Local contractors upbeat on 2004 outlook

Rudijanto, Contributor, Jakarta

Indonesian population growth of 1.4 percent to 1.9 percent per annum constitutes a source of optimism for the country's construction sector, which has started showing signs of recovery during the past two years.

With a relatively stable government and low interest rate the growth of project value in this sector reached 80 percent, to total Rp 156 trillion (about US$18.35 billion) in 2003, from Rp 87 trillion the previous year.

Head of the Construction and Investment Development Agency (BAPEKIN) at the Ministry of Settlement and Regional Infrastructure Setio Wibowo estimated that the total construction market could total Rp 200 trillion this year.

"Within five years, the value of infrastructure projects in the government's development program could reach Rp 610 trillion. Every year we allocate Rp 120 trillion for such programs," Wibisono said, as quoted by Kompas.

Wibisono revealed that development programs would include a variety of construction projects such as transportation, oil and gas drilling, and office and residential projects.

Chairman of the Indonesian Builders Association (Gapensi) Agus Kartasasmita shares such optimism. He estimates the construction market could be even greater, at Rp 240 trillion this year.

Agus believes that the construction sector has the ability to become the nation's backbone in supporting growth in other economic sectors.

"At present, toll road and other road projects are worth Rp 90 trillion. The government has announced the construction of one million houses, which could cost Rp 8 trillion to Rp 10 trillion," Agus said.

The Center for the Study of Indonesian Property (PSPI) estimates this year's commercial property market to increase by 3.9 percent, from Rp 13.87 trillion in 2003 to an estimated Rp 14.42 trillion in 2004.

The PSPI also shows that commercial property projects have tended to occur outside Greater Jakarta. Such a trend in commercial property construction is expected to provide more growth opportunities for regional construction companies.

Many players believe there could be significant growth in the commercial property construction market, both in 2003 and 2004, due to a positive outcome forecast for this year's general election.

Most businesses believe that whoever wins the presidential election in July, his or her mandate will be stronger due to being chosen directly by the people. With such prospects in mind, business players have started, since last year, to build commercial property such as shopping centers and other retail floorspace.

The Indonesian economy grew by 4.1 percent in 2003, and more than 3.7 percent in 2002. Such growth has fueled optimism that the country has finally recovered from the prolonged economic crisis that devastated the economy from late 1997.

But with 4.1 percent economic growth, Indonesia can only absorb 1.6 million job seekers. The nation has around 2.5 million job hunters per annum. To be able to absorb all the unemployed, the country needs higher economic growth of 6.5 percent.

Agus said that one of the major problems of many domestic contractors was a shortage of funds. Though the interest rate has declined significantly, Agus says, banks are still wary about extending credit to the construction sector.

"The construction business carries a high risk but it promises good profits. We do need bank funding to provide initial capital to start large projects but we can only show them a contract as a guarantee, not collateral to the same amount or even twice that of the loan in question," Agus noted.

Aside from a shortage of funds, most of Indonesian contractors still operate equipment purchased prior to the 1997 monetary crisis. It can hardly fulfill the need for speed and high-quality work.

"Since we don't have the ability to buy new equipment, we hope the government will purchase it through a newly established, state-owned company that rents the equipment to us," he added.

Are such requests from domestic contractors too much for the government? Contrary to many domestic contractors' expectations the government would like to see more participation from the private sector in developing the domestic construction sector.

Wibisono urged the private sector to lead investment in a variety of construction projects. He believes that it is time for contractors not to rely solely on government funding for their survival.

"It's time for the government to push for a larger private sector role so as to achieve a funding balance between the government and the private sector similar to what existed prior to the crisis -- namely 30:70," said Wibowo.

The government has played an important role in generating growth in the construction sector through a variety of government-funded projects. In 2002, total government and private sector contributions to construction projects were in the ratio 60:40.

Chairman of the Indonesian Constructors Association (AKI) A. Sutjipto revealed that private sector contributions had increased significantly. In 2003, Sutjipto said, they already accounted for 50 percent of the total construction market.

Unlike Gapensi's small- and medium-scale construction company members, AKI members mostly come from the larger construction companies. AKI members are expected to compete with international construction companies in both the domestic and international markets.

Currently, international markets, including the reconstruction of Iraq and Southeast Asian (ASEAN) countries, offer more room for growth for domestic construction companies. However, one of the problems encountered by many Indonesian constructors is the credibility of the country's banks.

"We know that our banks are not yet trusted by international banks so they cannot play an intermediary role that enables us to win projects in foreign countries," says Agus.

Apart from the credibility of domestic banks, at current commercial interest rates, banks can barely help contractors to win tenders in international markets.

"How can we win against foreign contractors that pay only 3.4 percent interest to their banks while here we have to pay 7.5 percent? At such rates we can operate only in Indonesia," Agus said.

Given this funding limitation, he has revealed that some Indonesian contractors have had to work with foreign partners in order to win projects in foreign countries. However, under such arrangements, Indonesian contractors usually become simply the subcontractors of their foreign counterparts.

"We have a big opportunity to play a role in construction projects in ASEAN countries because the business climate in these countries is supportive to us. Apart from funding, our problem is a lack of both international experience and modern equipment," Agus said.

Gapensi believes that Indonesia has the potential to fulfill an important role in the international construction market. Major players such as Japan, South Korea and Taiwan have withdrawn from this sector due to their more costly labor.

But with a lack of funding, new equipment or international experience, one wonders if the country's construction companies will be successful in capturing these lucrative market opportunities.

Although they enjoyed rapid growth in the domestic construction market last year and, most probably, will do so this year, Indonesian contractors still need more government support to help them.