Infrastructure

author : Administrator

by Richard Michael

The Infrastructure Sector Focus Group is designed to act as a forum where BritCham members with an interest in the infrastructure sector can exchange ideas, hear about the latest developments and bring their collective expertise and knowledge to bear in order to assist in the development of Indonesia’s infrastructure. The focus group is open to all with an interest in this area, which is of such vital importance if Indonesia is to achieve its ambitious plans for economic growth in the medium term. UK plc has a lot to offer in this sector, whether it be in the area of advice, engineering consultancy, construction, operational management, finance or investment.

In recent years, the focus group has been actively involved in hosting seminars on various topics of interest to BritCham members and the infrastructure sector as a whole. Of particular note is our involvement for several years now with the EU-Indonesia Business Dialogue (EIBD), whereby we have hosted the sessions dedicated to infrastructure and reported to the plenary meeting with recommendations for how much needed improvements can be made to the delivery of adequate infrastructure in Indonesia.

The importance of infrastructure and its key role in supporting general economic development has always been recognized, but there is now extra impetus under the new administration under President Joko Widodo. Over the next five years the ambition is to raise infrastructure spending from the current level of 2-3% to as much as 10-11% of GDP in order for Indonesia to remedy the infrastructure deficit that is evident in anyone’s experience of traffic conditions in Jakarta. The inadequacy of existing infrastructure means that Indonesia lags many of its regional peers with which it is competing for investment. According to the latest World Bank Indonesia Economic Quarterly, Indonesia ranks 53rd out of 160 countries in the Logistics Performance Index, placing it behind its G20 and ASEAN peers. Logistics costs remain relatively high at around 24% of GDP compared to 16% in Thailand and 13% in Malaysia.

The budget approved for 2015-2019 totals approximately US$370 billion, with the private sector expected to account for over a third of the total spend. The highlights are as follows:

  35,000 MW of new electrical power generation capacity in addition to the projects already in the pipeline;
•  A 300,000 tpd refinery;
  3,650 km of new roads, of which 1,000 km will be tolled;
  24 new port developments to bring container capacity from 13m to 27m TEUs per annum;
•  A “sea toll” linking from West to East the key hub ports of Belawan, Jakarta, Surabaya, Makassar and Bitung;
  25 new regional airports;
•  3,258 km of rail;
  Mass transit projects in 23 cities;
  Commuter and express rail links between downtown Jakarta and Soekarno-Hatta International Airport; and
  Various municipal water and wastewater projects.

Many of these sectors are open to foreign investment and there are undoubtedly opportunities for British investors, contractors and service providers.

In recent years the Government of Indonesia (GoI) has taken a number of significant steps to improve the investment climate in infrastructure, with the key measures being:

  The new Land Law of 2012 (which has been subsequently revised) to streamline the often difficult process of land acquisition;
  A new Public-Private Partnership (PPP) framework with the Presidential Decree 38/2015, allowing for example availability-type payment structures in co-operation agreements between the private sector and line ministries;
  Viability Gap Funding under the MoF to allow a grant to be made of up to 50% of project costs during construction for those projects where the private sector would not be able to pass on the full cost to end users (in the water sector for example);
   A central PPP unit under the MoF to co-ordinate project development;
•  The planned creation of a national Infrastructure Bank through the state-owned Sarana Multi Infrastruktur (SMI);
•  A “one-stop shop” avenue for foreign investors under BKPM, the investment co-ordinating board;
  The establishment of the Indonesia Infrastructure Guarantee Fund (IIGF) to provide support for the obligations of state agencies that contract with the private sector (such as the electricity utility PLN); and
Various policy reform packages designed to attract additional investment, particularly with the revision of the Negative Investment List to allow foreign ownership in the land transport and electricity installation sectors.

 

Despite the ambitious programme announced by the GoI and the recent policy measures, there do remain significant challenges and any investor should be aware of these and be prepared accordingly. For example, investment in the water sector is currently under a bit of a cloud of uncertainty following recent decisions in the Constitutional Court and Central Jakarta District Court affecting the 2004 Water Resources Law and the two privately-owned Jakarta water concessions respectively.

In the past, implementation of infrastructure plans has been poor, with many projects facing considerable delays due to:

  • Issues with land acquisition;
  • Lack of co-ordination between ministries at national level and between the national and provincial/municipal tiers of government;
  • A lack of human resource capacity to implement PPPs;
  • The vagaries of the legal system; and
  • The relative lack of strong domestic infrastructure players in the private sector

 

Nevertheless, the issues are fully recognized and understood by all market participants, particularly GoI, and we can expect that some progress will be made in the next few years towards achieving the objectives even if there will continue to be delays and other hurdles faced by investors. Investors should tread carefully, but the rewards could be very attractive for those who select their projects wisely and have the patience to stay the course.

 




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