Indonesia Infrastructure Report Q2 2008

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 the statutory 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 rate of 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 firms are members of the Indonesian Contractors' Association (AKI). These are the players that are expected to undertake major government projects and compete with international construction companies, both in the domestic and international markets.

In the current year, the central government has allocated nearly 20% of the overall budget expenditure to public 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 economic expansion. In a recent presidential address on the draft 2008 state budget, it was indicated that budgetary allocations 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 in funding, 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 security concerns and poor governance characterised by widespread corruption, lack of transparency, poor legal compliance 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 encountered has to do with the credibility of Indonesian banks. With the lack of funding and limited big-project exposure, it is uncertain whether the nation's own construction companies will be successful in capturing these 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 to US$44.4bn in 2012. Moreover, in BMI's Infrastructure Business Environment Ratings for Asia, Indonesia manages a net score of 50.