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Indonesia Construction Prospect
Background

 BACKGROUND

A. Economic Outlook

When we look Indonesia macro economic within the last 3 years, we can see growth even though in 2005 especially during the 4th quarter there was high inflation due to world oil price up to US$ 70/barrel, at the time Indonesia was the net oil importer.

 

B. The Economic Challenges And Strategy

Indonesia continues to face enormous challenges, starting from efforts to improve economic stability by maintaining price and exchange rate stability up to efforts to raise economic growth. Lastly, more employment opportunities have to be created and poverty has to be reduced.

The strategy to encounter these challenges consist of three policy actions, namely : one, to improve economic stability by improving the coordination and effectiveness of fiscal and monetary policies. Two, to strengthen the role of domestic demand in anticipation of a fall in external demand. And three, to reduce cost in order to promote investment and to improve the competitiveness of non-oil-and-gas exports.

Furthermore, the strategy is elaborated into eight action plans. First, improve economic stability means a gradual reduction of inflation and stable exchange rate. Second, the economic growth should be driven by an effective fiscal policy. Third, investment climate should be enhanced to attract more domestic and foreign investors. Fourth, increase non-oil-and-gas export by improving competitiveness and market diversification. Fifth, provide appropriate incentives to drag investment and increase non-oil-and-gas export. Sixth, promote banks intermediary function for investment and production. Seventh, protect financial sector sustainability from adverse impact of tight monetary policy adopted internationally as well as domestically. And the last, improve the quality of economic growth in terms of reducing unemployment and alleviating poverty.

The external challenge with respect to promoting investment is likely to be harder in 2006 globally foreign direct investment is showing a downward trend, and China is still the preferred destination for foreign investors and also tight competition from neighbouring countries. To improve the investment climate, the Government of Indonesia (GOI) has initiated a set of policy measures that include improving security and public order, judicial reform, labour reform, tax and custom reform accelerating the provision of infrastructure and replacing central and local governments laws and regulations which obstruct investment and trade.

The strategic action plans include : (i) to simplify the procedure to obtain permits and licenses to within 30 days, (ii) to revise laws and regulations on investment and on infrastructure provision, and (iii) to provide tax incentives to promote direct investment in business activity and/or in certain national priority areas to reduce regional disparity.

 

Infrastructure Projects

Infrastructure Projects

 

Government sector and investment policy that will be carried out by government in construction sector is very clear, as delivered by the government in Infrastructure Summit I, that within 5 years ahead infrastructure is expected to become the locomotive of the National development.

Due to 1997 crisis some infrastructure projects including new development projects were postponed. But then, after the crisis it brings new hope to Indonesia as some of the projects that were postponed are starting again, such as:

1.   Road development projects (1,500 km highway in the next 5 years 17,270 km road rehabilitation and improvement in some provinces 121 km road in regencies and cities including infrastructure in villages).

2.  Telecommunication, electricity, clean water, housing, harbor and airport development.

3.   Irrigation infrastructure, rehabilitation of irrigation network development to support National food endurance.

4.   Rehabilitation for Nanggroe Aceh Darussalam (NAD) and Nias.

5.   In Energy sector, especially gas pipeline for Java-Sumatra-

 

The new problem in the government sector is how to finance new development infrastructure project. For illustration : Dr. Ir. Suyono Dikun, Deputy V of Coordinating Minister for Economic Affairs mentioned that to support the future economic development for average 6,6% per year, we need US$ 80 Billion investment. The estimation exclude rehabilitation of infrastructures damage such as roads in provinces and regencies, airport, harbor, irrigation and others. The total investment needed for the next 5 years US$ 145 Billion. In other words, we need USD 29 Billion or equivalenttoRp. 290 Trillion every year excluding NAD and Nias rehabilitation. According the Government of Indonesia optimist that Government has prepared budget amount of US$ 4.6 Billion and budget from loan multilateral and bilateral side amount of US$ 2 Billion/year, and from the public sector will be US$ 33 Billion.

 

Besides, we still have potential budget source from the Domestic Capital Market which consists of : Bank, Insurance, Pension Budget and Capital Market a round US $ 6 Billion/year or US $ 30 Billion in 5 years.

Government of Indonesia realize that there is still a financial gap amount of US $ 67 Billion (or USD 13,4 Billion peryear). It is expected from the private investor (Equity, Strategic Operator and Equity Investor).

To encourage investment from outside, the Government conducted the Infrastructure Summit II (Indonesia Infrastructure 2006) on 1- 3 November 2006 and reached a new regulation that were published and take side to the investor or known as a "Investor Friendly".

The main policy that should be done to encourage investment accord ing to Deputy V of Coordinating Minister for Economic Affairs a re as follows:

1.   To reduce regulation obstacles.

2.   To unbind and liberate Infrastructure.

3.   To create a healthy competition.

4.   To  create  competition   model/shape  of  Public  Private   Partnership  (PPP),   Risk  Management and Infrastructure Developmentfunds.

(for more detail issue on result of the Indonesia Infrastructure 2006 please contact National Committee for the Acceleration of Infrastructure Provision (KKPPI) on www.indonesiainfrastructure.org).

 

Construction Projects in Private Sector

The private sector will be concentrated on the housing and property sector such as Flats, Apartments, Condominiums, Ruko (House and Small shop), Rukan (House and Office), Off ice/bus in ess centers, Shopping malls, Hotels and Resorts in the specific area in some prospective provinces.

Besides property sector, there are renovation projects and revitalization of traditional market to be modern market in big cities.

Bilateral cooperation projects for private and government, in the form of Built-Operate-Transfer(BOT) and or Built-Operate-Own (BOO) to optimize Pemda (Provincial Government) assets will be a trend in the future.

As an illustration, accordingto Bank of Indonesia (in June 2006) private sector sources of fund as follows:

1.   Share         Rp. ll,4Trillion (USD  1,2 Billion)

2.   Obligation   Rp.     8 Trillion (USD   0,8Billion)

3.   Private Equity         Rp. 100Trillion (USD 10,8 Billion)

4.   Bank          Rp.27,lTrillion (USD  2,9 Billion)

5.   FDIInflow  Rp.60,6Trillion (USD  6,6Billion)

 

Construction sector is very sensitive to external influences, especially macro economic (such as loan rate and exchange rate), tax, safety factor, unstable politic condition and Government Policies all together will create high cost economy.

Government of Indonesia aware that construction industry donates big contribution to the increase of GDP and also job opportunity. This is basic capital to construction development growth in Indonesia. Indonesia believe the construction industry prospect in years ahead will be very promising and challenging at the same time.

References:

National Committee for the Acceleration of Infrastructure Provision (KKPPI)

Deputy V of Coordinating Minister for Economic Affairs

Bank of Indonesia

Central Bureau of Statistic (CBS)

Sudarto/AKI Data Base (Author)

Photos by Hardini

 
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