the aging
former general Soeharto’s attempt to quell brewing resentment within the business–
politico class over the stranglehold his children had gained on the sector. While this move
may have been politically expedient, dividing the Expressway into mini-concessions was
inefficient. It stood in stark contrast to what then Prime Minister Mahatir – well known
for his cronyism too – had done in Malaysia. In 1988 he awarded the contract to build the
country’s toll road showpiece, the 966 kilometer North–South Expressway, to a single
(government-linked) firm. Tapped to build and operate the tollway, PLUS Expressway
Berhad finished it in 1994, 15 months ahead of schedule.
Nevertheless, the New Order’s distinctive legacy of cronyism presented post-Soeharto
governments with a peculiar irony. The nepotism intrinsic to the toll road industry
obscured the important fact that motorists in Indonesia enjoyed low tariffs. Toll fees were
not raised on nine main toll roads, for instance, from 1994 until 2005 (Jasa Marga
(Persero) 2006, p. 85). In fact, Indonesia’s rates have been the lowest among select Asian
examples (Table 1).
While companies linked to Soeharto’s children may have dominated the industry,
they did not charge monopoly rates. Presumably, they were prevented from doing so by
the patriarch himself. We have no evidence to substantiate Soeharto’s intervention, but
according to the pertinent regulation (number 8/1990, article 40), toll hikes were decided
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Regulatory reform and expressways in Indonesia J. S. Davidson

Table 1 Toll rate comparison with select Asian countries (2003)

Country Rupiah per kilometer
Indonesia 65–435
Malaysia 400–600
China 500–700
The Philippines 700–1000
South Korea 1,000–1,500
Japan 2,000–3,000
Sources: Kompas (2003) and Jasa Marga (Persero) (2006).

by the president. It is widely acknowledged that Soeharto aspired to create what one
astute commentator has called a system of “middle class welfare” (Dick 2007, p. 57). The
growing urban middle class – a result of the regime’s industrialization policies – lent
crucial legitimacy to the New Order starting in the mid-1980s, with the important
proviso that this class continue to benefit from growth in order to support its increasingly
consumerist lifestyle. Fuel was the more well-known New Order subsidy, but low toll rates
must also be considered part of this broader tactic.
This condition presented post-Soeharto governments seeking to attract private
investment in tollways with a dilemma, for tariffs are the most determinative factor for
investors. Rates were not raised, however, once Soeharto stepped aside because (i) with
the economy crippled and the purchasing power of the middle class depressed, rate hikes
would have been politically untenable and (ii) the perception (and likely reality) was that
such hikes would benefit companies linked to Soeharto’s children.

5. Liberalizing and regulatory reforms

In post-Soeharto Indonesia, as early as in January 2001 discussions had surfaced about
putting an end to Jasa Marga’s dual role as operator and regulator. Consonant with the
best practice approach, this move, it is argued, levels the playing field between the private
and public sectors, for the former is disinclined to invest in sectors where its competitors
act as its regulators.
Formal liberalization was finally achieved in October 2004 under President Megawati
Soekarnoputri with the passing of a new law on roads (number 38/2004). This legal
product was part and parcel of a broader post-Soeharto campaign of statutory liberal-
ization – promoted and backed by IFIs – across such sectors as telecommunications
(number 36/1999), oil and natural gas (number 22/2001), electricity (number 20/2002),
and water (number 7/2004). Taken together, these laws were intended to signal to private
investors a credible commitment to market-based competition. This was deemed impor-
tant not only because of the porousness of the rule of law in Indonesia, but also because
of the vicissitudes of democratic elections, where a change in government could induce
changes in policy.2
Several provisions in the 2004 Road Law signaled the sector’s liberalization. First, the
law granted the private sector the authority to operate directly (but not own3) concessions
(article 50, point 4). This clause put an end to forced (commercial) cooperation with the
state (Jasa Marga). Second, the law established a new toll rate adjustment mechanism.
Consonant with the mandate of creating good governance, imbued with transparency,
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J. S. Davidson Regulatory reform and expressways in Indonesia

predictability, and accountability, drafters sought to depoliticize the process by taking it

out of the hands of a single individual – in this case, the president’s. Accordingly, the
rule-based formula calls for an automatic increase every two years, with the increase
matching official inflation rates (article 48, point 3). Since 2005, toll rates have been raised
a number of times, anywhere between 7 and 25 percent.
Third, the law split Jasa Marga’s operational role from its regulatory authority, with
the latter transferred to a new agency, the Toll Road Regulatory Agency (Badan Pengatur
Jalan Tol [BPJT]). The composition of BPJT’s board reflects best practice standards; it
comprises representatives from the state bureaucracy, the academic community, the
private sector, and civil society. Internal debate among policymakers did arise over the
question of the new agency’s autonomy. Best practice calls for full independence to guard
against executive or legislative interference, a position some supported. In the end, BPJT
was placed under the authority of the Public Works Minister. A consultant with knowl-
edge of the deliberations said it was reasonable to fear that a new body such as BPJT, if
fully independent, would be devoured by the pack of wolves that was Indonesia’s con-
struction companies.4
A fourth element of statutory liberalization involved the tendering process. Auctions
have long been conceived as a means to inject market forces or competition into a field
characterized by natural monopoly properties and long-term contracting problems
(Demsetz 1968). Accordingly, the law states that bidding should be transparent and open
(article 51, point 1).
The significance of the final provision to be discussed here lies in its capacity to almost
singlehandedly undermine all the best practice standards contained in the 2004 law. A
small clause (article 66, point 3) before the law’s concluding section states that conces-
sions based on the prior road law (number 13/1980) were considered valid and thus could
not be voided. In other words, interests associated with the New Order triumphed. With
this one article, they could now legally retain their concessions and thereby flummox the
plans and aspirations of reformers to realign the toll road sector along best practice lines.
Although uncertainty is a tested feature of megaprojects (Flyvbjerg et al. 2003), this final
twist in the law would ensure one thing: a slowdown of efforts to jumpstart the Trans-Java
Expressway. Here, power and vested interests trumped best practice efforts.

6. Land problems
To demonstrate his commitment to resolving the country’s infrastructure woes, in
January 2005 President Yudhoyono hosted an Infrastructure Summit in Jakarta. The
summit was attended by hundreds of representatives of foreign and domestic capital, and
it put 91 (mostly) public–private partnerships projects with an estimated total value of
US$22 billion on the auction block. Thirty-eight toll road projects accounted for nearly
half of this figure (PT Data Consult 2005).
Despite the hoopla, the summit flopped. More than a year later the press noted that
only five projects were successfully tendered and the number of new kilometers added to
the country’s toll road network stood at zero (Adlin 2006). Difficulties in acquiring the
public right of way for toll roads worried investors. Investors were not overly concerned
about public protests halting construction, but they were wary of spiraling costs and
delays due to drawn-out negotiations between land owners and local government land
committees.
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In response, in May 2005, Yudhoyono promulgated one of his most contentious

presidential decrees: number 36/2005 on land procurement for the implementation of
development in the public interest. To the consternation of his civil society supporters,
Yudhoyono’s decree appeared more draconian than its predecessor, presidential decree
number 55/1993 (of the same name) that was passed under the New Order. One reason for
this apparent contradiction was that, unlike under Soeharto, Yudhoyono’s administration
could no longer rely on the army to clear the land if local resistance proved stiff. Typically,
state coercion won under Soeharto; land for “development” projects, which under the New
Order included golf courses, was cleared with minimal compensation paid (Lucas 1992).
Yet in an attempt to improve its sullied image in a democratic Indonesia, the army has
reduced its public role, including that of land clearance enforcer.5
Decree number 36/2005 is more severe than its predecessor in a number of respects.
For a start, its predecessor had defined the public interest as “the interest of all levels of
society,” from which for-profit, private sector projects were excluded. Yudhoyono’s decree
restricted its scope to “the interest of a significant portion of society” (article 1, point 5).
This narrowing of the meaning of public interest favored for-profit, private sector
projects. So did the corresponding list of projects eligible for eminent domain: it was
increased from 15 under the 1993 decree to 21.
Both decrees rely on a process of deliberation, especially regarding the level of com-
pensation. But Yudhoyono’s decree capped negotiations at 90 days, whereas the New
Order version did not contain time limits. The 2005 decree also detailed a procedure that
involved the courts more than the 1993 regulation had done. In short, if negotiations
between land owners and government committees were not resolved within the specified
time limit, the government could deposit its offer at a district court. In so doing, the
government could consider the transaction legally complete; the money would remain at
the court for an indefinite period (Moeliono 2007). While this procedure seems to run
roughshod over due process and the peoples’ rights to land, which the 2005 decree
claimed to respect, Yudhoyono’s administration pointed to a likewise practice in Malaysia
to justify its approach. There, the government takes possession of the land in question
during court proceedings to jumpstart the project. The court decides only on the final
level of compensation (Atmanto & Ilwan 2007).
The promulgation of presidential decree number 36/2005 sparked controversy. Civil
society organizations and socially aware academics penned rebukes in the press and
published critical reports.6 Demonstrations were held in major cities. Critics drew trou-
bling parallels to the decree’s New Order predecessor, doubted the neutrality of the
courts, and queried the meaning of the “public interest” as defined by Yudhoyono’s
decree. The development projects, they charged, were about making money. Toll roads
were exemplary.
Unable to ignore the public anger percolating, in June 2006 Yudhoyono promulgated
another decree (number 65/2006). An attempt at compromise, it slashed the number of
public interest projects to seven, although tollways remained – as did the restrictive
definition of the public interest. The number of days allowed for deliberation was
increased to 120, but the limited recourse to appeal was left unchanged. In all, the
maneuver was politically expedient, for this decree did not cause the public outcry that its
2005 counterpart did.
The question arises, with this presidential decree in hand, why has land acquisition
progressed devilishly slowly? Why in June 2008 was the Public Works Minister grilled by a
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J. S. Davidson Regulatory reform and expressways in Indonesia

parliamentary committee to account for the fact that seven percent of the land for the
Expressway had been purchased? Why did this figure increase to only 30 percent nearly two
years later? To answer these questions, the land acquisition process, the aforementioned
decrees, and the state’s weak power of eminent domain must be situated in their broader
legal and political context. As one may surmise, the problems are multiple and complex.

7. Political and legal contexts

The weakness of the rule of law in Indonesia is reflected in the convoluted legal basis for
land acquisition. Land aquisition is rooted in the 1960 Basic Agrarian Law, independent
Indonesia’s first major bill that sought to unify the country’s land laws by “subsuming all
Dutch-derived land rights, and most adat [customary] rights, into a series of new statu-
tory rights” (Fitzpatrick 2008, p. 90). The law is a product of its times. Promulgated under
the left-leaning Sukarno, Indonesia’s first president, the law’s socialist orientation is
reflected in article 6, which maintains all land must have a social function. To fulfill this
aim, the state is given control, not ownership, of land (article 2). Subsequent clauses
authorize it to terminate land ownership rights, which revert to the state (article 27). This
includes in the public interest (article 18) (Fitzpatrick 2008).
The procedure for titular revocation is established in a subsequent law (number
20/1961), where authority is placed in the president’s hands. In a twist characteristic of
Indonesian land law – that is, the messy melding of formalist, universalist norms with
local customs – law 20/1961 states that this revocatory procedure would be executed if a
process of deliberation had failed to reach a consensus. It requires emphasis that, given
the coerciveness of Soeharto’s New Order (1966–1998), voluntary acquisition and the
deliberation mechanism obtained compulsory characteristics. In this light, the aforemen-
tioned 1993 presidential decree merely formalized the purported deliberation procedure
(Fitzpatrick 2008). Yudhoyono’s decrees followed this path-dependent tradition.
Thus, land acquisition has rested fundamentally on state power, not on state law. But
as Indonesia has democratized, the army has retreated.7 This change has had a number of
implications. For one thing, it has emboldened landowners. With overt coercion reduced,
the costs of non-compliance have decreased. Meanwhile, there has been a parallel rise in
a right-based consciousness among a newly empowered citizenry. Post-Soeharto amend-
ments to the country’s constitution, for example, now guarantee a range of rights,
including adequate housing. These transformations were exemplified by landowners in a
suburb of Semarang, Central Java, through which the Expressway was slated to pass.
Negotiations spanned years. Calling themselves the Toll Road Communication Forum,
these neighbors constantly publicized their rights, which included appeals to the new
national ombudsman’s office to support their claims that the route was in violation of a
local zoning regulation.8
The legal uncertainty surrounding the relevant land laws has further complicated
matters. As was noted above, the law on revocation is predicated on the 1960 Basic
Agrarian Law. The latter’s own legal status is in doubt, however. For a start, many of its
implementing regulations were never issued: not only has this contained the law’s social-
ist implications, but also, over time, it has eroded the law’s efficacy. Moreover, stakehold-
ers are aware of current attempts to pass a new encompassing land law. That the draft
remains just that, a draft, worsens the law’s legal standing. In response, actors with
interests in the highway industry have lobbied parliament to pass a new statute with
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Regulatory reform and expressways in Indonesia J. S. Davidson

higher standing than a presidential decree on the specific matter of land acquisition.
Optimistic forecasts call for a late 2010 promulgation.
The efficacy of a new land acquisition law remains to be seen, for problems extend
beyond weak laws. They also concern implementation. Here, Indonesia’s new governance
structure is brought into focus. In short, to rectify the New Order’s excessive centralism,
Indonesia has embarked on a radical program of decentralization. Illustratively, matters
pertaining to land were devolved to the city or district level. This explains why local
officials on the land appropriation committees have had a great say in determining the
amount of compensation to be paid. But this situation also has given rise to contravening
incentive structures, throwing another wrench into the land acquisition process.
Central officials in charge of national roads like highways want the Trans-Java
Expressway built as quickly as possible. While they may enjoy some rent stemming from
this process, local officials, tasked with the thankless duty of negotiating with angry
citizens, have felt marginalized. From where do they, for instance, obtain their rent?
Apparently the answer has been in land purchases (mostly by proxies) needed for the
Expressway. For years these bureaucrats have been privy to the route’s details. In this light,
drawn-out negotiations can be seen as a means by local officials of extracting rent from
the central government.
It is precisely this concern, state compensation, which figures as another obstacle.
State policy on compensation has changed over the years but its core component is as
follows: the state pays the costs of the land appropriation, whereby it is reimbursed by
concessionaires up to 110 percent of pre-agreed-to estimates. Costs above 110 percent are
the state’s responsibility. In practice, the government was slow in allocating these funds.
For instance, although the Megawati administration (2001–2004) was imploring the
concessionaires to build their turnpikes, her administration never allocated the requisite
land funds. They first materialized in mid-2006 under Yudhoyono. Three trillion rupiah
(US$317 million), however, was deemed inadequate to procure all the land needed for the
Expressway.
In early 2007, the first installment was declared ready for the Toll Road Regulatory
Agency’s (BPJT) use. But inter-ministerial dissension quickly surfaced, epitomized by the
public spat between the Minister of Public Works, BPJT, and the businessman-turned-
vice-president, Josef Kalla, on the one hand, and the Ministry of Finance, as represented
by its then minister, Sri Mulyani Indrawati, on the other. Indrawati publicly expressed
doubts over the professionalism of the concession holders and insisted on accountability
before the funds could be disbursed. BPJT refused, for example, to form a proposed
special purpose vehicle to manage the money. The squabble caused a slowdown in the
fund’s disbursement. By August 2009, only slightly more than half had been allocated
(Muhanda 2009). Land appropriation committees could not be expected to negotiate
with landowners in good faith when the promised compensation might not be available.
It is for this reason, combined with the litany of problems described above, there have
been no cases thus far where the government deposits the money at a local court follow-
ing the 120-day limit of negotiations. In all, the state, under the New Order and during
post-Soeharto administrations, has fundamentally failed to address adequately the social
impact of the land acquisition process for development projects. The subsequent loss of
legitimacy in the eyes of citizens has made its job that much harder.
If we were to ignore the foregoing discussion and imagine that the land had been
cleared expeditiously and legitimately, would the concessionaires have reacted by
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J. S. Davidson Regulatory reform and expressways in Indonesia

investing in their respective turnpikes? This troubling question is addressed in the sub-
sequent section.

8. The difficulty of mobilizing capital

At this point, one might conclude that land acquisition has been the primary obstacle to
toll road development in Indonesia, but it is only half the story. The other half pertains to
the reluctance of the concessionaires to invest in their projects. Reasons for their intran-
sigence are varied.
The principal cause for the delay of the Trans-Java Expressway was the 1997–1998
economic crisis and the concomitant halting of infrastructure projects by the govern-
ment. The lifting of the freeze in 2002 affected little in the short term. Some investors
waited for improvements to the regulatory framework. This came with the October 2004
passing of the aforementioned Road Law, followed six months later by the issuing of the
law’s implementing regulations.9
The financial losses license holders suffered due to the economic crisis exacerbated
matters. Massive debt and defaults were problematic. Illustratively, the principal holders
for three licenses in West Java Province were forced by bankruptcy proceedings to relin-
quish their concessions. Concessionaires of turnpikes in Central and East Java, although
they retained their franchises, were also in financial distress.
Cash-strapped concessionaires sought to sell their licenses, but not without contro-
versy. Consider the three West Java concessions. The new concessionaires, including
among them then Vice President Kalla, were questionably granted permission to bundle
the existing licenses into one concession.10 That in late 2006 they then sold 55 percent of
the concession’s rights to PLUS, the aforementioned Malaysian government-linked
tollway developer, was even more questionable. The sale contravened a then new govern-
ment regulation (number 67/2005) prohibiting such practice; that is, the selling or
“flipping” of a license prior to a project’s commercial operation. The sale was consum-
mated nevertheless.11 Troubled concessions in Central and East Java soon thereafter were
sold to domestic concerns.12
The cumulative effect of the sales of the licenses and government efforts to put an
effective regulatory framework in place led to the sudden materialization of loan pledges
between banks and concessionaires. In January 2007, the first one for the Trans-Java
project was agreed to by a consortium of state banks for the 41 kilometer Mojokerto–
Surabaya turnpike in East Java.13 Similar arrangements followed and by August 2007,
more than one dozen banks had pledged credits worth some Rp24 trillion (US$2.3
billion).
Undoubtedly, this was a remarkable turn of events. Still, a peculiarity remained in the
fact that all creditor banks but two were state-owned. Foreign lenders and private domes-
tic bankers have expressed reluctance to invest in the Trans-Java Expressway due to
Indonesia’s uncertain investment climate and the poor terms of the concessions to the
project’s long-term nature.14 Were not state banks facing similar conditions? Why the
sudden pledge of such volumes of credit? In part, the answer lies in the collective effects
of the steps highlighted above. The other part of the answer lies in the form of political
pressure applied by then Vice-President Kalla, whose company held multiple conces-
sions.15 On a number of occasions he criticized the banks’ conservatism, accusing them of
buying high-interest bearing government bonds rather than lending for development
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Regulatory reform and expressways in Indonesia J. S. Davidson

purposes (Achmad & Perkasa 2007). Kalla’s heavy-handed tactics alarmed economists,
who feared that the state banks had wisely adopted cautious lending practices and now
were being forced to assume risks in areas outside their comfort zones (Setiawan et al.
2007). Fortunately for these observers, pledging to lend money is one thing; dispersing it
is another.16 Little dispersing has happened, as land disputes and concessionaire intran-
sigence continues apace.

9. Concluding remarks
The struggles to build the Trans-Java Expressway should not be used as a stick with
which to beat countries like Indonesia over the head for failing to reform along best
practice lines. This case study has highlighted the considerable complexities involved
that surpass the usual risks associated with infrastructure such as their large scale, sunk
and immobile capital, and long-term profit horizons. The challenge includes construct-
ing a new highway through the densest corridor of the world’s most densely populated
island in a country characterized by a weak rule of law and whose economy crashed
a short decade ago. Meanwhile, the toll road franchises were divided into mini-
concessions and distributed to cronies of a former authoritarian ruler, and yet where
current democratization efforts have meant both competitive elections bringing fre-
quent changes in executive administration and decentralization where emboldened local
officials disregard central government directives. Indonesia’s capital markets are also too
underdeveloped to securitize toll road assets, which in turn forces investors to rely on
the strict lending requirements of the banks. Policymakers have had little control over
the assortment of these structural factors.
Given this context, reforms in this sector, once synonymous with the cronyism of
Soeharto’s New Order regime, are laudable. Liberalizing legislation has been passed; a
new regulatory agency, yet to be tainted by corruption, is up and running; tolls have been
raised without precipitating street protests; and Trans-Java turnpikes are being built –
most recently in January 2010 (Kanci–Pejagan, 34 kilometers). Another is expected to be
completed in late 2010 (Semarang–Ungaran, 14 kilometers).
Still, these are minor victories; the slowness by which kilometers are added to the
country’s highway network is apparent. Progress is dogged by the intractable land acqui-
sition process and it is doubtful a new law on this matter will accelerate efforts. This
problem has led to a new concern, although one that is common to public–private
partnerships; namely, renegotiations (Guasch 2004). Land appropriation delays have led
some concessionaires to seek better terms such as higher tariffs from the Toll Road
Regulatory Agency.17
What lessons can be drawn then from this case study? The implications of the study
presented here go beyond platitudinous recommendations to enhance institutional
capacity, although this certainly does matter. More specifically, the interests of central and
local government officials need to be better aligned, given the pervasiveness of decen-
tralization programs worldwide. Even for national-level projects, local officials must be
given meaningful input into the decisionmaking process when these projects “trespass”
on local terrain. Otherwise, as we saw above, local officials can create unwanted headaches
when they are expected to act merely as mindless implementers of national policy. In fact,
it has been shown that part of China’s phenomenal growth in highways has been due to
the fact that provincial officials are in charge of the process.18
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J. S. Davidson Regulatory reform and expressways in Indonesia

Another lesson concerns the timing of reforms. Research has demonstrated the posi-
tive effect on private investment when institutional reforms precede privatization (Wall-
sten 2003). For toll roads, similar steps should occur with respect to land acquisition. All
relevant laws need to be in place before private investment is sought. Indonesia’s land
acquisition problem has kept foreign investment in its toll road industry to a minimum.
Meanwhile, this crucially important issue needs to be given more weight in the best
practice literature. Desired reforms and a host of policy packages will stonewall if land
cannot be obtained in a timely manner. It is an essential step. Regarding the bidding
process, efforts must be made to ensure the financial well-being of bidders, especially
winners. Intent to build, and not to sell the license, must be demonstrated. Putting a new
regulatory regime on paper is insufficient to gauge investor sincerity.
That said, the expectations of PSP in infrastructure needs to be lowered, especially in
countries where the main ingredients for these programs’ success – power of eminent
domain, rule of law, regulatory authority, and fiscal space – are lacking. Two decades of
disappointment has characterized private highways in Latin America, where social and
fiscal costs have been substantial (Engel et al. 2003). This Indonesian case study has shed
light on the fact that implementing reforms is not as easy as selecting among a range of
best practice options. Regulators, investors, and other state officials are enmeshed in
asymmetrical power relations whose path-dependent properties are rooted in history and
social conflict. This is an important lesson to which the best practice literature should pay
greater heed. To be sure, the latter has begun its own reform. It no longer insists on a rigid
set of institutional guidelines to be uniformly applied across countries (Estache &
Wren-Lewis 2009, p. 764). Still, further recognition is required that reforms cannot be
started from scratch, unencumbered by the messiness of vested interests and power.
Regulatory reform is a politically charged process from start to finish, and beyond.
If we then recognize the importance of adapting to localized environments (Rodrik
2007), real alternatives must be made available. In Indonesia, this might come in the form
of an improved public sector, rather than reform-vested private, rent-seeking interests.
Tollway construction does not require the sophisticated technological innovation of such
infrastructure sectors as telecommunications. Thus, foreign or domestic private invest-
ment cannot be expected to bring large gains in efficiency. Moreover, the cost-of-funding
argument has been proven to be misguided, as the state can collect tolls, and thus gain
revenue, as easily as private entities can (Engel et al. 2003). While Jasa Marga has a
notorious past under Soeharto’s New Order, the company has impressed experts with its
organizational reforms, headed by an able technocrat, Frans Sunito. They note the com-
pany’s experience in building and operating toll roads and its new-found professionalism
and sound business practices.19
This change, combined with heavy state bank investment in the Trans-Java Express-
way, might lead one to consider that Indonesia is approaching the East Asian develop-
mental state model. This observation is inaccurate, however. Indonesia is sorely bereft of
the collaborative business–government relations and strong state institutions upon which
that model rests. What then does the toll road sector tell us more broadly about Indo-
nesia’s political economy? Reform efforts continue, notching victories along the way. But
roadblocks are severe: scratch beneath the surface and one finds a patronage-infused
system where rent-seeking and political interests continue to percolate.
When the structure of power collides with best practice reforms, outcomes thereby
produced are neither singular nor predictable. It is typical to find evidence to support a
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Regulatory reform and expressways in Indonesia J. S. Davidson

range of results, from regulatory progress to policy failure. The building of the Trans-Java
Expressway is illustrative. The toll road may or may not be completed, but if this mega-
project is realized, it will be unlikely to be along the lines best practice reformers or its
detractors had envisioned.

Acknowledgments
The Academic Research Fund of the National University of Singapore funded the research
for this article (project R-108-000-033-112). Preliminary findings were presented at the
2009 annual Association of Asian Studies meeting in Boston, Massachusetts. Three
anonymous reviewers, Regulation & Governance’s editors, and Portia Reyes offered
insightful comments on earlier versions of the article. Shortcomings are my own.

Notes
1 Jordana and Levi-Faur (2004) note that the implementation of neoliberal reforms has been
accompanied by a corresponding increase in regulatory institutions.
2 Non-governmental organizations have successfully challenged the constitutionality of several
of these laws at the Constitutional Court (Butt & Lindsey 2008). The Road Law has not been
challenged.
3 The government owns the road (article 45, point 1). Here, the build, operate, and transfer
(BOT) model applies.
4 Interview with Sumaryanto Widayatin, 10 July 2007, Jakarta.
5 Exceptions occur when the army (or another military branch) owns the land in question.
6 For instance, see Sumardjono (2005).
7 This has been exemplified by horrific violence committed by paramilitaries and thugs – not
the army – in the employ of the Jakarta municipal government to clear land for a drainage
canal (Human Rights Watch 2006). There have been no such cases reported in connection with
the Trans-Java Expressway.
8 In early 2010, a settlement on compensation was finally reached.
9 This six-month delay is considered fast by Indonesian standards.
10 This bundled concession runs from Cikampek to Palimanan (117 kilometers).
11 For a more detailed investigation on this affair, see Davidson (2011).
12 The Central Java licenses were sold to Indonesia’s richest, most politically well-oiled and thus
most controversial businessman, Aburizal Bakrie.
13 The banks included the Indonesian National Bank, the Indonesian Peoples Bank, and
Bukopin Bank. The concessionaire, Marga Nujyasumo Agung, later sold this franchise to Jasa
Marga.
14 Interviews with Eugene Gailbraith, President of the Bank of Central Asia, 11 June 2008, Jakarta
and Robert Clarke, Managing Partner of Allens Arthur Robinson, 26 July 2010, Singapore.
15 Besides his West Java turnpike, he held two more in East Java (east of Surabaya).
16 In these situations, banks agree to turnkey contracts, where the disbursement of funds is tied
to construction progress.
17 Interview with Olsan Muhammad Isa, Project Manager, PLUS Malaysia, 7 July 2010, Jakarta.
Press reports indicate other concessionaires are in like renegotiations.
18 This arrangement has also caused grave inefficiencies (Lin 2007).
19 Interviews with Lukas Sihombing, lecturer, University of Indonesia, 9 July 2010, Jakarta and
Doni Kuswantoro, financial analyst at the Indonesian Credit Rating Agency, 22 September 2010,
Jakarta. It should be noted that in late 2000 Jasa Marga was partially privatized (30 percent).
© 2010 Blackwell Publishing Asia Pty Ltd 481
J. S. Davidson Regulatory reform and expressways in Indonesia

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