Percentage discount local companies receive in a tender: 7.5
Indonesia’s infrastructure budget for 2015: $21.7 billion
Boost in Indonesia’s engineering sectorNovember 3, 2015
Arief Susanto, president director of Synergy Engineering, talks to TOGY about how local content regulations have both revived and added further obstacles for foreign and local companies in the engineering sector. In April 2015, Synergy Engineering was awarded the front-end engineering and design (FEED) contract for upstream independent Kris Energy’s offshore Lengo gas development in East Java.
How have local content regulations impacted Indonesia’s engineering sector?
Indonesia’s governmental regulation PTK 007 stipulates that contractors are required to prioritise the use of domestic goods services, technology and engineering expertise in production-sharing contracts. This regulation gives advantages to locally owned companies in the tendering process as a participating 100-percent local company automatically receives a 7.5-percent discount.
While this regulation promotes local entrepreneurs to blossom in the local oil and gas industry, it has its drawback. The same regulation can cause difficulties in hiring experienced expatriates who are vital in sharing knowledge and technology for more complex developments, such as deepwater, FLNG, refinery, and ensuring the necessary quality is met for engineering and design.
How could the tendering process for engineering and design projects be improved?
Under the PTK 007 regulation, the lowest bid wins the tender. While this approach is logical, it has some disadvantages. Cost cannot be the sole factor in determining a suitable contractor. Other factors to be considered include a solid track record and sound financial standing.
Indonesia’s engineering costs are some of the lowest in the world. Exporting the service globally would be advantageous but locally, it hurts the sector as this normally equates to low quality. Clients or end-users commonly will not be able to realise this immediately and more often than not only discovers this once the facility is operational. By then, the problem might have escalated and with that leads to a higher cost for repairs or remediation. The government needs to keep an eye out for this.
The Indonesian government also does not allow for companies to bid on FEED and engineering, procurement and construction (EPC) contracts at the same time. The lack of continuity is frustrating as the momentum and knowledge gained from the FEED is lost when switching companies for the EPC work.
Some companies prefer it to be a continuous process to save time and money, but the regulation does not allow for it. The government’s reasoning behind this regulation is to promote transparency and to avoid conflicts of interest. However, the government can ensure the tender process is open and fair without separating the FEED from the EPC.
What are the disadvantages for local companies in competing with international players for EPC work?
Many local players are able to deliver onshore projects such as contractors Rekayasa Industri and Wijaya Karya, but the number of local companies that can complete complex offshore or floating facilities and LNG terminals on their own is still low.
Not many local companies are able to produce a product that competes internationally in those areas, meaning in co-operation with the international companies is vital. For example, local subsidiary JGC Indonesia is an expert in building LNG terminals and regularly partners with local companies because of the requirements for local content.
The local content regulations will help grow the local companies in expertise and technology, but it can also delay the more complex projects.
Where is the most opportunity for engineering projects in Indonesia the next two or three years?
Engineering companies should concentrate on the opportunities offered by Indonesia’s expanding infrastructure. With the government’s ambition to expand energy infrastructure, many of these projects will move ahead despite lower oil and gas prices, including LNG plants and pipelines.
The big international players, however, will have the advantage when bidding for those highly technical projects. Companies such as US engineering independent Bechtel and German multinational conglomerate ThyssenKrupp have the expertise and the technology to get those projects off the ground.