Infrastructure Development Indonesia: Gaining Momentum in 2016

On the one hand, reforming the nation's energy subsidies (particularly the scrapping of gasoline subsidies at the start of 2015) was the reason why there occurred a delay in infrastructure development as the revised State Budget required approval from the House of Representatives (DPR). On the other hand, these budgetary revisions made more funds available for infrastructure development in Southeast Asia's largest economy. As such, the number of key (government-led) infrastructure projects that were initiated in the first half of 2015 was disappointing. 

Disappointment was particularly huge as infrastructure development is regarded the main pillar of support for economic growth in Indonesia amid current low commodity prices (hurting Indonesia's export performance) as well as sluggish domestic consumption in Indonesia (due to weakened purchasing power).

However, disappointing infrastructure development in the first half of 2015 is only expected to strengthen the sense of urgency for the government even though the government has already shown its commitment to infrastructure development by reforming energy subsidies, significantly raising allocations to infrastructure development in the 2015 and 2016 State Budgets, easing the process for tenders involving key infrastructure projects, speeding up the land clearing process, and its intention to inject capital into state-owned construction firms. Indeed, government spending on infrastructure development and the number of groundbreaking ceremonies for infrastructure projects increased in the second half of 2015 causing room for optimism.

Funds Allocated to Infrastructure Spending in the Government's State Budget:

Indonesian credit rating agency Pefindo said the key to overcome bottlenecks that hamper more rapid infrastructure development is in the hands of the government. However, infrastructure projects don't happen overnight and therefore robust acceleration of infrastructure development may only be felt from the second or third quarter of 2016 onward.

A positive sign is that the number of new contracts won by Indonesian publicly-listed (and partially state-controlled) construction companies has increased significantly in the first nine months of 2015 (compared to contracts won in the same period last year). This signals that infrastructure development is on the rise.

New Contracts Listed Government-Controlled Construction Companies:

Company	Credit Rating	New Contracts 9M-2015	New Contracts 9M-2014	YoY Growth
Wijaya Karya	idA+ (stable)	IDR 12.5 trillion	IDR 11.6 trillion	7.8%
Adhi Karya	idA (negative)	IDR 10.6 trillion	IDR 4.9 trillion	116.3%
Waskita Karya	idA (stable)	IDR 16 trillion	IDR 11.6 trillion	38%
Pembangunan Perumahan	idA (stable)	IDR 17 trillion	IDR 12 trillion	41.3%

^{Various sources}

The difficulty of land acquisition is possibly the most notorious stumbling-block for infrastructure development in Indonesia. In order to smoothen this hurdle, the government issued Law No.2/2012 on Land Procurement for Development in the Public Interest (known as the 'Land Acquisition Act') in 2012, which aims to speed up the land acquisition process by dealing with the revocation of land rights to serve public interest, putting time limits on each procedural phase and by ensuring safeguards for land-right holders. However, in reality problems remained, causing the persistent delay of infrastructure projects as locals still refuse to give up their land. For example, when the groundbreaking ceremony for the USD $4 billion coal-fired power plant in Batang took place in August 2015, several local farmers were still reluctant to sell their land, needed to construct the plant. The dilemma for the government in these cases is whether or not to respect the rights of individuals at the expense of the benefit for the larger community.

Another problem is weak tax collection. Tax revenue in 2015 is most likely to fall below the government target, implying that the government has less funds to spend (as the budget deficit is already becoming close to the legal limit at 3 percent of gross domestic product).

Tax Revenue Indonesia:

	9M-2015	9M-2014	YoY Growth	Target 2015
Tax Revenue	IDR 686.3 trillion	IDR 688.1 trillion	-0.3%	IDR 1,294.3 trillion

^{Source: Directorate General of Taxes}

Lastly, private sector involvement has not been optimal. The government hopes that the private sector will account for 30 percent of the country's infrastructure needs. However, so far the private sector has only contributed 15 percent to the nation's infrastructure development, meaning that the government needs to make the investment climate more attractive. However, big infrastructure projects are usually not the first choice of investors as these projects require large capital and usually take a longer time before profits start to roll in.

However, the government's push for infrastructure development also implies financial risks. The state-owned companies that are tasked to engage in infrastructure projects will see their debt increase two-fold or three-fold, while infrastructure projects usually require time to generate profit. This will cause the financial ratios of these companies to weaken. A possible consequence is that some companies cannot diversify their businesses in the future due to financial pressure or higher borrowing costs.

Another risk is the foreign exchange risk, especially for those companies investing in electricity infrastructure projects. A large chunk of capital expenditure is spent using foreign currencies and as these projects are usually costly, there occurs the need to take on foreign currency-denominated debt. In times of rupiah depreciation companies' debt situation deteriorates.

Lastly, infrastructure projects, due to their long-term nature (+25 years), are more susceptible to political risks. A new government or a shift in the political situation in the country can undermine previously agreed contracts. Given that Indonesia is a young democracy (experiencing growing pains) and also a highly complex country in terms of diversity, size, welfare and inequality, political risks are larger in Indonesia than in many developed countries.

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