BUILDING INDONESIA'S FUTURE - UNBLOCKING THE PIPELINE OF INFRASTRUCTURE PROJECTS RESEARCH BY - PWC
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Research by
Building Indonesia’s future
Unblocking the pipeline of infrastructure projects
www.pwc.com/idOutlook to 2025
Indonesia
Key points
a. Total infrastructure spend is estimated to have been $57.3bn in 2014. This figure is projected to increase to $138.6bn by 2025.
b. The 2025 figure represents a downward revision from our previous forecast. This is largely driven by a revision of historical
estimates and spending. Compound annual growth rate to 2025 remains approximately the same at 8.4%. The outlook for
extraction and manufacturing investment has weakened since our previous forecast; this is offset by a stronger outlook for
telecoms and some transport subsector spending (ports, rail).
c. Infrastructure spend was equivalent to 6.4% of GDP in 2014. The new administration’s infrastructure programme is expected to
accelerate spending before 2019, peaking at 7.7% of GDP in 2017. As the Indonesian economy matures, infrastructure spend in
Indonesia will likely account for a slightly lower proportion of GDP, falling to 5.3% by 2025.
d. Indonesia’s share of regional and global infrastructure spend is expected to remain broadly stable throughout the forecast
period, at around 4% and 2% respectively.
e. Investment in health and education infrastructure is expected to grow particularly strongly from a low base – by more than 10%
per year on average between 2015 and 2025. As such, social infrastructure is expected to account for 10% of total spend by 2025,
up from 7% in 2014.
1. The macroeconomic growth outlook in 2015 and 2016. to our longer-term outlook of a gradual
Weaker external demand from key export appreciation of the Rupiah against the
environment markets such as Japan, China and US dollar in line with strong economic
Growth of the Indonesian economy Singapore, as well as for Indonesia’s fundamentals and rising capital inflows.
slowed to a five-year low in 2014 as main commodity products, has been
mining revenue stalled on weak global reflected in disappointing export and Some of the key drivers of Indonesia’s
demand. Business investment also industrial production outturns. Business future economic growth will be: a step
slowed in the face of heightened confidence expectations are relatively low change in and growth in infrastructure
economic and political uncertainty, and although the trade balance has investment that will go some way to
including the protracted and turbulent improved, this is more down to weaker alleviating the economy’s considerable
presidential election. imports including for capital goods, supply-side bottlenecks; increased
which partly indicates implementation macroeconomic stability; continued
At the time of the election of the new issues with public infrastructure strong demographic and labour supply
government and the months that spending. The authorities are trying hard growth; improvements to the business
followed, there was a definite sense of to stimulate the economy but have their and regulatory environment (in areas
optimism that the economy was on an hands somewhat tied by macroeconomic such as business licensing, Public Private
upward trajectory. Macroeconomic stability targets for the current account Partnerships (PPP); new public finance
fundamentals were improving, with the and public finance deficits and inflation. institutions; improved investment
‘twin’ fiscal and external deficits moving The new president’s lack of united coordination and land acquisition for
in the right direction; at the same time, support in Parliament and within his own infrastructure); and, a growing middle
the new government’s more business- party is also slowing reform. class. Together these developments
friendly planned reforms were welcomed should lead to higher levels of domestic
as a potential catalyst for stronger Following a fraught 2013 when the and foreign private investment. This is
growth. The improvement in public Rupiah plunged, the economy has started critical for the infrastructure sector as
finances, supported by the slashing of to look less vulnerable to changing Government will only be able to fund
fuel subsidies, were also expected to investor sentiment. Even though the about half of its targeted level of
boost infrastructure investment in those Rupiah has depreciated by more than infrastructure investment over the next
sectors more dependent on government 10% against the US dollar since July five years. Indeed there are already
funding like transport, electricity, water, 2014, this is no worse than many other positive signs of a pick-up in private
health and education. major currencies like the euro or yen; in investment in the economy. According to
fact, the Rupiah has retained its value on the Investment Coordinating Board, total
While the long-term outlook for a broader trade-weighted basis. Interest investment rose by 16.9% year-on-year in
Indonesia remains strong – this study rate hikes in the US in the near future, 2015 Q1 to a record level of IDR 124.6trn
forecasts that Indonesia’s economy in however, could lead to capital outflows ($10bn), with Foreign Direct Investment
real GDP terms will likely grow by 5% or towards the end of 2015, prompting the (FDI) rising by 14%.
more per year in the medium and long central bank to maintain its tight
term to 2025 – the recent optimism has monetary stance to avert this, as well as
certainly been checked according to latest to bring down inflation. Any short-term
indicators, leading to downgrades in the exchange rate volatility should give way2. Infrastructure Indonesia1. The share of infrastructure bureaucratic, procurement, land
spending as a percentage of national GDP and skills bottlenecks the
spend outlook and total economy investment (see infrastructure sector will face in
2015-2019 Figure 1) and as a share of global and managing this ramp-up in activity.
Asia-Pacific infrastructure investment is Looking beneath the aggregate detail,
The period of 2015 to 2019 – and projected to rise sharply in 2015 and
potentially beyond – is likely to be a transport, utilities and manufacturing are
remain at higher levels than previous the largest infrastructure sectors today in
game-changing era for Indonesia’s years until 2019. But benchmarking
infrastructure sector. The sharp decline Indonesia based on annual investment in
regionally, Indonesia’s infrastructure 2014. Over the next five years, transport
in global oil prices, and relatively weak shares of national GDP and total
rebound to date, prompted the new will likely account for around 37% of total
economy investment between 2015 and infrastructure spend, utilities 26% and
president Joko Widodo to largely scrap 2019 will still be considerably lower than
fuel subsidies in January – a move that is manufacturing 21%. The remaining 16%
in China during the mid-2000s. will come from extraction, telecom and
expected to save more than 10% of total
government expenditure overnight. the social sector. Comparing cumulative
Total infrastructure investment between
Around half of this windfall has been spend 2015–19 to the five previous years,
2015 and 2019, in 2014 constant
earmarked towards addressing the social spend will increase the most and
exchange rate terms and covering all
country’s considerable infrastructure extraction the least (see Figure 2).
sectors included in this study (which is a
deficit. The 2015 public investment wider definition than that of the In terms of Indonesia’s demographics,
budget has jumped in comparison with government’s), is projected to be around there are currently six times as many
2014, resulting in a structural break in 87% higher than the preceding five-year children aged 14 and under as there are
forecast infrastructure spend levels. period. Importantly, our projections the elderly aged 65 or over; however, the
Public investment in the forthcoming imply that Government will fall short of country is undergoing a dynamic
years up to 2019 is set to remain high as its ambitious targets by around 19%. This demographic transition with this ratio
Government embarks on an ambitious implication applies to all sectors though falling from 6:1 to 3½:1 by 2025 (see
medium-term infrastructure programme. some may in practice get closer to target Figure 3). Even though education
Although Government needs to do better than others. The undershooting of the accounts for a much higher share of
than it has done to date to implement its government’s infrastructure target is social infrastructure spend than health
ambitious public infrastructure spending based on historic patterns of spend today, we expect health infrastructure
plans with the extra resources that are (which were at much lower levels of spend to grow at a faster pace than
available to spend. investment than projected for the next education going forward (see Figure 4).
These developments are reflected in five years) and recognition of the range of But both subsectors will remain a high
our infrastructure spend outlook for priority for the new government.
Figure 1: Infrastructure spending in a national context Figure 2: Infrastructure spending by broad sector
25% 10% $bn, current prices, 2014 exchange rates
20% 8% 150
15% 6% 100
10% 4%
50
5% 2%
0% 0% 0
2006 2009 2012 2015 2018 2021 2024 2006 2014 2025
Infrastructure spending as % of total fixed investment (Left-hand side) Transport Utilities Manufacturing
Infrastructure spending as % of GDP (Right-hand side) Social Extraction Telecommunications
Source: Oxford Economics Source: Oxford Economics
Figure 3: Demographic change Figure 4: Social infrastructure investment
35% $bn, current prices, 2014 exchange rates
30% 16
25% 14
12
20% 10
15% 8
10% 6
4
5% 2
0% 0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Population aged < 14 Population aged > 65 Hospitals Schools
Source: Oxford Economics Source: Oxford Economics
1 For more details on our methodology and definition of different infrastructure sectors, please see page 6 of Comprehensive Research Findings at http://www.pwc.com/gx/en/capital-projects-
infrastructure/publications/cpi-outlook/download.jhtml
2 PwC | Building Indonesia’s futureBeyond 2019 A broader backtrack on subsidies would There is particular uncertainty around
Much of this outlook focuses on the almost certainly divert fiscal resources social infrastructure forecasts as it is
period of 2015 to 2019 as this coincides away from infrastructure. While political not yet clear what priority Government
with the government’s planning risks have subsided somewhat after the attaches to social infrastructure
timeframe. It is more difficult, however, fiercely contested election, a disruptive investment.
to make accurate predictions for the opposition with a parliamentary majority
period of 2020 to 2025 as this will be and internal disagreements with the Overall, there are significant risks in our
strongly influenced by the government’s President’s party could make it difficult forecasts but we have sought to strike a
next five-year plan. We assume a for Government to fully implement its balanced view.
slowdown in the growth of infrastructure infrastructure programme.
spend in the latter half of our forecast The forecasts are based on a
period (see Figure 5), resulting in a Practical procurement bottlenecks macroeconomic model at a global level.
decrease in infrastructure’s share of GDP present a potential source of downside They have also been reviewed at a
and total economy investment. This risk too. The recent postponement of country level. However, they do not
would mean that between 2014 and some power tenders in particular could account for such risks as political
2025, infrastructure spend in Indonesia slow down the implementation of the 35 decisions and implementation issues
will likely grow at a pace similar to its GW programme (see Power Generation related to individual projects and
regional neighbour the Philippines, but on page 9). programmes that might materially affect
faster than Malaysia (see Figure 6). With actual results at a country level. Our
Government likely to undershoot its Lastly, nationalistic government policies forecasts take into account
infrastructure investment target from against foreign private investment and implementation risk generally in
2015 to 2019, it is possible for investment ownership could constrain future private Indonesia but do not reflect the possible
to spill over into the 2020–24 period – infrastructure spending (for example, the scenario in which the government might
provided there is sufficient fiscal space to recent Rupiah Transactions Regulation, face political opposition and
fund this and infrastructure remains a Bank Indonesia Regulation No. implementation challenges across many
top priority. Such a spillover is not 17/3/PBI/2015), which means that some of its programmes. In such a scenario,
reflected in our forecasts. projects will be obliged to receive revenue the outturn in terms of investment might
in Rupiah, making them less attractive to be much lower than our forecast.
While the infrastructure outlook is foreign investors.
positive for Indonesia, there are
important risks as well. Rising oil prices
have brought into focus the policy to
scrap fuel subsidies, and pump prices are
still not fully reflective of market cost2.
Figure 5: Growth in infrastructure, investment and GDP Figure 6: Indonesia versus peers
40% Index, 2014=100
300
30%
250
20% 200
10% 150
0% 100
-10% 50
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 0
Total infrastructure spending 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Total fixed investment
GDP Indonesia Philippines Malaysia
Source: Oxford Economics Source: Oxford Economics
2 International Institute for Sustainable Development, Global Subsidies Initiative, Indonesia Energy Subsidy Briefing, June 2015.
http://www.iisd.org/gsi/sites/default/files/ffs_newsbriefing_indonesia_June2015_eng.pdf
PwC | Building Indonesia’s future 33. Infrastructure policy With the additional funds, the central Indonesia has signed a $20bn
government infrastructure spending plan Memorandum of Understanding with
Infrastructure is a top priority for the
for 2015 to 2019 totals IDR 2,216trn China Development Bank to finance
Widodo administration. Elected in
($187.0bn) over five years, or 2.9% of infrastructure, which is planned to be
September 2014, Mr. Joko Widodo
nominal GDP on an annual basis. channeled through SOEs.
(“Jokowi”) ran on an infrastructure
Recognising that the total infrastructure
ticket, and has already earmarked IDR SOE funds are already being disbursed.
requirement is even higher, Government
112.4trn ($9.5 bn3) of additional In January this year, several state-owned
has set an overall target of IDR 5,519trn
infrastructure funds this year in the enterprises were injected with IDR 48trn
($465.7bn) over the same period, or 7.2%
national budget, APBN-P (see Figure 7). ($4.1bn) additional capital by the
of annual GDP5. Including subnational
This represents a 39% increase over the government, including:
government funding of IDR 545trn
2014 budget, largely made possible by
($46.0bn), state funding is planned to Airport operator: PT Angkasa Pura II
fuel subsidy savings.
make up 50% of total investment, with
The funds have been allocated across a 19% to come from state-owned Construction companies: PT Hutama
range of infrastructure4 including oil and enterprises (SOE) and 31% from the Karya, PT Waskita Karya Tbk and PT
gas, power, water supply and waste private sector (see Figure 8.) Adhi Karya Tbk
treatment, road and urban transport, rail,
It is worth recognising that some of the Miner: PT Antam Tbk
ports and airports.
funds earmarked as SOE or Public may in
practice be foreign sovereign or other Port operator: PT Pelindo IV
lending. For example, the Government of
Figure 7: Spending on infrastructure Figure 8: Source of infrastructure financing 2015–2019
300 Increase of IDR
112.4trn ($9.5bn)
250
200
IDR trn
31%
150
50%
100
50 19%
-
2012 2013 2014 2015
Revised State Budget Actual
Public SOE Private
Source: Ministry of Finance Data Source: National Medium Term Development Plan 2015–2019
3 All Rupiah-denominated government targets cited in this document have been converted to US dollars at a 2014 constant IDR:$ exchange rate of of 11,850:1.
4 Financing amounting to IDR 2trn ($168.8m) was earmarked for ‘social infrastructure’ including schools and hospitals. This was channeled through PT SMI, the quasi-public infrastructure fund,
and is not direct budget funding.
5 Expenditure figures from Bappenas (December 2014), Prioritas Kedaulatan Energi dan Infrastruktur RPJMN 2015-19.
4 PwC | Building Indonesia’s futureGovernment has set aggressive targets, Land Acquisition for Public Interest, Company (PT SMI) and PT Indonesia
announced new funding commitments effective as of 2015, limits the land Infrastructure Finance (IIF).
and displayed an openness to the acquisition procedure to 583 days
intelligent leverage of private sector and allows for revocation of land More broadly, we observe that
finance. Regulatory and policy reforms rights in the public interest. This is the availability of finance is not a
have gradually been put in place to create crucial as many projects have been constraint on the infrastructure
a more conducive environment for held up by extended land acquisition programme; domestic and international
private sector participation, including: disputes. funding is readily available for well-
conceived and well-structured projects.
PPP directives: Presidential BKPM One Stop Service: BKPM,
Regulation No.67/2005 has just the Investment Coordinating Board,
been superceded by Presidential now provides a centralised licensing We consider how aggressive these
Regulation No.38/2015 to stimulate point for certain sectors, which targets are in quantitative terms. We
investment in Public Private should increase the efficiency of the have adjusted both government data
Partnership projects by expanding investment approval process. and our data to facilitate a like-for-like
eligible sectors and offering a more comparison over the period 2015-196,
favourable legal framework. These measures are supported by a and included the results in Figure 9.
number of public finance institutions Our forecasts are around 19% lower
Land acquisition bill: Law that have been set up, such as the than equivalent government targets.
No.2/2012 and Presidential Indonesia Infrastructure Guarantee Fund
Regulation No.71/2012 regarding (IIGF), Indonesia Infrastructure Finance
Figure 9: How do our core infrastructure forecasts compare
to the government budget?
90
Our forecasts: $312bn Government targets:$387bn
Billion $
80
70
60
50
40
30
20
10
0
Oil & Gas Electricity Water Road Rail Ports and Airports Telecoms
inland
water
transport
Our forecasts 2015-2019 Govt. of Indonesia National Development Plan 2015-19
Source: PwC and Oxford Economics, National
Development Planning Agency (Bappenas)
6 Schools, hospitals, chemical manufacturing, metal smelting/processing, housing and irrigation are not included in the like-for-like comparison due to absence of reliable data or comparable
definition of the sector. Gas distribution and oil refining are included in Oil and Gas (rather than Utlilites or Manufacturing respectively) for the same reason; note that this differs from other
country analysis in this report series. These adjustments explain the difference between the totals in Figure 9 and the text on the previous pages.
PwC | Building Indonesia’s future 5There are several drivers of this shortfall. will require additional private have a positive demonstration effect
According to our analysis, there are investment. The Committee for and boost investor confidence.
inherent frictions in the macroeconomy Acceleration of Priority Infrastructure
that dictate the maximum speed of Delivery (KPPIP) has also highlighted Phasing investment: Given the
investment, such as banks’ capacity gaps in SOE and other planned funding procurement bottlenecks and
to absorb FDI and shortages of sources in the overall targets. uncertainty over future fiscal
skilled labour. resources, staggering or phasing
some investment will help minimise
But the outlook is mixed across sectors
wastage of public funds.
There are also specific issues hindering and some sectors like roads, airports and
projects in the pipeline right now, as power may see investment close to target. Government coordination: There
well as bottlenecks in the public and PPP Others will fall significantly short (e.g., is often a lack of coordination
procurement process at large. Notably, water, oil and gas). We discuss select between the central, provincial, and
almost all of the projects listed as ‘Ready sectors one-by-one in Section 4 regional governments; for example,
for Tender’ in the 2013 Book of PPP (see page 7). the opening of Kuala Namu
Projects are stalled. As discussed in the International Airport in Medan,
following sections, bottlenecks are But even achieving our forecasts of North Sumatra was postponed due to
sector-specific, but common issues $312bn on core infrastructure would be a delays in the construction of the
include land acquisition problems, huge achievement for Indonesia, and 14 km road linking Medan to the
uncertainty on legal issues such as the ease a critical constraint on economic airport8. A strong, centralised
right of the private sector to participate, development. Whatever the most realistic strategy for infrastructure and PPPs,
reluctance or inability by SOE to invest, target is, there are several economy-wide which defined clear roles for different
and problems of bureaucracy within and critical success factors: levels of government, would help.
between government institutions.
Crucially, many individual projects are Stable investment climate: This Capacity building to prepare
not designed, documented and important success factor has been and finance projects: Indonesia
structured in line with international undermined by the recent would benefit from faster and more
best practices. constitutional court ruling rejecting transparent procurement as well as
private sector participation in water better project preparation at the
There is also likely a multiyear lag projects as well as the lower court Feasibility Study stage. KPPIP will
between realising fossil fuel subsidy ruling questioning the rights of have an important role to play in
savings and being able to spend them7. offshore corporate bondholders to finding and training talented
As Figure 7 illustrates, government vote on restructurings. It remains to managers, especially at the regional
infrastructure spending averaged only be seen what new measures might be government level.
83% of budgeted expenditure between taken to promote a more stable
investment environment. Land acquisition: Land acquisition
2012 and 2013, and that is before new
has historically delayed many
windfall revenues and the intention to
Leadership: Strong political will is projects. The new law is welcome, but
substantially boost capital expenditure.
expected to be a critical factor in it is too soon to tell whether this will
driving forward bottlenecked solve the problem. The lack of clear,
Government does acknowledge potential projects. Jokowi’s reputation to ‘get nationwide land tenure recognised by
bottlenecks in the pipeline. On the his hands dirty’ and drive on-the- the national and subnational
financing side, The Investment ground performance is encouraging, government agencies as well as the
Coordinating Board (BKPM) has stated but he cannot do this nationwide. courts will remain an ongoing
that around half the planned expenditure Using political clout to push through challenge.
is not likely to be funded from known just a handful of model projects will
public, SOE or private sources and so
7 Jakarta Post, “Indonesia to enjoy constructive period this year: ANZ analysts”, 26 January 2015.
8 Jakarta Post ‘Road delays Kuala Namu International Airport Opening’, March 2013.
6 PwC | Building Indonesia’s future4. Trends and outlook in The major players appear to be holding It is not all doom-and-gloom for the
firm, continuing operations and sector, however. Thermal coal production
select sectors negotiating with Government on continues to hold strong with 458 million
Extraction individual smelters. However, capital tonnes produced in 2014 (greater than
expansion plans (new mines, etc.) are the government’s target of 421 million
Indonesia is amongst the world’s major likely to be impacted, particularly for tonnes). The announcement of 35 GW of
producers of minerals such as tin, nickel, smaller peripheral players or those still in new power capacity (see Power
coal, iron and copper ores. While
the exploration phase. The challenge for Generation on page 9 for more details) is
Government does not publish specific
the sector going forward will be to also likely to support coal investment,
targets for mineral extraction, we
reconcile tight operational cash flows despite the current low price. Low oil
forecast $2.8bn of new investment before with Government’s understandable prices and the weak Rupiah support
20199 (see Figure 10). This is significantly desire to add more value to raw materials margins for coal producers.
lower than last year’s estimate, and
through increased capex.
reflects two key drivers. It is important for Government to
While short-term expenditure on provide the necessary strategic
Firstly, the global fall in mineral prices extraction for minerals may have been direction and incentives (tax, supporting
has driven down returns. Iron ore, for dampened by the export ban, there are infrastructure and a supportive
example, fell over 50% in 2014. signs of interest in investments in regulatory environment) to encourage
Secondly, in January 2014, a ban on the integrated mine-smelter projects the development of key projects that
export of unprocessed mineral ores came (particularly for nickel), which will likely would boost the economy and foreign
into force as part of the implementation see increased capital expenditure in these exchange revenues. It also needs to
of mineral value-add requirements areas (together with the associated simplify the process for investment of
contained in the 2009 Mining Law. A supporting infrastructure such as power foreign capital. Smelters are the type of
three-year reprieve was granted for and transport links) over the next three long-term capital-intensive investments
certain copper concentrates subject to to five years. This is in addition to the that the country needs to support the
stiff export duties and a commitment to commitments made by the large copper currency and the economy in general,
build refining facilities. Other ores must concentrate producers to build additional offsetting the volatility of short-term
be processed to specified levels of smelting capacity by 2017. foreign investments in the financial
mineral content before being exported. markets. But a “one size fits all” policy
Government’s seriousness in developing does not take into account the differing
This is a negative development for a a downstream minerals industry is commercial viability of refining
sector that provides an enormous export illustrated by the recent injection of IDR different minerals.
and GDP contribution as well as 7trn ($590.7m) in capital into Antam, the
hundreds of thousands of jobs; and the state-owned minerals producer.
export ban had a significant drag on However, to develop all of the projects in
the 2014 current account deficit10. its pipeline, it is likely that Antam will
Fortunately, in this case, it was mitigated need further capital through joint
by lower oil prices. venturing with strategic investors.
Figure 10: Investment in non-oil and gas infrastructure
$bn, current prices, 2014 exchange rates
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Coal, mining, minerals
Source: Oxford Economics
9 This excludes investment in mineral smelting, which is included in metal manufacturing investment ($44bn).
10 World Bank, Indonesia Economic Quarterly, December 2014.
PwC | Building Indonesia’s future 7Oil and Gas However, downstream developments refineries is particularly uncertain. More
In the oil and gas sector, oil production such as refining and gas distribution are than $4bn in total may be available for a
and exploration activity has been falling also important focal areas for the number of new projects and refinery
in recent years and the outlook is for this government. Indonesia is short on upgrades, but relatively long construction
trend to continue. Government is refining capacity relative to crude output. periods (up to 4–5 years) make it difficult
focusing instead on oil refining capacity Linking up sources of net gas supply to tell when the new capacity will come
and gas distribution. Our forecast (Eastern Indonesia) with net demand online, or even if any will come online
($30bn) is notably lower than the overall (Java, Sumatera) through increased before 2019.
investment target of $43bn. Also, the liquefaction and gasification capacity, as
recent fall in world oil prices and the well as intra-island pipeline networks, Pertamina in particular will play a
sluggish recovery is expected to hold back will enable growth. Gas distribution leading role, mainly through joint
oil and gas infrastructure investment in accounts for $8bn of our $30bn forecast. ventures with foreign partners
the near and medium term. (Government expects one-third of
However, the refining sector has a funding to come from SOEs, with the rest
Many of the sector’s challenges are faced chequered history and Pertamina, the from the private sector). It has already
upstream ($20bn of the $30bn). Oil state-owned oil and gas company, has not publicly announced discussions with at
production is in decline. And while built new refining capacity since the least two international oil companies for
mature fields will keep pumping 1990s. Our forecasts assume that refining joint development of refineries.
regardless of the oil price, new accounts for $4bn of new investment
exploration activity has been falling for between 2015 and 2019, or enough for
years. Contract terms commensurate around 200,000 barrels/day of new
with the risk would catalyse investment, capacity at International Energy Agency
especially for harder-to-explore areas (IEA) benchmark costs12; this is less than
such as Eastern Indonesia11. half the government’s target of 600,000
barrels/day. But, the outlook for
11 President of Indonesian Petroleum Association, May 2015, as quoted in Katadata news.
12 At International Energy Agency (IEA) benchmark capex of $20,000 per barrel/day of capacity.
8 PwC | Building Indonesia’s futureUtilities role to play and are planned to account significantly enhance the commercial
Already one of the three largest for 31% of generation by 205015. Huge viability of IPP investments.
infrastructure sectors today in Indonesia, geothermal and hydropower resources
remain untapped across the country. More worryingly, we are seeing delays in
utilities is expected to grow to a little over several power project tenders;
a quarter of the infrastructure market by PLN was planning to provide 18 GW of continuation of this trend could drag
2019. Power generation and water will be the 42 GW target itself, while procuring down the forecasts and the ability of the
two major areas of focus. Independent Power Producers (IPPs) to government to hit its 35 GW target by
fund the remaining 24 GW, although 2019.
Power generation Government has recently indicated that
more projects may be available to IPPs, Government adjusted the Negative
Power generation is the largest utilities
given PLN’s need to focus on investment Investment List provisions in April 2014,
subsector in Indonesia today by level of
in transmission infrastructure. removing the possibility of foreign
infrastructure investment. One of the key
majority equity ownership in projects less
drivers of demand is urbanisation.
Again, this is in line with our than 10 MW in capacity. This last
According to the UN13, Indonesia’s
expectations. IPPs already account for provision will hit renewables projects
urbanisation rate is projected to rise from
approximately 19% of Indonesia’s total hardest, for which we were seeing strong
50% in 2010 to 60% in 2025, equivalent
generation capacity, and 11.4 GW of IPP foreign interest in the early 2014 PLN
to 50 million extra urban dwellers. Given
projects are committed16 to be built by bidding rounds.
this situation, the Government of
2019. One positive step was the
Indonesia has set an ambitious target of However, planned development of
launching of the BKPM One Stop Service,
adding 35 GW of capacity within the next smelters in the minerals sector will create
which this year mainly serves the power
five years. Accounting for 7 GW of additional power needs, and recent
sector. In addition, PLN is under new
ongoing projects, PLN, the national state- government regulations to allow fast-
management since late 2014, and the
owned utility, is planning for a total of 42 tracking of tenders through Direct
new President Director has a background
GW of new capacity within the same time Appointment/Direct Selection by PLN
in the financial sector.
frame14. Including transmission and may lead to more success in achieving the
distribution, the required capital However, there are challenges for both targets than was the case in the past.
investment ($83bn) is broadly in line PLN and IPPs. Power tariffs do not
with our forecast of $79bn by 2019. It is always reflect the cost of production. Water
critical that these forecasts in particular Flagship coal-fired PPP projects have In the water sector, Government has set
are realised as current black/brown-outs stalled due to land acquisition problems. a target to provide 100% access to safe
and reliance on diesel generators State guarantees are generally restricted drinking water and to sanitation
represent a significant cost to business. to PPP projects and IPP projects on the facilities, which will require $42bn
The social imperative must also be to Fast Track Programme (a priority list of investment by 2019. Our forecast
increase household access to a reliable of investments in the Indonesia ($24bn) is notably lower than this,
power source, which in remote areas is power sector from the Yudhoyono partly due to the impact of a recent court
likely to involve mini-grid and other administration). Eligibility of projects in ruling, which is likely to destabilise
innovative solutions. the 35 GW programme for a government private investment.
guarantee is not yet clear, but this would
Fossil fuels, especially coal, will continue
to play a dominant role in baseload
power, but renewables have an increasing
Figure 11: Utilities infrastructure investment
$bn, current prices, 2014 exchange rates
40
30
20
10
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Electricity T & D Water Gas Power generation
Source: Oxford Economics
13 United Nations, World Urbanization Prospects (2014).
14 PLN RUPTL (Annual Business Plan) 2015-2024.
15 Dewan Energi Nasional Republik Indonesia, Outlook Energi Indonesia 2014.
16 The PLN definition of ‘committed’ is that a project developer and financing source are both committed.
PwC | Building Indonesia’s future 9Since the 2004 Water Resources Law, was estimated17 that funding capability Therefore, the immediate priority for the
private participation in the sector was from public sources was less than half the government is to clarify the law for
regulated but encouraged, and various required investment needed to meet private investors. Our forecasts assume
projects were being developed under the Millennium Development Goals, and that, in line with announcements by the
PPP programme. But in February 2015 there is no evidence that PDAMs are any central government, a compromise will
(in a case related to a water bottling better funded now than in 2011. be found and private investment
plant), the Constitutional Court ruled can resume in some form, albeit with
that private participation was contrary to The outlook for the water sector is some delay.
Indonesia's constitution, which unclear. Under a best-case scenario, if a
guarantees the basic right to water and regulatory compromise can be found to Over the longer-term, the focus should
state control of water resources. satisfy the requirement for state control continue to be on making private sector
Government has said that it will clarify while allowing privately-operated projects commercially viable as well as
the impact of the ruling on the sector and concessions, then investment may revert continued reform of PDAMs, including
will protect existing projects; but, until to our forecast of $4.9bn per year by consolidation and increases in tariffs to
this point, it is likely that most current 2019. Under a worst-case scenario, where fund capital investment. National
projects will be frozen. the old 1974 Law on Water Resources government has an important role to play
Development is again applicable, then in addressing capacity limitations and
Yet private investment is essential to the public sector investment by itself would administrative barriers in subnational
water sector. Many of the local water be unlikely to reach target levels without government (such as the inability to
utilities (PDAMs) have insufficient cash the expansion of local government budget across more than one year).
flow to fund investment in new water funding capacity and/or significant
supply, given low water tariffs. In the increase in PDAM water tariff levels.
previous planning period (2010-2014), it
17 Ministry of Public Works & World Bank (2012) Indonesia Water Investment Roadmap.
10 PwC | Building Indonesia’s futureTransportation For example, there are $11bn of toll road particular are critical for alleviating
All transport subsectors are projected to concessions signed in the last 10 years for congestion in major cities (Jakarta was
have increasing levels of infrastructure which land acquisition is incomplete. recently estimated to be the world’s most
spend over the next five years. Roads and Constructing these concessions in the congested city20). However, we forecast
ports are the largest subsectors today by next five years would add 1,000 km of only $18.3bn of investment for rail and
investment value, but growth is expected new toll roads. rail MRT projects.
for airports and railways as well in the
At the moment, the state-owned Our forecasts largely reflect low historical
coming decade.
enterprise Jasa Marga is the dominant investment by Kereta Api, which for
Roads player in toll roads. But given several many years did not raise fares to a level
concessions being tendered before needed to generate strong cash flow.
Government has set a target of adding
the end of 2015, the private sector With several years of reform under the
3,650 km of new roads (including
could increasingly play a major role previous CEO (who is now Minister of
1,000 km tolled) and maintaining 46,770
in this industry. Transport), including increases in
km roads, which will require IDR 805trn
passenger fares and operational
($67.9bn) of investment by 2019. In Although the sector outlook is good, restructuring, it is plausible that
addition, a share of the IDR 115trn Government must ensure that the impact investment could grow significantly this
($9.7bn) allocated for Urban Transport is of the land acquisition bill is felt on the year. Profitability has improved since
aimed at constructing Bus Rapid Transit ground and that other steps are taken to Kereta Api swung into the black in
(“BRT”) in 29 cities18. encourage private participation (for 200921, and in 2013 the allocated capital
example, to hold as many open tenders expenditure was IDR 7.3trn ($616m).
Our forecast of $70.9bn is a little
as possible).
lower than this and reflects an
The use of PPP schemes for rail is a new
expected increase in historical state Rail development. Projects planned for tender
spending patterns (which averaged $7bn
Government has set a target of adding include the Jakarta-Bandung High Speed
per year according to a Spending Review
3,258 km to the existing railway network Rail and the Soekarno-Hatta Airport Rail
in 201219).
(2,159 km intercity and 1,099 km urban), Link. The private sector can participate in
The main reason for optimism that the which will require IDR 283trn ($23.9bn) passenger railways under such schemes
outlook will improve this year is progress of investment between 2015 and 2019. In and can invest in freight railways
on land acquisition. This has long been addition, a share of the IDR 115trn according to Law No.23/2007 on
an issue in the industry and has caused ($9.7bn) allocated for Urban Transport is Railways. For now, the public sector and
major delays in past years. But with the aimed at constructing Mass Rapid SOEs are still likely to be the major
implementation of Land Acquisition Law Transit (“MRT”) in six metropolitan developers of conventional passenger
No.2/2012 starting this year, we expect it cities and 17 large cities across Indonesia. rail projects.
to be easier to deliver transport projects.
Reducing logistics costs is a national
As a result, investment could increase.
priority and urban MRT projects in
Figure 12: Transportation infrastructure investment
$bn, current prices, 2014 exchange rates
50
40
30
20
10
0
2006 2008 2010 2012 2014 2016 2018 2020 2022 2024
Roads Rail Ports Airports
Source: Oxford Economics
18 For the analysis and graphics in this section, we have assumed urban transport is 50% MRT and 50% BRT, in the absence of a more detailed breakdown.
19 World Bank (2013) Investing in Indonesia’s Roads: Improving Efficiency and Closing the Financing Gap - road sector public expenditure review 2012.
20 Castrol Stop-Start Survey 2015.
21 The Edge Singapore, “The Pragmatist Who Restored Indonesia Railway to Profitability”, 9 September 2013.
PwC | Building Indonesia’s future 11The private sector role has been even though some residents disagree Nationwide, it has been estimated that
constrained by the unviability of projects with the level of compensation. logistics costs account for 24% of GDP,
due to the lack of public subsidy and the and it costs three times more to ship a
lack of commercial flexibility (in the case Ports container from Jakarta to Padang,
of Special Railway concessions). Government has targeted the expansion Sumatera than to Singapore23, despite
Flexibility could be enhanced by relaxing or construction of 24 ports in total – five being the same distance from Jakarta.
the restrictions that only one customer port hubs and 19 feeder ports across the However, given the low economic activity
(the owner or controller of the Special archipelago. This will require IDR 900trn and potential volumes for shipping in
Railway) can use the Special Railway or ($81.0bn) of investment by 2019. We many parts of the country, it is difficult to
limiting the number of non-end use stops forecast $62.2bn of new investment, incentivise private sector capital. SOEs
to only one22. For PPP projects such as about 80% of target. and public funding will be the key to the
High Speed Rail where the financial sector’s transformation and reducing
viability is a challenge, Viability Gap costs in Eastern Indonesia.
The development of ports throughout
Funding may be needed.
Indonesia has become the top priority on
the infrastructure development agenda Airports
It is also important for Government to under the new government. And since, Government has set a target of IDR
clarify the role of the private sector. On historically, investment in ports has 165trn ($13.9bn) of investment in the
High Speed Rail it now appears that primarily come from the public sector airport sector, including maintenance of
Chinese or Japanese developers will lead through the four state-owned enterprises, existing airports and construction of new
project development, supported by state Pelindo I–IV, there are grounds for airports and Air Traffic Control facilities.
funding. On the Soekarno-Hatta Airport optimism. The combination of political In comparison, our forecast of $10bn
Rail Link, lack of clarity about Kereta will and new funding could accelerate falls around 39% short of target.
Api’s role is causing uncertainty. public investment.
Investment will come from a number of
For urban rail, the outcome will depend The private sector will probably not sources. The two state-owned operators
on project-by-project progress. For play a leading role by itself, but mostly are undertaking multibillion-dollar
example, the MRT project in Jakarta is participate in the form of joint ventures capital investment programmes across
the first MRT project in Indonesia. As a with these SOEs or through private more than half of their 26 airports (a
result, the country has not yet developed single-commodity ports. In terms of mixture of bond and balance sheet
strong technical and project management legal framework, Shipping Law 2008 financing). In addition, the Ministry of
expertise for such schemes. In addition, significantly updated the previous Law Transport is building 15 new airports and
land acquisition may potentially cause No.21/1992, changing the structure of revitalising 10 existing airports. A
delay since the project requires port administration and allowing handful of pure private sector airports
considerable amount of land in urban private operators access to the sector in have been proposed.
areas. Other cities developing LRT will the form of PPPs. In addition, the private
likely struggle at first with similar issues sector can now also participate as a With double-digit passenger and fleet
of lack of expertise. terminal operator. growth (driven particularly by the Low
Cost Carriers), many airport projects
Previously, the construction of the High logistics costs will remain an issue should be commercially viable. The
Jakarta MRT faced major delays due to for the ‘Archipelago Nation’ unless policy framework is largely sound, if
regulation (in relation to financing) and Government realises its plan to develop untested. The priority for Government
land acquisition issues. However, the more – and more efficient – ports. The should be the acceleration of individual
situation has changed: the Governor of bottleneck at Jakarta’s Port of Tanjung projects, including the preparation of
Jakarta has coordinated and negotiated Priok, for instance, leads to long waiting feasibility studies and business cases, as
with various lines of government to move times; the maximum capacity of the port well as the detailed sounding of market
the programme forward. For instance, he is 5 million twenty-foot equivalent units views. The two SOEs have shown a
coordinated with the Ministry of Youth (TEUs), but it handled 5.9 million TEUs willingness to partner with foreign
and Sports Affairs to dismantle Lebak in 2013. The New Priok project – a operators and EPC contractors, which
Bulus stadium as part of MRT $2.5bn project procured by Pelindo II may also accelerate progress.
construction. This is an encouraging step (IPC), of which the first terminal is due
for other rail projects in Indonesia. And for completion in 2015 – should ease
he has emphasised his commitment to the situation.
deliver the project by giving PT MRT
Jakarta full authority in acquiring land
22 Indonesia Infrastructure Initiative (2011) Special Railway Guidelines and Regulatory Framework Recommendations Final Report.
23 Business Monitor International, Indonesia Infrastructure Report Q1 2015.
12 PwC | Building Indonesia’s futureContributors Strategic direction and project pipeline Julian Smith PwC Indonesia Capital projects & infrastructure Rizal Satar PwC Indonesia Capital projects & infrastructure Tim Boothman PwC Indonesia Capital projects & infrastructure Economics Graeme Harrison Oxford Economics To have a deeper conversation about this subject, please contact: Julian Smith Indonesia Capital Projects & Infrastructure Tel: +62 21 521 2901 ext 90966 Mark Rathbone Asia Pacific Capital Projects & Infrastructure Tel: +65 6236 4190 Richard Abadie Global Leader Capital Projects & Infrastructure Tel: +44(0) 20 7213 3225 This report from PwC, with research by Oxford Economics forecasts through 2025 capital project and infrastructure spending by country for investors, public officials and companies planning capital investments. It provides insight into factors driving the expected investment growth. In developing this analysis, Oxford Economics used data sets to provide consistent, reliable, and repeatable measures of projected capital project and infrastructure spending by country. Historical spending data is drawn from government and multinational organisations statistical sources. Projections are based on proprietary economic models developed by Oxford Economics at the country level. The results for this report have been estimated using the following underlying data sources: World Health Organisation, UNESCO, World Bank, Annual Capital Expenditures Survey, Association of American Ports, Edison Electrical Institute, Office of Highway Policy Information, Federal Highways Authority, Department of Transportation, National Clearinghouse of Educational Facilities, Department of Education and Oxford Economics. The analysis, completed over the first half of 2015, incorporates all available information at that time.
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