Infrastructure: Threats and opportunities

Bob Setiadi
Research Analyst
Bahana Sekuritas

To elevate Indonesia’s status to a middle-income country, the government, through the National Planning Agency (Bappenas), has mapped out a 5-year development target (RPJMN 2014-19). This ambitious goal has an estimated cost of IDR5,519tn, with the government contributing 40% of the funding with the rest split between state-owned enterprises (SOE) companies (20%), local governments (10%) and the private sector (30%).
We expect President Jokowi to prioritize several vital areas such as seaports, toll roads and irrigation due to the plan’s sheer size and budget constraints. In the end, the government is targeting to increase its infrastructure spending to 5% of GDP (exhibit 1).
President Jokowi’s latest move to partly dismantle the fuel subsidy scheme, effective 1 January, will provide badly needed funds to kick-start the country’s massive infrastructure plan. In the upcoming State Budget Revision, the government will double its 2015 infrastructure budget from IDR157tn to IDR295tn on fuel-subsidy reallocations and tax revenue increases.
The Ministry of Public Works and Public Housing, which provide a major contribution to SOE construction companies’ revenues, should see its original 2015 budget of IDR85tn to rise by IDR33tn. Thus, this year, we expect the sector’s total 2015 new contracts to increase 18.5% y-y to IDR88.3tn from IDR74.5tn in 2014 (exhibit 2).
Despite high hopes about the new government’s infrastructure program, there are some lingering issues on program implementation. We are waiting to gauge the effectiveness of the new land-clearing law (UU No.2/2012), which is meant to address arguably the most challenging issue in developing Indonesia’s infrastructure. Furthermore, the government needs to pass several regulations to improve Indonesia’s investment conditions and to more evenly distribute the budget proceeds throughout the year, unlike the current practice of back-loading projects at the last quarter of the year.  
Hence, it is still possible that we may see project delays in the first year of President Jokowi’s administration.  Nevertheless, at this stage of the cycle, the market appears to have currently placed high expectations on the success of President Jokowi in accelerating these ambitious infrastructure plans.
Despite some uncertainties, we expect the Parliament to approve President Jokowi’s new State Budget Revision, which he plans to submit later this month. In general, the public, including the media, understands the dire need for infrastructure development in Indonesia; as a result, we expect the Parliament to feel pressure to approve the planned fund reallocations. We believe the approval would have a positive impact on construction companies in Indonesia, in particular SOEs, as it should increase the number of their projects.

Within the sector, we see three main risks: 1. The rejection of President Jokowi’s State Budget Revision by the opposition, which would result in budget reallocation delays; 2. Possible longer-than expected land clearing issues and; 3. Shortage of skilled workers for project executions.