The construction sector in Indonesia grew at 7% in 2010 and up to 10% predicted for 2011 in real growth, fuelled by high demand for residential projects and infrastructure. Being largely labour intensive and heavily sensitive to changes in the prices of raw materials for construction and fuel has made the sector vulnerable to shocks and rising inflation. Improving levels of expertise among the private sector contractors has been a challenge in improving competition, as the state owned companies (SOEs) continue to be the main players. This makes finding a local partner to execute PPP (see Public Private Partnerships) projects as well as locating qualified human resources an obstacle for foreign companies operating in Indonesia.
The gap between the rates of nominal growth of the construction sector which stood at 32% for 2009 and real growth at 7% is a reflection of the high costs the sector must contend with. The fast rate of expansion has fuelled inflation which has also been impacted by the sharp rise in oil prices. This increased the price of construction materials such as asphalt, glass plates and cement by up to 20% at the end of 2010. Global price rises in steel and iron bars have also hit the sector as when coupled with Indonesia’s persistently high logistics costs, it cuts deeply into potential profits. The China ASEAN Free Trade Agreement enacted in January 2010 removed tariffs for many types of construction materials, however often the quality of products such a cement has often failed to meet national industry standards. Other factors influencing the high prices are that inter-island transportation can be more expensive than that of international. Therefore, until the infrastructure and logistical improvements start to make an impact, costs for constructions materials will continue to increase.
According to the Business Competition Supervisory Commission, KPPU, the construction sector is unhealthy; lacking competitiveness as well as expertise among the smaller contractors to compete with state owned companies. The largest companies in the sector are SOEs such as PT Adhi Karya Tbk (Persero) and PT Wijaya Karya Tbk (Persero) which are far more successful in being awarded state contracts than private competitors. Being state owned brings obvious advantages to the government as they have a stake in it and have the facilities to purchase the necessary technology but is unsustainable over the long term. Over 80% of Indonesia’s 58,000 registered contractors are small companies that cannot take on large scale projects, with only 1% of those being considered ‘large’ and 12% being ‘medium’. The Presidential Decree No 54/2010 on Governmental Goods/Services Procurement is being considered for revision so that it may give smaller companies a fairer chance in tender proceedings by partnering with state owned companies for knowledge transfer.
Indonesian contractors face limitations in the expertise and technology required for infrastructure projects under the PPP scheme and are being outdone by foreign contractors. Of the construction projects offered by the state in 2010, Indonesian contractors only won 40% of them. Foreign companies are better positioned to secure tenders and have come to dominate the sector in the country by having 60% of the construction market, mainly from Japan. The 2010 government regulation guarantees local contractors a right in projects over 100 billion RP, meaning that foreign contractors are required to take on a local manpower and engineers. As the majority of contractors are small companies, they lack experience in managing and executing projects of such scope. Qualified human resources are in short supply with a small percentage of Indonesian engineers holding the mandatory ASEAN Chartered Professional Engineer certificate. Foreign companies seeking a local partner must consider factors outside of just skill and size; local contractors who have the political connections needed for state funded construction projects are the most advantageous category of partner to take advantage of the 140 trillion RP to be spent on infrastructure projects over the next 5 years.
The construction sector in Indonesia is predicted to grow at an average of 6.8% a year to 2014 according to Business Monitor International, driven by the boom in residential and commercial developments as well as state infrastructure projects. Construction material costs in some areas will be brought down by the expanding of domestic capacity in manufacturing materials such as cement and steel. Remaining reliant on imports will restrain real growth and therefore presents opportunities for manufacturers to fill the demand. In regards to expertise, foreign companies will continue to have advantages in terms of technology and knowhow and the pool of local companies which could form partnerships will remain limited.
Global Business Guide Indonesia - 2012
Contribution to GDP: 10% (2016)
Number of Contractors: 77,000 (2015)
Number Employed in the Sector: 7 million (2016)
Standardised Qualification: ASEAN Chartered Professional Engineer (ACPE) certificate and the National Construction Services Development Board (LPJKN) certification.
Relevant Law: Presidential Regulation No. 39 of 2014 on the Negative Investment List reserves low-technology and low-risk construction services for local SMEs and cooperatives. Foreign companies can establish representative offices in Indonesia and execute complex and high-technology projects in partnership with local companies, Minister of Public Works Regulation No. 10/PRT/M/2014 provides the guidelines.
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