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Interview

with Ir. Pandri Prabono-Moelyo, President, Gapenri

09.03.2012 / Energyboardroom

The infrastructure industry looks very positive in 2012 with $4.7 billion investments within the energy sector alone. What is your perspective on the growth of the industry?

In my capacity as chairman of GAPENRI, the association of EPC contractors, I can see a significant change occurring in 2012 in comparison to the last few years. The future of infrastructure projects has become a lot more concrete and clear-cut. Consequently growth predictions are high and possibly as much as 10%. In previous years it was not always easy to tell what project would come online and at which point. There is now much more stability in planning and sequencing.

Indonesia has been lagging behind the rest of the world in terms of infrastructure, particularly in the energy sector in areas such as LNG regasification terminals, ` oil&gas pipelines, storage facilities and processing plants. The same picture is evident in the case of electricity, in spite of the government’s 10,000 megawatt program.

Naturally, there are still a fair number of challenges at various levels in this industry, at the investor level, the contractor level and even at the subcontractor level. These challenges can range from arranging building permits to regulation on land use. The ministry of forestry has priority with regard to land use and mining contractors will technically borrow land to use it. Land acquisition procedures can be very time consuming which is delaying projects, in some cases for years. However, the new law on land acquisition should solve many of these problems.

What is your assessment on the role of regional government in this picture?

One of the members of GAPENRI was made responsible for acquiring a building permit as part of their contract. It is often difficult to acquire a permit when socio-economic or political issues are concerned and when the construction contractor is meant to handle this matter it is doubly challenging because it is not within the usual remit of an EPC contractor’s business.

There are natural delays arising from dealing with local regulations and all stakeholders should become more innovative in finding ways to identify these problems much further in advance so that they can be properly managed.

Situations where the EPC contractor handles the land regulations are very rare but understandable in a country where foreign producers are responsible for production. It is easier to request local companies to resolve these problems.

One relatively new concept which EPC companies must face is that many upstream projects now involve local government shareholders, who are taking stakes in locally established business entities. This adds a different kind of stakeholder to an oil&gas producing company’s regional operations and complicates the situation.

However, despite these challenges Indonesia has plenty of scope for optimism as gradually the country is becoming more sophisticated and proactive in dealing with challenges.

There is a lot of potential in the upstream sector and projects are already at the plan of development (POD) stage. There is also a lot of activity in the construction of fertilizer plants and new refineries. However, in the downstream sector there are concerns over whether or not Pertamina will invest as the company may have other priorities at the moment.

The potential is everywhere given that people are short of infrastructure and at the same time Indonesia is growing and wants to make use of its trained and skilled talent. The only prerequisite for success in economic development is having the infrastructure in place. Indeed, one of the key functions of the state is to provide this infrastructure.

Indonesia is currently at a crossroads for the financing of large infrastructure developments and is trying to decide the issue of the right balance between public and private financing. The government needs to decide on the type of cooperation and partnerships between public and private bodies. According to some analysis, Indonesia needs at least 5 major ports to be constructed. Using private partnerships, these ports can be built in 2 years rather than 20. However, people might label this as neo-liberal and view the private role as socio-economically dangerous ground.

Indonesia should look towards successful regional examples. For example, China is currently constructing incredible high-speed railways
under a de jure communist regime. This is all made possible by having extremely clear guidelines and regulation concerning the stock exchange and forex in China. The efficiency of their financial environment is what allows them to grow so fast.

How do you see the role of Indonesian EPC contractors within this picture?

EPC contractors in Indonesia have a highly strategic and nationally significant function. These companies provide the foundation for the usage and movement of goods and services around the country. Through affirmative action and national empowerment, Indonesia’s EPC companies have grown in their size and capacity. The rationale behind supporting local companies has been their role in creating employment and facilitating business in Indonesia.

However, Indonesian companies still need to adapt and improve their capabilities. In 2012 Indonesia’s EPC capabilities are strong in onshore projects but the projects ahead of Indonesia are offshore. This is where the challenge lies.

The decision regarding which environment, technology and type of project is complicated further by the fact that this is a dynamic environment. If Indonesian EPC companies move offshore and by 2018 become a force to be reckoned with internationally and then all of a sudden the market again switches to onshore such companies could be left adrift. The best solution is early preparation and a good understanding of the market directions.

What role do you assign to partnerships between international and local companies?

The best way forward is through cooperation because local and international companies operating in this market have a lot to offer to each other. For example, Western contractors cannot match local companies on price for labor-heavy construction works. UK based company, Amec, cannot carry out labor-heavy construction and/or engineering works cheaper than Berca and that is why there is a joint venture between them – to make cost and efficiency savings by using the local workforce. In return, the local construction industry benefits from technology and know-how. Of course, there are partnerships which are more successful than others and this depends on their individual management but the necessity to establish these partnerships is self-evident.

These relationships should be strong across the entire field of construction industry in 2012 from offshore to power to petrochemical industries. Most of the projects over $100 million will likely be done through partnerships. Only projects below $100 million will see one company involved which is likely to be a local one.

The type of partnership as the one proposed between IKPT and Toyo may be the right path. IKPT will benefit from the technology and international access. Toyo will gain a local presence and what we call local “know-who”. It is a logical relationship.

The days of large international EPC contractors entering Indonesia out of the blue and winning tenders are over. These are the days of cooperation, partnership and making use of complementary strengths. Investors are very knowledgeable nowadays and every dollar saved counts towards the bottom line. In this environment the synergies created through cooperation are a must.

What do you see as the strengths of Indonesian engineers in going international?

Indonesia as a producer of individual engineers is very successful. Indonesian engineers already work all around the world in Africa, the Middle East and even in the USA and Europe. However, Indonesia lacks a strong EPC company which operates on the world stage. GAPENRI’s members sporadically enter into projects in Malaysia and other regional countries, however they then head back to Indonesia. Few have a local permanent presence regionally. GAPENRI is therefore pushing for EPC companies to increase their international ambitions.

How do you see the role of GAPENRI in the future of Indonesia’s construction industry?

The role of GAPENRI is to better inform the EPC industry about future projects and the pre-qualification requirements and encourage them to form partnerships to meet the needs of these projects. GAPENRI’s mission is aligned with the philosophy of the relevant Indonesian laws which states that the purpose of the state and its laws is to create a competitive industry which will serve the people. In Indonesia, the way to make the most competitive proposals is to create the right partnership. As the Chairman of GAPENRI, I therefore recommend that international partners come to Indonesia to see the partnerships they can form.

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