Thu, 19 Feb 2009
Andhika Suryadharma, Analyst

The Indonesian Investment Coordinating Board recently stated there are three industries expected to be the prime driving force behind investment in 2009: Agriculture, energy and infrastructure.

These industries are expected to help drive the economy forward despite the adverse effects of the global economic slowdown.

But, judging from developments in the first quarter of the year, we believe it is high time for the government to press down on the accelerator pedal to get things moving.

Infrastructure, for example, is one subject that has been long been discussed and planned for years.

Infrastructure projects, through the development of public facilities, roads, canals and irrigation, are expected to create thousands or even millions of jobs for Indonesian people as well as to improve their purchasing power and stimulate economic activities to generate growth.

Still, implementation will not be without challenges this year, particularly given the current global financial turmoil.

Currently, it is difficult to obtain guaranteed financing for construction activities, particularly from banks and other financial institutions which are reluctant to provide project financing following tighter liquidity restrictions.

Since the Infrastructure Summit in 2005 the budget for infrastructure development for the next five years was supposed to reach Rp 1,300 trillion, but so far, four years later, few projects have been achieved.

Challenges confronted by the Indonesian infrastructure sector include classic stories of project funding problems, prolonged land acquisition processes, problems of transparency in funding distribution and lack of private sector incentives.

In 2009, the government has proposed to allocate Rp 61 trillion from the state budget for the country's infrastructure spending, of which Rp 35 trillion is allocated for the department of public works, 17 trillion for transportation, Rp 6.7 trillion for energy and mineral resources, Rp 2.1 trillion for information and communication and Rp 1 trillion for public housing.

From the total Rp 35 trillion, approximately 50 percent (Rp 17.5 trillion) would be spent on making new roads, including improving and maintaining existing roads and facilities as part of the massive government spending program on infrastructure.

This year's road construction program financed by the ministry would prioritize inter-city roads across Java and Sumatra, while the other 50 percent will be spent on irrigation projects, sanitation projects and others.

In addition to the Rp 61 trillion, there is Rp 10.2 trillion allocated for additional direct spending on infrastructure from the fiscal stimulus planned in the 2009 state budget.

While these extensive funding proposals have not all been passed by the parliament, we are confident that it would just be a matter of time before they are approved.

Historically, infrastructure spending for Indonesia has ranged between 2 and 3 percent of gross domestic products while Vietnam and Thailand managed to book about 6 to 8 percent of GDP for infrastructure spending.

For Indonesia, low expenditure has stemmed partly from inexperience at regional level following Indonesia's decentralization program, coupled with the government's moves to eradicate corruption in the various provinces.

For toll roads, the issue of land acquisition has been a perennial problem for road builders. It could even take several years for a specific land site to finally be acquired by toll road operators.

This problem includes problems of land areas which are considered sacred, for example.

In light of this, it is imperative that the government should be stricter in obtaining land for toll road projects. The implementation period must be shortened for instance, to ensure immediate development.

Another problem on infrastructural development is the lack of incentives for the private sector to develop low profit yielding projects such as irrigation and sanitation projects, village roads and electrical power sources for villages.

In fact, the government has built partnership schemes with the private sector to improve funding for projects through Public Private Partnerships (PPP), to promote joint cooperation in the development of infrastructure.

However, so far this scheme has not brought forward significant improvements.

On the financing issues, due to current tight liquidity, Bank Indonesia has unveiled a series of regulations aimed in part at increasing bank lending to reach a targeted economic growth of around 4.2 percent for this year.

Recently, a few state owned banks have expressed support to provide financing for the telecommunications sector, the energy sector and the 10,000 MW (megawatt) program and toll road infrastructure.

On a more positive note, we are seeing that favorable conditions are emerging in the form of lower commodity prices which would lead to lower prices for materials for construction.

This coupled with funding from state-owned banks should bode well for the realization of planned government spending.

Thus, a great deal of effort is being made to consolidate infrastructural development, which will be the driving force behind Indonesia's economic growth this year.

However, with obstacles clouding the sector, it is imperative that everyone involved, from the government to banks to the private sector, must now step on the accelerator pedal.

The writer is a research analyst Bahana Securities



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