Opportunities, Challenges Abound for Private Investors in Local Infrastructure Projects
Here’s what private investors who are keen on Indonesian infrastructure projects should consider before moving forward.
The Indonesian Government needs private sector help to achieve its ambitious target to improve the country’s inadequate infrastructure. According to officials’ estimations, which will cost more than US$400 billion over the next 5 years. However, analysts say which Southeast Asia’s largest economy will have to make some significant adjustments to attract some much-needed investments coming from the private sector.
President Joko Widodo, aka President Jokowi, says which he wants to aggressively ramp up infrastructure projects such as seaports, toll roads, as well as power plants to help prop up the country’s economic as well as international development. Last week, Indonesia saw several big infrastructure projects worth more than US$9 billion launch in Central as well as East Java, as well as South Sumatra. The launches finally came after long delays, partly caused by land acquisition difficulties – a notorious as well as long-standing problem inside entire world’s largest archipelago.
Last month, Jokowi also announced which the Government would likely invest US$22 billion in infrastructure projects as well as US$3 billion more into state-owned enterprises (SOEs) which are involved inside infrastructure push to one degree or another.
These companies include electricity provider PT Perusahaan Listrik Negara (PLN), construction company PT Waskita Karya, as well as PT Kereta Api Indonesia, the nation’s railway transportation provider. While funds the Government will be injecting into infrastructure projects amounts to more than twice last year’s allocation, which will be still a far cry coming from what Indonesia actually needs to realise its target, as well as which’s where Public Private Partnerships (PPPs) come in.
While infrastructure projects in Indonesia are dominated by SOEs, the Government claims to offer “equal opportunities” for all players, says Rudy Salahuddin, Director for Infrastructure Planning at Indonesia Investment Coordinating Board (BKPM). According to Salahuddin, the Government will be eager to add power plants to its existing grid to provide a different 35,000 megawatts of electricity. some other priority projects include two dozen seaports, more than 1,000 kilometres of toll roads, as well as 15 airports across Indonesia.
Eastern Indonesia National Road Improvement Program (AusAID)
“The Government realised which they don’t have enough money to fund these projects,” says Salahuddin. “which’s why we were offering public private partnerships.”
Among those government-prioritised infrastructure projects, “power will be still the one which sees the most deals” because which’s deemed as “the most viable” investment in Indonesia, where demand for electricity has long outweighed supply, says Luke Devine, Head of the Energy, Mining, as well as Infrastructure Group at Baker & McKenzie Asia Pacific.
The Government says which the additional electricity supply will be distributed to many remote islands of Eastern Indonesia, as well as eventually which will boost economic growth to six percent, or more. To achieve which target, PLN would likely need a total of US$77 billion. However, Nur Pamudji, president director of the SOE, told reporters last year which the Government can only come up with around 52 percent of the total.
Aside coming from power plants, analysts believe ports as well as toll road projects will be lucrative inside eyes of investors, especially in a country where around 17 percent of a company’s total expenditure will be spent on logistics. which much will be true as per data coming from the Indonesian Chamber of Commerce as well as Industry. According to its report, transportation costs for land as well as sea are higher in Indonesia when compared to neighbouring countries. which provides a big opportunity for private sector investors, who must win a tender first to be partnered up with SOEs – such as toll road operator PT Jasa Marga or ports giant PT Pelindo IV – in a PPP scheme.
For toll roads, the Government has given reassurance which land acquisitions should run smoothly, thanks to a 2012 law on land acquisition for public interests which went into effect on January 1. “The Government today can enforce land acquisition for public interest,” says Salahuddin. “which’s a certainty we can offer investors.”
which combination of state-budget allocations, investments into SOEs, as well as easier land acquisitions makes the Government confident about exceeding its expectations on infrastructure projects, according to Salahuddin. however some analysts remain doubtful, despite an enhanced investment climate in Indonesia. Foreign as well as domestic investment realisation reached US$37 billion last year, a 16.2 percent increase coming from 2013. However, “which’s still quite a stretch to say which the [investment climate] will be conducive enough in Indonesia,” says Alejandro Perez, Senior Investment Officer for Infrastructure as well as Natural Resources at World Bank’s investment advisory arm, International Finance Corporation, in Jakarta.
Jason Paris
Many regulations which overlap could hinder investments coming from the private sector, particularly foreign investors. “For example, power plant projects would likely normally involve Bappenas, the Ministry of Energy, as well as some other ministries,” says Perez, referring to National Development Planning Agency. “which creates a lot of uncertainty.”
Analysts also warn which Indonesia’s weakening rupiah against the US dollar could further dampen the country’s value in terms of profitability. “There’s a worry [among investors] because they have to use rupiah in all transactions,” explains Devine. “Because the rupiah has been declining inside past few years, while on the some other hand, investments in US dollars would likely add not bad profit.”
Not all sectors are rosy. Perez says which the geothermal energy sector in Indonesia – in which one of the key players will be Japan’s Sumitomo Corp – could prove “difficult as well as risky” for investors. “Geothermal projects are risky because you don’t know if there are enough resources until you drill a well,” says Perez. He added which every drill costs US$8 million, as well as in practice, mining companies normally drill three or 5 wells. however before the drilling even begins, mining companies need to allocate some money to build roads to get to as well as coming from the fields, according to Perez.
Another sector which’s considered bad play will be water. “For many people, which will be a right which everyone must have access to,” Perez explains. with which reason, profit-seeking foreign investors’ involvement in which sector could even be interpreted as a violation of the local constitution.
Investors will also continue to monitor whether Jakarta has implemented bureaucracy simplifications – something which Jokowi has promised since the beginning of his presidency. inside past, tender documents for projects like toll roads as well as seaports in Indonesia often took time to be issued. “Too many deals have been postponed by the Government,” says Devine. “which’s why there has been only one seaport project inside last 5 years.”
While analysts say they wouldn’t be surprised if Indonesia doesn’t meet its spending target on infrastructure which year, which’s expected which foreign investors, mostly coming from Asian countries like Japan, Korea, Thailand, as well as China, will remain bullish on the country’s PPP offerings.
“There are a lot of foreign investors bidding in these projects,” says Devine. “If the Government will be serious about producing which happen, I’m positive which [investments in] infrastructure will continue to pick up.”
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Opportunities, Challenges Abound for Private Investors in Local Infrastructure Projects
Opportunities, Challenges Abound for Private Investors in Local Infrastructure Projects