Opportunities Abound

Indonesia

Economic News

22 Jul 2010
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Indonesia’s huge infrastructure investment programme and rapid economic growth are powering up the construction sector, with opportunities aplenty for both foreign and domestic contractors.
The Indonesian government has said that it is seeking upwards of $110bn from investors to finance infrastructure projects up to 2014. Overall, it expects some $150bn to be invested in infrastructure over the next four years, as the country aims to support 7% annual growth.



Indonesian officials are keen to bring in foreign partners to drive infrastructure expansion. In early June, representatives of Indonesian government officials met Chinese construction and electrical firms in Shanghai, hoping to lay the foundations for deals that could see Chinese contractors take on projects in Indonesia.



A wide range of construction schemes were on the table. Ahmad Heryawan, the governor of West Java, spoke on behalf of the province’s investment body, Jasa Sarana, which is looking for a partner to develop a $1bn, 240-km toll road between Bandung and Tasikmalaya, as well as a $1bn port at Cilamaya designed to relieve pressure on Tanjung Priok. According to Heryawan, Toyota Astra Motor, the Indonesian wing of the Japanese automaker, has already expressed an interest in the port project. Meanwhile, Riau and East Kalimantan provinces are looking to build many hundreds of kilometres of rail tracks, and East Kalimantan, a growing energy centre, is looking for an investor to take on the construction of a 930-MW power plant.



A number of projects are already under way, including the Jakarta Mass Rapid Transit (MRT) network, which will help alleviate the capital’s chronic traffic problems. The first phase of construction for the 14.5-km line between Lebak Bulus and Dukuh Atas is expected to be complete by 2016, and the second by 2020. The project is part-funded by the international wing of the Japanese government-owned Japan Finance Corporation (JFC), the Japan Bank for International Cooperation (JBIC), which has invested substantial amounts in Indonesia.



Foreign investors already present are well aware of the importance of Indonesia’s investments in infrastructure and are upbeat about ongoing reforms that will encourage greater foreign and private sector participation.



"The imperative for the government to address the many infrastructure-related issues the country faces has never been higher," Roy Olsen, the president director of Thiess, an Australian mining and construction company active in Indonesia, told OBG. "There are indications that the government will review the law addressing the issue of land acquisition, which has been a major stumbling block in terms of encouraging foreign investment in the infrastructure sector under the public-private partnership model."



Gita Wirawan, the chairman of Indonesia’s Investment Coordinating Board (BKPM), has pointed out that the country has already made significant progress in easing investment. She cited the example of obtaining a business permit, which now takes between four hours and seven days, while it took six months in the past.



Government projects have been a vital driving force for the construction industry during the global economic downturn, in Indonesia as elsewhere, though the country still managed impressive 4.5% growth in 2009 at a time when many other countries slipped into recession. State-led programmes will continue to remain important, but the private sector will also be increasingly vital as the economy expands. Bank Indonesia (BI), the country’s central bank, has forecast economic growth of 6% in 2010 and 6.5% in 2011. According to the IMF and analyst surveys, growth is expected to come in around 6% this year, which is likely feed through into rising demand for construction services, residential, commercial, industrial and tourist property, as well as logistics following the enhancement of the transport network.



Sector players will be keeping a keen eye on BI's interest rate movements. They are hoping for a "Goldilocks" outcome in which rates are kept low enough to keep credit moving, after a spell in which liquidity was rather light, but ensuring that inflation, which had a serious impact on the industry in 2008, is kept in check. The bank expects to keep rates in the 6.5-7% bracket in 2010 and 2011, supporting Indonesia’s rapid growth, with inflation at 4-6%, somewhat high by international standards but eminently manageable for a rising economy. The BI governor, Hartadi Sarwono, believes that “inflation pressure is still benign”, allowing the BI to keep rates at the record low of 6.5% for the duration of this year. He expects loan growth of 20-24% in 2010, which should prove healthy for project finance in the private sector.
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