Infrastructure-related project developments have long been the central focus of the Indonesian government, no surprise given that huge amounts of money are involved.
According to the Public Works Ministry, total funding for infrastructure development from 2010-2014 will amount to around Rp 400 trillion (US$42 billion), of which 50 percent will be allocated for road development.
Hence, under the government’s first 100-day work program, infrastructure development ranks as No. 8 on the country’s top-15 priority list.
In this regard, the role of domestic construction companies in participating in infrastructure development continues to escalate, particularly amid the recent debt fallout in Dubai, which is likely to lead to a slowdown in investment from the Middle East.
Based on our recent observations, a common theme that has emerged is an overall positive outlook on the Indonesian infrastructure sector, supported predominantly by government-related projects, which mainly consist of road construction, water resources and power-plant development.
Nevertheless, delivery of projects remains challenging due to the lack of government-supporting regulations and weak horizontal interdepartmental and vertical coordination.
The government’s target for the next five years is to build 800 kilometers of new toll roads, mainly trans-Java routes.
In 2010 alone, an additional four routes with a total length of 59 kilometers will come from the Bogor Ring Road section I (in Greater Jakarta), Semarang—Surakarta section I (in Central Java), JORR W1 (in Jakarta) and Kanci—Pajagan (in West Java).
Hurdles, however, remain in the complex land acquisition process. It is worth pointing out that based on the government re-evaluation, the capability of some investors to continue on six projects out of 15 has come into question.
To remove roadblocks from the development of toll roads, the government has submitted a proposal to further deregulate the current land acquisition process, which would enable it to revoke individual land rights for public facilities and accelerate the development.
The enactment of this new revision is crucial to developing the total toll roads under the government’s prioritization program. With the remaining 11 projects under construction or land acquisition status, it is imperative that this new regulation be issued in a timely manner.
With the establishment of the new law in 2010, we expect continued acceleration of toll road development into 2011.
In the power-plant sector, the construction development of the 10,000-megawatt Phase I program at 35 locations has shown significant progress, of which two will be operational by December 2009 (PLTU Labuan and PLTU Rembang with 930 MW combined capacity).
Furthermore, capacity expansions at 10 locations (six in Java) are progressing at more than 50 percent completion. Thus additional stream in power generation of around 5,000 MW in 2010 is imminent.
Among the construction companies involved in the engineering, procurement, and construction (EPC) in the 10,000-MW program are Wijaya Karya and Adhi Karya, with carrying contract value worth Rp 782 billion and Rp 2 trillion respectively.
Going forward, an additional growth engine for construction companies will come from the 10,000-MW Phase II at 78 locations across Indonesia, with estimated total investment of $16.1 billion. The scope of works will range from EPC to infrastructure development surrounding the power plants.
On the international front, despite recent concerns on the Dubai debt debacle, we have learned that most domestic construction companies plan to continue their pursuance of overseas projects as alternatives.
Some of the well-known players in the international market are state-owned companies (Adhi Karya, Wijaya Karya, Waskita Karya) and private company Citra Megah Karya Gemilang. Existing and potential overseas projects are in Algeria,
Jeddah, Dubai, Kuwait and Libya, with scope of projects varying from civil construction to oil-and-gas development.
While the outlook in various overseas markets remains favorable, most construction companies have reassessed the risk-reward trade-offs to prevent potential problems that may arise and jeopardize financial performance going forward.
For state-owned companies, the respective managements have become extra cautious in doing overseas projects, particularly in light of the dispute between Adhi Karya and Al-Habtoor.
Going forward, further developments in the power-generating capacity coupled with sizeable government infrastructure-related projects have caused us to maintain our positive stance on the infrastructure-related sector outlook.
However, the key for realization in infrastructure projects rests on strong government commitment to delivering better supporting regulations and to developing improved public-private partnerships.
Without these, Indonesia’s infrastructure-development, as so often in the past, will again experience late delivery.
