Indonesia Infrstructure Outook 2010

INDONESIAN COMMERCIAL NEWSLETTER

January 2010

PROSPECTS AND OPPORTUNITY OF INVESTMENT IN INFRASTRUCTURE 2010

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Development of infrastructure is an important and vital aspect in the efforts to accelerate the country's economic development. Infrastructure is one of the main driving motor for the country's economic growth. Economic development needs the support of various types of infrastructure such as transport, telecommunication, sanitation, and energy facilities. Transport infrastructure is the backbone of the process of production and it will facilitate the mobility of the people and distribution of commodities and exports. Other facilities and infrastructure such as telecommunication, electricity and water are also important elements in the process of production of economic sectors such as trade, industry and agriculture.

The government has set the country's economic growth target at 7% in 2012. In order to meet the target, there should be adequate infrastructure. The National Development Planning Board (Bappenas) said around Rp1,400 trillion would be needed for infrastructure development in 2010-2014.

Competitiveness of infrastructure weak

Inadequate budget set aside for the development of infrastructure resulted in Indonesia to continue to be less competitive in infrastructure in this region. According to Global Competitiveness Report 2009-2010, Indonesia ranks the 96th among 133 developing countries in infrastructure competitiveness far below Thailand in the 41st, Malaysia the 27th and China the 66th. See the following table.

According to data at a Bappenas, the budget for infrastructure considered idea is 5%-6% of the GDP and currently Indonesia's infrastructure budget is around 3.25% of GDP. The budget ratio is expected to rise to 5% in 2014.

Priority in development program in first 100-days of new government.

The government has given serious attention to improving the condition of infrastructure in the country in the first 100 days of its administration as it is strategically important to support economic development. The government has outlined a 10-poit strategy in infrastructure development as follows:

" Improvement of the environment health through development drinking water facilities in 1,379 locations for low income people and development sanitation in 61 locations.

" Technical auditing to restore the functions of dams, dykes and irrigation systems holistically and in integrated system.

" Improvement of capacity of cross roads in Sumatra and Sulawesi totaling 695 kilometer, as part of development of the cross roads of Sumatra, Java, Bali, West Nusa Tenggara, East Nusa Tenggara, Kalimantan, Sulawesi, and Papua totaling 19,370 km in 5 years.

" Setting up of a team to prepare infrastructure connecting Java with Sumatra to carry out feasibility study

" Completion of flood control canal in Jakarta.

" Increase the occupancy rate of low cost apartment buildings already built and to be built from 40% to 80% in 100 days.

" Completion of establishing telephone connections to 25,000 villages in 32 provinces

" The launch of local information technology and communications and at the same time strengthening the program of Indonesia Go Open Source- IGOS.

" Improvement of transport service for backward and isolated communities.

" Improvement of fishing port facilities and infrastructure with drinking water facility and ice factory by the government.

Challenges in infrastructure, 2010

One big problem yet to be solved in the infrastructure sector is shortage in power supply. The reserved margin is still below normal. Some areas even have suffered deficit. In 2008, there were 7 systems having a total deficit of (243 MW). Another problem is inefficiency in consumption and in the use of electric equipment by consumers.

A challenge in the development of electricity sector is the utilization of alternative sources of energy, which are easily available locally especially primary energy potentials. Also a big problem is limited financial capacity and difficulty in land clearing.

The challenges in the development of transport sector in 2010 include lack of discipline among the users and providers of transport facilities such as overloading of vessels or other vehicles with cargoes and passengers. In addition, traffic jams is getting worse from year to year, imbalance in the provision and demand for transport capacity.

In energy sector the main problems include capacity of oil refinery being below requirement, low capacity of oil and gas transmission and distribution pipelines, low utilization of primary energy sources outside oil such as natural gas, geothermal, and coal and renewable energy sources (solar, water, wind and biomass) The state, therefore, continues to be burdened with huge energy subsidy.

Development of infrastructure, 2010

In the government's working plan (RKP) for 2010, the government underlines the policy of development of facilities and infrastructure in :

" Increasing infrastructure service in line with Minimum Service Standard (SPM) through : (1) rehabilitation, operation and maintenance of facilities and infrastructure in line with requirement to guarantee the sustainability of public service; (2) increasing accessibility of coverage of facilities and infrastructure services in isolated and frontier areas and islands; (3) increasing the availability of facilities and infrastructure for poor communities both in urban and rural areas, isolated, interior and frontier areas and islands.

" Supporting improvement of the competitiveness of real sector , through : (1) expansion of the capacity of facilities and infrastructure in areas facing bottlenecks; (2) expansion of the capacity of facilities and infrastructure especially areas where demand for facilities and infrastructure grow fast; (3) improvement of the compatibility of facilities and infrastructure in supporting development of the sectors of industry, agriculture, trade both domestic and international trade (4) resetting regulations and agencies to create a favorable condition for business competition in facilities and infrastructure ; (5) optimization of limited resources sources for development of facilities and infrastructure ; (6) increasing and developing information and communication technology

" Promoting cooperation between the government and the private sector (KPS), through : (1) improvement of KPS related regulations and implementation guidelines; (2) the forming of KPS management institution, , KPS center and KPS knot in the center and regions; (3) increasing the capability and capacity of contract providing body in preparing KPS projects in the center and regions. through the forming of KPS knots; (4) operation of non bank financial agencies supporting development of infrastructure (Guarantee Fund and Infrastructure Fund); (5) operation of policy and guidelines of operation about land procurement for the acceleration of development of infrastructure to be built under KPS, including increasing the capacity of land procurement fund; (7) creation of cooperation between the government and the private sector in infrastructure projects including toll road, port , airport, railway, drinking water supply and waste treatment projects.

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