15 January 2020 (closed)
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Indonesia's economic growth in the first quarter of 2016 was rather disappointing at 4.92 percent (y/y), below analyst estimates that averaged around 5 percent (y/y), due to slowing household consumption, private investors being in a wait-and-see mode, and relatively weak government spending (a usual phenomenon at the year-start). Indonesia's construction sector also grew weakish in Q1-2016. However, the construction sector still has good prospects in the years ahead on the back of the government's infrastructure projects.
The Joko Widodo administration has raised its focus on infrastructure development across the Indonesian archipelago in an attempt to boost the nation's competitiveness, improve the investment climate, improve access to social services (such as health centers) and - as a whole - boost Indonesia's economic growth. In order to free up funds for this ambitious undertaking the government cut spending on energy subsidies and redirected a large part of available funds to the government's infrastructure budget. Government-led infrastructure projects (which also involve state-owned companies as well as the private sector) include airports, toll roads, harbors, and reservoirs.
At least up to the end of 2018 the construction sector of Indonesia is regarded to have good prospects because the government has specified (and allocated the budget for) the infrastructure projects. It is unlikely that the government will suddenly alter its commitment regarding these projects (Joko Widodo's first term will end in 2019). Moreover its is also unlikely that macroeconomic developments will disturb the government's commitment to realize these projects. This is different from the private sector. When economic growth slows then private investors tend to be more hesitant to invest in costly and long-term infrastructure projects, given their asset accumulation have weakened amid slowing macroeconomic growth. For the government, macroeconomic developments is less of a concern regarding the realization of these infrastructure projects.
The major obstacle to infrastructure development in Indonesia remains the issue of land acquisition. Not unoften local landowners ask for very high prices when selling land to an investor for a project. This has caused many infrastructure projects in Southeast Asia's largest economy to be cancelled or delayed. Several years ago - under the Susilo Bambang Yudhoyono administration - the Indonesian government implemented the Land Acquisition Act, a bill that sets rules and time-frames for the land acquisition process (only applying to cases when an infrastructure project benefits society as a whole). However, only recently the government has been using this law to kick off projects (for example the USD $4 billion Batang power plant in Central Java). This is another sign that the Indonesian government is committed to boost infrastructure development, even if it makes itself unpopular in the eyes of local landowners (usually farmers).
This month, Indonesia's House of Representatives (DPR) may pass the Construction Services Bill, a revision of the existing 1999 Construction Law. This bill includes an article that forces foreign investors (or foreign companies) - that want to conduct construction work - to establish a representative office or a joint venture (JV) company with a local Indonesian construction firm.
For more information about the establishment of a representative office or a foreign investment company in Indonesia, visit this section: Foreign Investment in Indonesia.