Sector Report

Indonesia paves the way for construction boom

by Sarina Lesmina / Sep 15, 2016

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It has been two years since President Jokowi reformed the country’s fiscal budget with substantial cuts to fuel subsidies and aggressive infrastructure buildout. Of his three stated priorities – tollroads, seaports and powerplants – tollroads have been cruising in the fast lane and show the most headway. From 2014, 190km of new tollroads were inaugurated (up 23% vs a 4% Cagr in 2001-14). Funding remains the largest roadblock due to the substantial capital requirements for infrastructure financing and we continue to wait for the necessary private-sector involvement.

The Trans-Java tollroad network has doubled in two years and, after 30 years in the making, the mega-project is set for completion in 2019. With stalled projects restarted and faster land clearing, the national tollroad network is expected to double in five years. Seaport capacity rose 18% in the past two years. However, the power sector is still in need of an overhaul and encouragingly there has been a recent shake-up of some infra-related ministers.

The Jokowi administration aims to spend 10% of GDP over five years on infrastructure. Until the government is able to attract private-sector money, the state budget and local bank funding will be stretched. Declines in cost of capital and falling risk premiums should spur investment. The recent negative-investment-list revision liberated foreign ownership in quite a few infra sectors and the new Investment Board head is also encouraging.

Progress is promising and economy is improving gradually. The latest cabinet line-up shows that President Jokowi is paving the way for reform acceleration. In the longer run, the whole economy will feel a multiplier impact and while the journey is long, we are on the right path to prosperity.