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Indonesian builders face uphill battle in Asean

Publication Date : 17-03-2014


The implementation of the Asean Economic Community (AEC) at the end of 2015 will provide huge opportunities for construction companies operating in the region to strengthen their foothold in Southeast Asia.

Indonesian construction firms, however, are not so optimistic.

In the common Asean market, which will have a combined gross domestic product (GDP) of US$2.1 trillion, high domestic lending costs and high taxes mean Indonesian firms will be less competitive than their Asean peers.

“Issues of interest rates and taxes could hamper local construction firms in expanding their businesses to neighbouring countries,” Indonesian Contractors Association (AKI) chairman Sudarto told The Jakarta Post recently.

He said Indonesian construction firms had to pay around 13.5 per cent in interest while their counterparts in Malaysia, Singapore and Thailand pay only 3 to 4 per cent to their respective commercial banks.

State-owned construction firm PT Wijaya Karya (WIKA), which has become a subcontractor for several infrastructure projects in Africa, the Middle East and Timor Leste, has raised the same concern.

“We have a strong financial posture, but expensive construction costs will remain a constraint on our expansion plans,” WIKA corporate secretary Natal Argawan said, adding that his firm aimed to pocket 500 billion rupiah ($44.02 million) from overseas projects this year.

Natal said that in addition to high interest rates, local construction firms carrying out overseas projects generally had to pay taxes both in Indonesia and in the host country.

“We do expect that there will be an agreement among all Asean countries that will allow us to pay taxes only to our country of origin, Indonesia,” he said.

According to data from the Finance Ministry, Indonesia has signed bilateral double tax treaties (P3B) with 57 countries, including all Asean countries, except Cambodia, Laos and Myanmar.

A bilateral double tax treaty exempts Indonesian construction firms carrying out projects in bilateral partner countries from paying similar taxes already paid to the Indonesian government.

Sudarto of AKI said that apart from possible double taxation, local construction firms were subject to a fixed domestic tax of 3 per cent of their total project value. 

“This is not good. Our Malaysian counterparts pay tax based on estimated profits from their projects. Less profit means less amount of tax to be paid,” he said, adding that the government should follow the Malaysian government.

“We are also currently stumbling over the lack of certified workers, with the government providing no assistance or training.”

Data from the Public Works Ministry reveals that from the total of 6.34 million of construction workers, only 10 per cent or 634,000 people are listed as experts, while 30 per cent are skilled labors and the majority, 60 per cent or 3.8 million workers, are unskilled laborers.

The ministry’s investment resource development director, Mochammad Natsir, said that Indonesia currently had 113 certified construction engineers and 44 certified architects.

“It is actually a matter of paper work. Many [Indonesian engineers and architects] are actually eligible to get certificates but they haven’t registered themselves,” he said.

Natsir said that with their current capabilities, Indonesian construction firms were very capable to do subcontracted work, proven by more overseas infrastructure projects, particularly from Middle Eastern countries, being awarded to Indonesian firms in the last 10 years.

Indonesian firms are working on constructing the financial center of King Saud University in Saudi Arabia, carried out by WIKA and PT Waskita Karya, the East-West motorway in Algeria by WIKA and toll roads in Timor Leste by PT Pembangungan Perumahan (PTPP).

Natsir, however, admitted that Singaporean and Malaysian construction firms were already steps ahead in terms of design and planning for a diverse range of overseas construction projects.

Singapore has so far provided construction services ranging from the engineering, procurement and construction (EPC) to consultation on more than 270 overseas projects in more than 27 countries, according to a report by Singapore’s Building and Construction Authority (BCA).

Several Singaporean construction firms have handled more complex construction projects than their Indonesian counterparts.

Singapore-based Jurong Consultants, for example, has handled the construction of Trieste Bio-tech Park in Italy while Lian Beng Group Ltd. has provided EPC services for the construction of wastewater collection in Maldives. 

Malaysian construction firms, meanwhile, have been the prime contractors on construction projects in more than 14 countries worldwide, including Indonesia, Bosnia-Herzegovina and South Africa, according to a report from the Master Builders Association Malaysia (MBAM).

Trust Securities analyst Reza Priyambada said that although Indonesian construction firms were currently still behind their Singaporean and Malaysian counterparts, they could catch up soon as they had actually learned a lot from the huge domestic construction market worth more than 400 trillion rupiah.

“Our construction firms have gotten involved in various outstanding international projects both in the country and overseas. If they can build their reputation, they will be able to provide EPC services in the complete package,” he said.

Natsir also said that although the challenges were many, the opportunities were there.

He said that many local construction firms had learned from their advanced Japanese counterparts as the government required all foreign construction firms carrying out projects in the country to collaborate with local firms through joint operations or joint ventures.


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