Aug 24 2010
New Construction market report from Business Monitor International: "Indonesia Infrastructure Report Q4 2010"
Indonesia's construction industry is anticipated to experience dynamic growth over our forecast period, following its immunity to the global downturn, and continued efforts to attract foreign direct investment (FDI) into the sector, which are paying dues. Between 2010 and 2014 BMI is forecasting real growth of 6.8% on average per year, with nominal value anticipated to triple from IDR721trn in 2010 to IDR2,127trn in 2014.
The Indonesian government has been eager to attract private investment into the sector, and has employed a number of tools and enacted a variety of measures to facilitate investments and increase the number of public private partnerships (PPPs). Measures include the creation of the Indonesia Infrastructure Fund, designed to provide an alternative source of funding for infrastructure projects. Measures related to land issues are also being implemented, as land clearance is one of the major barriers to the country's investment climate. The first is land capping, which provides a government guarantee that the cost of land on which a toll road will be built is at market price, with the government committing to pay the extra cost if the price of land has increased above this level. The second is the provision of a land-revolving fund. In this news over the last quarter has been PT Penjaminan Infrastruktur Indonesia (PT II), a state owned infrastructure guarantee fund. Established in January 2010, in May 2010 the World Bank announced it would earmark US$500mn for the fund. The fund was officially launched in May 2010 with a guarantee threshold of US$3bn. The fund will help with a crucial barrier to entry - securing financing at a reasonable price. Sponsors which have access to PT II guarantees, will typically receive commercial bank loans at rates between 150 to 200 basis points below the market price. With the World Bank's additional guarantee in place, interest rate premiums can come down between 200 and 500 basis points.
The efforts of the government are proving fruitful. FDI in Indonesia has grown substantially over recent years, from US$6bn in 2006 to US$10.8bn in 2009, according to the Indonesia Investment Coordinating Board. This trend looks set to continue in 2010, with first quarter figures rising by 41% year-on-year (y-oy) to US$3.92bn. Strong sectors for investment continued to be the transport, storage and communications industry, which recorded US$941.5mn investment for 23 projects and the mining sector, which attracted US$711mn for 12 projects. Both of these sectors demand supporting infrastructure, and investment into the sectors has buoyed the construction sector.
In turn, the construction industry has been booming, especially in nominal terms. Based on data released for the real construction industry value by Statistics Indonesia, 2009 real growth came in at 7%, despite growth in the nominal value of 32%. This indicates that inflation in the construction sector has been around 25% higher than that in the economy in general (based on CPI). The source of this is not entirely clear; however, the rising cost of raw materials, such as cement and steel, is likely to have driven increased costs. Cement demand in Indonesia has been growing rapidly, with consumption rising by 12% in the first half of 2010 (H1 2010) compared to H1 2009 according to the Indonesian Cement Association. This level of demand will do nothing to ease high prices for the material. According to a recent study of 11 countries in Asia, Indonesia had the fourth highest cement price in the region. Indeed, a 50kg bag of cement in East Java costs almost double what it would in China, according to the Jakarta Post. With cement costs accounting for around 30% of project costs, the impact is notable. The main reason for the higher prices has been blamed on transport and distribution costs, and the uncertain electricity supply in the country is bound to have an impact. There are also concerns of collusion between cement makers, limiting production to drive prices higher. In January 2010, the Business Competition Supervisory Commission expanded its investigation into the alleged collusion, including eight producers who control 90% of the market, according to the Jakarta Post.
Despite rising costs of construction, the industry is growing rapidly driven by an ambitious investment programme into the power sector, which, although mired in funding problems, has still seen a relatively large influx of capital into the sector. Growth in the power plants and transmission grids industry value is expected to average 17% between 2010 and 2014. Infrastructure related to Indonesia's booming mining sector will also drive industry value, with railway and port investments moving to the forefront, and industrial construction to support the sector will also propel construction industry growth as a whole over the forecast period.
Source: http://www.fastmr.com/