T

o elevate Indonesia'€™s status to a middle-income country, the government, through the National Development Planning Board (Bappenas), has mapped out a five-year development target (RPJMN 2014-19).

This ambitious goal has an estimated cost of Rp 5.52 quadrillion (US$437.6 billion), with the government contributing 40 percent of the funding and the rest divided among state-owned enterprises (SOEs) at 20 percent, local governments (10 percent) and the private sector (30 percent).

We expect President Joko '€œJokowi'€ Widodo to prioritize several vital areas such as seaports, toll roads and irrigation; this is due to the plan'€™s sheer size and budget constraints. In the end, the government is aiming to increase its infrastructure spending to 5 percent of GDP (table 1).

President Jokowi'€™s latest move to partly dismantle the fuel-subsidy scheme, effective Jan. 1, will provide badly needed funds to kick-start the country'€™s massive infrastructure plan. In the upcoming state budget revision the government will double its 2015 infrastructure budget from Rp 157 trillion to Rp 295 trillion on fuel-subsidy reallocations and tax-revenue increases.

The Public Works and Public Housing Ministry, which provides a major contribution to the revenues of construction SOEs, should see its original 2015 budget of Rp 85 trillion rise by Rp 33 trillion. Thus, we expect the sector'€™s total value of new contracts in 2015 to increase 18.5 percent year-on-year to Rp 88.3 trillion from Rp 74.5 trillion in 2014 (table 2).

Despite high hopes about the new government'€™s infrastructure program, there are some lingering issues on program implementation. We are waiting to gauge the effectiveness of the new Law No. 2/2012 on land acquisition, which is meant to address arguably the most challenging issue in developing Indonesia'€™s infrastructure. Furthermore, the government needs to pass several regulations to improve Indonesia'€™s investment conditions and to more evenly distribute the budget proceeds throughout the year, unlike the current practice of back-loading projects to the last quarter of the year.

Hence, it is still possible that we may see project delays in the first year of President Jokowi'€™s administration. Nevertheless, at this stage of the cycle, the market appears to have placed high expectations on the success of the President in accelerating these ambitious infrastructure plans.

Despite some uncertainties, we expect the House of representatives to approve the President'€™s new state budget revision, which he plans to submit later this month. In general, the public, including the media, understands the dire need for infrastructure development in Indonesia; as a result, we expect the House to bow to the pressure to approve the planned fund reallocations. We believe the approval will have a positive impact on construction companies in Indonesia, in particular SOEs, as it should increase the number of their projects.

Within the sector, we see three main risks: 1. A rejection of the state budget revision by the opposition parties, which would result in budget reallocation delays; 2. Possible longer-than expected land-acquisition issues and; 3. A shortage of skilled workers for project implementation.