Indonesia: Building momentum

Indonesia’s construction sector is in the midst of a sustained boom, with both private and public spending on the rise, but there are concerns in the industry that the slow pace of launching new projects could hinder this growth.

According to data issued by the Indonesian Construction Association (AKI), the construction sector grew 6.4% in the first half of 2011 compared to the same period in 2010, with growth gaining momentum as the year progressed, expanding 5.3% in the opening quarter and 7.4% in the second. This follows a strong performance in 2010, when the sector posted a 7% rise in activity. AKI figures show the value of work carried out in the first half of the year totalled $41.8bn, representing some 10% of GDP and making the industry one of the largest contributors to the national economy.

Much of this contribution comes from the private sector, which is developing up to 65% of all construction projects this year, AKI’s chairman, Sudarto, told local media in September. Although optimistic about private sector developments, Sudarto was less certain about state-backed projects.

“The growth in the private sector will be good, but we cannot estimate adequately growth in government projects, as the realisation of government spending during the first [half] of this year is still low,” he said.

The delivery of new projects is an area the government is keen to improve, particularly now that it is increasing expenditure on infrastructure developments. The construction sector is set for a major cash infusion, according to the draft of the 2012 budget, which was unveiled in mid-August. The proposed budget calls for capital expenditure to increase by just under 20% next year, with outlays to rise to $19.8bn, up by $3.2bn on this year’s figure.

Announcing the key details of the budget to parliament on August 16, President Susilo Bambang Yudhoyono said the increased spending would create jobs and strengthen the economy, as well as provide equal access to infrastructure throughout Indonesia. But a recent promise from Agus Martowardojo, the finance minister, to reward those ministries or state agencies that immediately spend their budget allocation and to impose sanctions on those that wait is likely to spur the sector to get work done earlier rather than later.

Among the key projects to be funded next year will be the construction of more than 4000 km of roads, 150 km of rail lines and 14 airports, all part of a building programme aimed at improving transport and logistics linkages across the country.

All of these new projects, along with increased activity by the private sector, will put a strain on Indonesia’s building materials suppliers, which will have to boost production capacity to meet the growing needs of local builders.

The current demand for cement, for example, is nearly 46m tonnes a year and rising. The Indonesian Cement Association (ASI) says this leaves too little spare capacity, given current maximum output of 54m tonnes, should any plant be forced to reduce output or if the ongoing increase in demand continues at the present rate. With ASI forecasting a 10% hike in demand this year, and the potential for further rises next year, cement production will be stretched to the limit by 2013 unless more production capacity is brought on line.

The situation is similar for steel, where consumption is set to increase by almost 4%, according to Irvan Kamal Hakim, the marketing director of Indonesia’s largest steel producer, Krakatau Steel. Steel consumption will grow from last year’s 8m tonnes to around 8.3m tonnes in 2011, he told reporters in mid-August.

“This increase was predicted by the acceleration of projects, mostly infrastructure, funded by government spending. The budget absorption will be higher in the second [half] of this year,” he said.

Anticipating further demand growth, Krakatau has entered into a joint venture with the Pohang Steel Corporation of South Korea to develop new processing facilities that will double the Indonesian firm’s capacity to 6m tonnes a year when the plant is completed in 2013.

Though some doubts remain as to whether the state can stay on schedule with all the major building projects it has planned, it does seem that Indonesia’s construction industry is set to benefit from bulging order books for at least the medium term.