Bustling Hotels Show Indonesia Struggle to Spend: Southeast Asia
Jakarta hotels are brimming with executives seeking a slice of Indonesian infrastructure deals from a government rushing to spend its 2012 budget. The year-end onslaught also exposes bottlenecks that threaten economic growth.
“Hotels are full at this time of the year,” said Indah Ariyani, executive director at the Jakarta International Hotels Association. “That’s usually because there’re a lot of government projects that need to be completed.”
While occupancy rates at hotels such as the Grand Hyatt Jakarta and Mandarin Oriental spike at the end of each year, the pattern is a symptom of Indonesia’s difficulty in implementing government projects on time. The Ministry of Public Works, among the biggest state spenders, had only disbursed about 77 percent of its 75 trillion-rupiah ($8 billion) 2012 budget as of yesterday. It expects to reach as much as 92 percent by the end of the year.
The late award of projects underscores President Susilo Bambang Yudhoyono’s challenge as he seeks to boost spending on roads, ports and bridges and sustain one of Asia’s fastest growth rates. Complex budget revisions, administrative delays and lengthy land acquisition processes have hampered Indonesia’s ability to implement budget plans, and infrastructure investment has fallen to about 4 percent of gross domestic product from more than 8 percent in 1995 and 1996, the World Bank says.
“Over a longer-term, three to five-year outlook, we have some concern the economy’s growth could start to run into constraints from deficient infrastructure,” said Andrew Colquhoun, Hong Kong-based head of Asia-Pacific sovereigns for Fitch Ratings. That will happen “unless we see faster progress on infrastructure investment.”
Government capital spending has averaged less than 2 percent of GDP each year over the past three years, Colquhoun said. Delays during budget preparations and slow clearance of land are among the reasons infrastructure spending has been slow, according to a May joint report by the Ministry of Finance and institutions including the World Bank.
The government has revised spending rules to speed up the disbursement process, Vice Finance Minister Anny Ratnawati said last month. The new rules allow ministries to hold tenders in November for projects to be implemented in the following year, she said. Starting next year provinces, regencies and ministries must also prepare disbursement of their budgets every month.
“We will monitor this closely,” Ratnawati said. “To anticipate a slowdown in China and impact of the commodity slowdown in our state budget, improvement in the quality of spending becomes important.”
Indonesia’s parliament approved in December 2011 a land acquisition bill to speed up the process for infrastructure projects. Yudhoyono plans to spend about 1,786 trillion rupiah through 2025 on projects such as new roads, bridges and ports. The Ministry of Public Works, which supervises construction and maintenance of assets such as roads, bridges, irrigation and dams, has a budget this year that’s twice the 37 trillion-rupiah allocation in 2010, according to spokesman Waskito Pandu.
At stake is reducing deterrents for companies seeking to tap rising consumer spending in the world’s fourth-most populous nation, estimated by McKinsey & Co. to generate $1.8 trillion in annual sales for agriculture, consumer and energy companies by 2030. Indonesia’s economy, Southeast Asia’s biggest, expanded 6.17 percent in the third quarter from a year earlier, holding above 6 percent for an eighth quarter.
Faster growth is stretching the capacities of roads and ports which must cope with increased flows of goods in the world’s largest archipelago. Indonesia has more than 17,000 islands, stretching across 5,300 kilometers (3,293 miles) along the equator.
“The private sector increasingly identifies infrastructure shortages in areas like transport, electricity and telecommunications as growing constraints on their operations and investment decisions,” said Theo Thomas, senior public sector specialist at the World Bank in Indonesia. “The symptoms of more than a decade of low infrastructure investment include the increasing congestion in urban areas, high levels of inter- island cargo transport costs, electricity blackouts and low access to modern sanitation.”
Indonesia ranked 78th in terms of infrastructure quality among 144 economies in the World Economic Forum’s 2012-2013 Global Competitiveness Index. China was 48th and neighboring Malaysia 32nd.
Even so, the industrial migration from China to most members of the Association of Southeast Asian Nations, including Indonesia, is accelerating because of improving infrastructure, Mingchun Sun and Christie Chien, economists at Daiwa Capital Markets, said in a note today. This will likely continue as foreseeable “rapid income growth” in China over the next two to three years is expected to widen the wage gap between China and ASEAN, the economists said.
Among Asia’s 11 most-active currencies, the Indonesian rupiah is the worst-performing after the Japanese yen, declining 6.4 percent this year to trade at 9,643 per dollar as of 9:25 a.m. in Jakarta, prices from local banks compiled by Bloomberg show. It reached 9,733 on Dec. 10, the weakest level since September 2009. The Jakarta Composite index has risen 13 percent this year compared with a 12 percent gain in the MSCI Asia Pacific Index.
Payments for capital spending are largely made in the last quarter of the year, which raises concerns about the quality of such spending, World Bank’s Thomas said. The outlay reached less than 85 percent of the budget target in 2010 and 2011, and in August spending was 30 percent of the revised budget allocation, Thomas said.
Spending is slow for construction projects partly because of the nature of the work itself, Pandu at the public works ministry said. The most expensive cost of a project such as road paving often occurs during the last stage when the contractor adds the layer of asphalt, he said. Some contractors also prefer to submit their invoices at the end of their fiscal year, preventing the ministry from paying them earlier, he added.
Still, slow disbursements mean construction of government projects usually start in the third and fourth quarter of each year, said Betty Ariana, corporate secretary at PT Pembangunan Perumahan (PTPP), a state-owned builder whose projects include toll roads and a new port in Tanjung Priok. About 80 percent of Pembangunan projects are contracts from the government and state-owned enterprises, Ariana said.
For hotels, that means a business boom in the final months of the year.
In the Cinnamon restaurant in Jakarta’s Mandarin Oriental hotel one November afternoon, two men sporting grey suits and British accents discussed an e-mail to report their closing of a $75 million deal. At a nearby table a woman spoke to three Indonesians about the legal hurdles for foreign investors. In a private room, a delegation of Papuans was deep in negotiation.
Business travelers tend to come to the Mandarin in the fourth quarter, said Lai Pheng, the hotel’s director for sales and marketing. At the Grand Hyatt Jakarta across the road, the occupancy rate rises to about 80 percent toward the end of every year from an average of 70 percent year round, according to marketing communications manager Viana Igah. Most four- and five-star hotels in Jakarta see occupancy rates of more than 80 percent at the year end, said Ariyani.
As with most countries under the Organization for Economic Cooperation and Development, the ministry of finance and the president’s office needs to be strongly involved in project selection, said Ian Hawkesworth, an official with the budgeting and public expenditures division at Paris-based OECD.
“It requires a strong political champion to drive a large infrastructure project forward,” Hawkesworth said. “You cannot expect these projects to happen without political focus and political drive.”