Analysis: Infrastructure: Execution is key
The Jakarta Post
At our recent Bahana Infrastructure Forum, panelists shared a common view that the government was moving in the right direction on addressing Indonesia's land acquisition issues, supported by the recent signing of Presidential Decree No. 30/2015, which applied Law No. 2/2012 (table 1) to all land acquisitions for infrastructure construction in the public interest, while also allowing private investors to participate in the land-acquisition process.
Going forward, Indonesia's Land Acquisition Law will provide more accommodating, transparent compensation payments to land owners with stricter timetables to accelerate the land-acquisition process.
Nevertheless, as the land-acquisition preparation and implementation process could take up to 500 days, we can only gauge the effectiveness of this new law from 2016 to 2017. In addition, a lack of policy socialization by the government could mean resistance from uninformed land owners to selling their assets, potentially delaying projects.
With the lack of infrastructure development having hindered Indonesia's economic growth in the past, President Joko 'Jokowi' Widodo is embarking on his ambitious program, the 2015-2019 National Medium Term Development Plan, with Rp 5.5 trillion in total investment, including the construction of 65 dams and 1,000 kilometers of toll roads.
As these projects are fully supported by the people and the legislature, a hefty Rp 290 trillion budget for infrastructure development has been allocated in the 2015 revised state budget, of which Rp 119 trillion (initial budget Rp 84 trillion) is for the Public Works and Public Housing Ministry. Indonesia's construction players are also supportive of the government's plan and have made some preparations to participate in the projects.
However, at this stage, Indonesia is forced to import materials, such as steel, asphalt and construction equipment (table 2), as we are unable to supply all required materials for the upcoming infrastructure boom. Further, it is unavoidable that a lack of qualified engineers, coupled with the commencement of the ASEAN Economic Community will open the floodgates for overseas workers to participate in Indonesia's infrastructure projects.
The ministry, a major client for Indonesian construction companies, stated that so far this year, tendered projects had reached Rp 59 trillion, out of the ministry's initial 2015 budget of Rp 84 trillion.
From the increased budget, note that there has been Rp 30 trillion in additional tenders that are being prepared by the ministry. By project, the tenders mostly center on the Directorate General of Water Resources (water management) and the Directorate General of Bina Marga (road construction and maintenance).
In summary, while we are still optimistic about a major increase in new orders from the government, we see possible delays in President Jokowi's plan to complete all of the government's tenders in March.
Given this and the uncertainties in the land-confiscation process within land-acquisition procedures, we advise our equity investors to remain neutral in the sector.
The writer is a research analyst in the Bahana Securities research department.
Table 1. Summary of Law No. 2/201
Main points of the land acquisition process
- Fair price is determined through independent appraisal
- Land owner may choose to reject through court, yet court has to decide in 30 days (final)
- After transaction process (normal) or by court verdict, project can commence
- Re-settlement is also an option
- The government should carry out socialization far in advance (transparent)
- National Land Agency (BPN) is the only body responsible for land acquisition for public interests
Source: Jasa Marga
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