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Infrastructure investment: How fast can it grow?

Indonesia has earned a respectable place among investors in recent years. It ranked fourth on the list of the top 20 countries with the best prospects for foreign direct investment (FDI), according to a 2013 report by the United Nations Conference on Trade and Development (UNCTAD). UNCTAD also revealed that among ASEAN countries, Indonesia was the second-biggest recipient of FDI after Singapore.

FDI to Indonesia grew well up through 2011. The flow of FDI in 2011 was five times greater than it was in 2009. Strong growth also occurred in domestic investment. According to the figures from the Investment Coordination Board (BKPM), investment under the domestic investment plan (PMDN) grew by 25 percent in 2011. 

It is not hard to find an explanation for Indonesia’s investment attractiveness. It has something to do with demography and geography. Indonesian consumers, mostly a dynamic young population with rising wealth, have become a huge market that investors cannot afford to ignore. Geography reveals a country with large supplies of untapped natural resources. That is why until now the mining sector has been the biggest investment destination for both foreign and domestic investors.

However, investment flows have started to taper off recently. Domestic investment grew 12 percent in 2012, well below the 25 percent in 2011. FDI was US$19.5 billion in 2012, about the same as in 2011. And the prospects for investment in 2014 will be clouded by many uncertainties. Several domestic factors will play a role in shaping Indonesia’s investment climate this year. 

First, monetary tightening by the central bank, Bank Indonesia (BI), will continue through 2014. BI policies to rein in bank loan growth will not only restrict the available amount of funding but will also increase borrowing costs as interest rates will remain elevated. The tightening of monetary conditions will also come from the tapering of the US Federal Reserve’s bond-buying program, which is expected to occur early 2014. The Fed’s tapering will add to the severity of liquidity contraction. 

The tightening of monetary conditions will affect the growth of sectors that heavily depend on outside financing and are sensitive to interest rate increases like property and infrastructure. Home buyers will have to pay higher interest rates and down payments, and this could slow down housing demand. The slowdown in housing purchases and construction activities will dampen the growth of demand for its supporting industries like building material industries, household fixtures, furniture and consumer durables. 

Second, insufficient investment in infrastructure such as ports and roads has contributed to serious traffic congestion, which will not be solved in the short term, hence Indonesia’s relatively poor logistics performance. Capacity constraint in logistics and weakness in institutional arrangements have affected Indonesian logistic performance adversely, pushing up costs and reducing export competitiveness. Poor connectivity could undermine efforts to attract investment in manufacturing as transportation costs become more expensive.

The government has introduced a public-private partnership (PPP) plan aimed at attracting private investors in infrastructure investment. But private investors will have to depend on offshore financing due to the limited capacity of domestic banks in financing infrastructure projects. But because of tightened global liquidity, offshore financing will be more costly and more difficult to get. New construction projects for toll roads and power plants, especially those being planned by the private sector, may have to be delayed as overall cost and available funding will have to be reviewed. 

The other problem hindering infrastructure development is land acquisition. Despite the enactment of the law on land acquisition for public development in December 2011, legal proceedings for land acquisition take a very long time, delaying project construction. 

It is worth noting that at the Asia-Pacific Economic Cooperation (APEC) Summit in Bali in November, Japanese Prime Minister Shinzo Abe complained in a speech about the delay in completing land acquisition for a Japanese financed coal-fired power plant in Batang, Central Java. That a foreign head of state at an international forum mentioned a land problem in a small town in Java demonstrates how serious the problem of land acquisition for infrastructure projects is in Indonesia. 

Infrastructure development also suffers from inefficiency and waste, because although expenditures in nominal terms have increased, repair and maintenance have not improved. Even newly completed roads are below standard, often because of markups and corruption. Before long, these roads will become damaged and need repair.

Third, industrial relations will remain uncertain, arising from the weakness of the government in dealing with labor union demands. Labor strikes that could disrupt production will continue to occur this year, with demands for a higher minimum wage persisting. It will remain difficult for the government, employers associations and labor unions to agree on a mechanism to set wages based on a set of objective and relevant criteria.

 It would also be difficult to depoliticize the process of setting the minimum wage. Indonesia faces the risk of losing its competitiveness in labor to other countries such as Vietnam, Cambodia and Bangladesh.

Fourth, the continued weakness in commodity prices will slow down investment in related industries. This will slow down investment in heavy equipment and machinery.

Fifth, rising nationalist sentiment, for example the Mining Law and government inconsistency on trade and the negative investment list (DNI), has eroded investor confidence and trust in the government. 

All of the aforementioned factors may result in negative sentiment that will curb investment growth. However, in the face of this negative outlook, some industries still have a chance to grow.

First, consumer goods and retail industries will have better growth prospects than other industries due to still strong domestic consumption. Indonesian consumers, especially the growing middle class, will prove resilient amid slower economic growth and higher inflation. They will continue to spend money. Spending for the 2014 general election will also stimulate economic activities. As a result, consumption ought to remain the main driver of Indonesian economic growth in 2014. 

Labor intensive, export-oriented industries will get a boost from rupiah depreciation and tax relief being planned by the government. The extent of their opportunity for growth will depend on how many imports they need in their production process, as higher import taxes will come into force. But a regulation for easier import tax payment by exporters issued recently by the Finance Ministry ought to help these industries, in terms of improved cash flow, thus reducing working capital costs. 

The government has issued two economic packages, one in August and another in December 2013. But given the weakness of the global economy in 2014, and the complexities of infrastructure development and bureaucratic reforms, it will be difficult for Indonesia to restore investment growth as in previous years and to maintain its reputation as one the most attractive investment destinations in the world.

Source :

Winarno Zain, Economist, Jakarta | Mon, January 27 2014, 6:55 PM (http://www.thejakartapost.com/news/2014/01/27/infrastructure-investment-how-fast-can-it-grow.html)

Note :

Aiueo : Simple Present

Aiueo : Simple Past

Aiueo : Simple Future