Analysis of Policy Barriers to the Implementation of Local Content Requirement in Construction Projects in Indonesia

Abstract

This study assesses the application of Local Content Requirement (LCR) in building construction projects, analyzes the contribution of LCR components (materials, labor, and equipment) to the total LCR value using regression analysis, and identifies obstacles in carrying out the policy. The research focuses on building construction projects, utilizing processed data sourced from 24 building construction project documents from 2022 to 2024. The results show a level of commitment and realization, with an average achievement of 64.67%. This LCR value exceeds the minimum regulatory requirement of 40%, indicating compliance with government standards. However, it is still below the aspirational target of 100% LCR, suggesting significant potential for increasing the proportion of fully local components. Although there were fluctuations, the LCR achievement ratio has shown a consistent upward trend. Furthermore, regression analysis demonstrates that the LCR value of materials has a significant positive effect on the total LCR value, whereas the LCR values of labor and equipment have negative effects that are not statistically significant. This negative relationship does not indicate reduced local utilization but rather reflects the smaller financial proportion of local labor and equipment compared to material costs, which dominate total project expenditures. Meanwhile, the results of the Relative Importance Index (RII) analysis show that significant factors hindering the implementation of LCR include: (i) dependence on a single LCR-certified vendor, which increases procurement costs (RII = 0.829); (ii) delays in budget disbursement from the client, which affect the procurement schedule (RII = 0.826); and (iii) locally manufactured heavy equipment that meets LCR requirements but is difficult to obtain (RII = 0.774). The research findings indicate that policy interventions should prioritize strengthening the domestic supply ecosystem, diversifying vendors, streamlining procedures, and fostering partnerships between public agencies and local manufacturers to enhance the sustainability and effectiveness of LCR implementation in Indonesia's construction sector.

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