JP Morgan Indo : Indonesia Infrastructure Achieving new year resolutions ahead of time

 ·         The tender for government’s projects have improved.  Based on the initiative of Agus Martowadjojo (Ministry of Finance), the government’s projects for FY11 are being tendered four months ahead of the usual schedule.  Feedback from contractors also suggests that tender process has become much more friendly, as the contractors can now tender the projects online (e-procurement), allowing for a faster tender process.  Last year, the realization spending by Public Works Department was lower than expectations as the tender process was done in the later part of the year, with the last four months not conducive for construction due to rain.

·         State-owned contractors have seen actual budget spending coming through. Our channel checks indicate that state-owned contractors have already been participating in the 2011 budget tender since November 2010.  With the increase in the government’s budget spending, the contractors stated that they will become more selective in the tender and would choose more profitable projects.  

·         Construction spending is driven by higher government spending budget. There is a sharp increase in the Public Works' Department budget (up by 60% to Rp54tr for FY11).  The increase of the Department of Public Work’s budget is the highest among all departments, which in our view, indicates the government’s commitment for a better infrastructure progress this year. National Contractors Association estimated that total national construction spending is up by 11% this year to around Rp200tr, compared to previous 2-3% y/y growth. Bulk of the growth is driven by the increase in Public Works' Department spending (which is around 25% of the total national construction spending).

·         Positive progress on Land Acquisition Bill? With regards to the land acquisition law, which aims to improve the methodology of land acquisition for infrastructure, we expect it will be passed in 1Q11 (assuming no more delays).  Some of the projects that were tendered include the renovation of old government buildings and infrastructure and the development of new roads which do not require land acquisition. Hence, we believe the increase in government spending can occur even without the land acquisition bill.