As costs rise, Indonesian construction firms seek force majeure on govt contracts

As costs rise, Indonesian construction firms seek force majeure on govt contracts

Wed, Oct 30 2013

By Randy Fabi and Fathiya Dahrul

JAKARTA (Reuters) – Work on billions of dollars worth of new roads, bridges, dams and power plants in Indonesia could soon come to a standstill unless the government takes emergency action to help construction firms cover rising production costs, an industry trade group said. In an unprecedented step, the Indonesian Contractors Association this month asked the finance ministry to declare force majeure on all rupiah-based government infrastructure projects after federal and state agencies refused to pay more for the cost of labor and raw materials. Government-funded public projects this year are estimated to be worth more than $12 billion.“The owners of the projects … don’t have the money (to pay the extra costs), so we need the government to issue a statement that this is a condition for force majeure,” Haryo Wibisono, the trade group’s deputy executive director, told Reuters in his office in Jakarta.

The cost to complete government projects – from expanding the capital’s main airport to building a new power plant in East Java – has risen on average 15-20 percent above the initial contracts, he said. Typical contracts allow for a maximum 10 percent increase in costs.

“Contractors may be forced to stop their projects … this is very difficult for us,” Wibisono said, adding some firms would rather pay the 10 percent penalty for cancelling a contract than risk bigger losses in completing it.

The government was reviewing the industry’s request, but has yet to make a decision, said Hermanto Dardak, vice minister at the Ministry for Public Works, which owns 60 percent of the federal government’s construction contracts. State agencies also hold a large share.

Construction contracts this year were estimated at more than $40 billion, up from $32.4 billion in 2012, according to the ministry. Of that total, the central government provides $8.4 billion for public projects, while $3.8 billion is from local governments.

ERODING PROFITS

Rising costs are squeezing profits at construction companies such as state-owned PT Waskita Karya (WSKT.JK: Quote, Profile, Research, Stock Buzz).

The country’s second-largest listed construction firm could fall as much as 15 billion rupiah ($1.35 million) short of its 363 billion rupiah annual net profit target due to higher prices and a depreciating currency, CEO Muhammad Choliq told Reuters.

For 2014, it sees net profit of 450 billion rupiah, down from an initial estimate of 500 billion.

“Next year, our profit will come under more pressure if the government refuses to change the contracts’ value according to the macro conditions that is calculated with the exchange rate now,” Choliq said.

The rupiah has fallen 14 percent so far this year, making it Asia’s worst performing currency, and driving up prices of imported asphalt, steel and fuel. A shortage of asphalt supplies has seen domestic prices jump by almost a fifth this year, Wibisono said. That has caused months of delays to more than half of Indonesia’s road projects.

PT Wijaya Karya (WIKA.JK: Quote, Profile, Research, Stock Buzz) and PT Pembangunan Perumahan (ADHI.JK: Quote, Profile, Research, Stock Buzz) said they remained confident they could reach their profit targets this year, but were uncertain about the future if contracts weren’t revised.

“We can’t just cancel the project. Everything must be resolved in a good way. We are still negotiating with our customers,” said Natal Argawan, a spokesman for Wijaya Karya.

Wijaya Karya and Waskita Karya are among a consortium of companies working on a $420 million 2-year expansion project of Jakarta’s Soekarno-Hatta airport. They are in talks with the ministry of public works seeking to increase the project price by 10-15 percent.