Sunday, June 29, 2008

Indonesia Infrastructure Report Q2 2008 (Abstract)

Indonesia, South East Asia’s largest economy, is home to a vibrant construction industry and is witnessing increased investment flows into its infrastructure sector as the state strives to improve thestatutory framework - making domestic infrastructure projects more attractive and bankable for investors.This report forecasts that the construction industry is likely to experience an average annual growth rateof 5.74% over the 2008-2012 forecast period.
There is a mix of small, medium and large companies operating in Indonesia’s construction industry.Some of the largest Indonesian firms are members of the Contractors’ Association (AKI). These are theplayers that are expected to undertake major government projects and compete with internationalconstruction companies, both in the domestic and international
markets.
In the current year, the central government has allocated nearly 20% of the overall budget expenditure topublic infrastructure development. Moreover, with projects worth more than US$100bn in the pipeline,Indonesia’s domestic construction industry looks set to experience robust growth, in line with economicexpansion. In a recent presidential address on the draft 2008 state budget, it was indicated that budgetaryallocations to the transport and public works
departments will be increased significantly. It is estimated that in the period 2005-2010, the Indonesian infrastructure sector would require over US$150bn infunding, and a large part of this will have to be raised purely through foreign and domestic private investment.
However, Indonesia is plagued by a few negatives. Primary among these is its business operating environment - considered among the poorest in Asia. Investors often have to contend with securityconcerns and poor governance characterised by widespread corruption, lack of transparency, poor legalcompliance and a highly inefficient tax regime.
Some players from nations such as Japan, South Korea and Taiwan are still wary of financing projects or investing directly in Indonesia. Costly labour is cited as one reason. Another problem that is encounteredhas to do with the credibility of Indonesian banks. With the lack of funding and limited big-projectexposure, it is uncertain whether the nation’s own construction companies will be successful in capturingthese lucrative market opportunities.
Banks are still cautious about extending credit to the construction industry. Aside from a shortage of funds, most Indonesian contractors still operate equipment purchased before the 1997 monetary crisis.Such equipment falls short of today’s requirements for speed and high-quality work.
That notwithstanding, BMI analysis indicates that on account of its vast untapped opportunities, the Indonesian construction industry value is expected to reach about US$38.76bn in 2008 and rise toUS$44.4bn in 2012. Moreover, in BMI’s Infrastructure Business Environment Ratings for Asia,Indonesia manages a net score of 50. (Business Monitor International, 2008)