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who’s who

indonesia 2011

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contents indonesia 2011

The who’s who of the Indonesian infrastructure market

Infrastructure focus would like to thank its knowledge partners:

10 Indonesia at a glance 12 Market Overview 15 Perspective: President Susilo Bambang Yudhoyono


ROUNDTABLE DEBATE This live Infrastructure Focus debate brought together the leading thinkers from government, development institutions and the business community to analyse how Indonesia should best take its ambitious infrastructure plans forward.

37 Business Intelligence: Public private partnership by PWC

Government & Politics 45 Political Overview



PERSPECTIVE: INFRASTRUCTURE, INTERCONNECTIVITY AND INCLUSIVE GROWTH Gita Wirjawan, chairman of the Indonesian Investment Coordinating Board (BKPM) gives his account of Indonesia’s infrastructural capacity. Charged with involving international private sector participants in transforming the nation’s infrastructure, he provides a summary of the country’s strategy and targets.

51 Who’s Who: Government & Politics



Frost & Sullivan get to grips with the fundamentals of Indonesia’s infrastructural development objectives. This feature takes you on a whistle-stop tour through the analyses and understanding of people with a lot of experience on the ground. Development Finance 77 Who’s Who: Development Finance

National Institutions 88 Perspective: current developmental issues by Adi Putra Tahir 90 Who’s Who: National Institutions 3

contents indonesia 2011

Managing Director Colin Forster Publisher Ronnie Tracey Country Publisher Cory D’Abreo Country Head Michèle Murzilli Editor Louis Black Deputy Editor Vincent Lebon Country Editors Muhamad Al Azhari, Chris Holms Sub Editor Nick Howells Regional Editor James Featherstone Designer Abi Hardwick Production Editors Emma Pearce, Emma Price Production Manager Paula Munakova Picture Research Jeanne Falies Sales Consultant James Baron Country Office Manager Rita Adnani Operations Head Raymonde Fraisiers Operations Assistants Rahmad Ramon Book Design Abi Imaging Ltd Photographer Marson Hendarno This publication is copyright protected. Copying any part of Infrastructure Focus is unlawful without the prior written permission of Capital Knowledge Limited. No part of this publication may be reproduced or transmitted in any form or by any means nor held in any information storage or retrieval system. No warranty: whilst every reasonable effort has been made to ensure its accuracy, neither Capital Knowledge Limited nor any contributor accepts any responsibility or liability for the accuracy of any part of the content in this publication. Readers should also be aware that external contributors may represent firms that may have an interest in companies, funds and/or their securities mentioned in their contributions. No statement in this book is to be construed as a recommendation to buy or sell securities in any entity or enter into or exit an investment of any kind.

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Energy & Natural Resources ENERGY OVERVIEW From production, to transmission and distribution, Indonesia’s infrastructure falls short of the mark. However, blessed with huge reserves of coal and renewable resources, such as geothermal, the government is ready to support private investors.


106 Natural Resources Overview 114 Who’s Who: Energy & Natural Resources 146 PERSPECTIVE: SHARED SERVICES by colin J davies 148 Who’s Who: Energy & Natural Resources (continued)

Transport TRANSPORT OVERVIEW As the largest archipelagic country in the world, Indonesia faces some very unique transport issues. In spite of the challenges facing investors, the transport sector presents great opportunities for logistics service providers.


179 Who’s Who: Transport 192 Perspective: Toll Roads by Scott Younger

Information & Communication Technology 195 Information & Communication Technology Overview 197 Who’s Who: Information & Communication Technology

Water & Waste WATER & WASTE overview With a population of approximately 240 million that is on the rise and a rapid increase in urbanisation, both supply and environmental issues are becoming ever more important. Significant opportunities for both suppliers of technologies and services are available in water and waste markets.


207 Who’s Who: Water & Waste 211 Perspective: Water & Sustainability by Scott Younger

Construction 215 Construction Overview 219 Who’s Who: Construction

Banking & Financial Services 231 Banking & Financial Services Overview 236 Who’s Who: Banking & Financial Services

Consultancy & Advisory Services 250 Who’s Who: Consultancy & Advisory Services


PROJECT DATA BAPPENAS, Indonesia’s national development planning agency, publishes a PPP book outlining PPP ready, priority and potential projects. PPP ready projects have tender documentation, market sounding reports and PPP procurement schedules, whereas priority projects have pre-feasibility studies, PPP modality and risk analysis data. 283 Hotel Listings 5

who’s who indonesia 2011

government & politics 43 – 74

51 Djoko Kirmanto Minister of Public Works

55 Darwin Zahedy Saleh Minister of Energy and Mineral Resources

57 Freddy Numberi Minister of Transportation

61 Tifatul Sembiring Minister of Communication and Information Technology

Development finance 75 – 86

63 Armida Alisjahbana Minister of State for National Development Planning/BAPPENAS



80 Joachim von Amsberg1 Country Director World Bank

James Nugent Country Director Asian Development Bank (ADB)

Gita Wirjawan Chairman, Indonesian Investment Coordinating Board (BKPM)

NATIONAL institutions 87 – 98

82 Joël Daligault1 Country Director, Agence Française de Développement (AFD)



Takanori Satake Chief Representative, Japan Bank for International Cooperation

Suryo Bambang Sulisto President, Indonesian Chamber of Commerce and Industry (KADIN)

93 Emma Sri Martini President Director Sarana Multi Infrastruktur (SMI)

energy & natural resources 99 – 172



Dahlan Iskan President Director Perusahaan Listrik Negara (PLN)

Sinthya Roesly Chief Executive Officer, Indonesia Infrastructure Guarantee Fund (IIGF)

122 R. Priyono President Director BP. Migas

126 Hans Peter Haesslein President Director & Chief Executive Officer, Siemens Indonesia


117 Karen Agustiawan President & Chief Executive Officer Pertamina

128 Darmoyo Doyoatmojo Chief Executive Officer Medco Energi

119 Elisabeth Proust President Director & General Manager, Total E&P Indonesia

130 Gatot Prawiro Country Executive GE Energy

133 Sukrisno President Director Bukit Asam

who’s who indonesia 2011

136 Willi Goldschmidt Chief Executive Officer Navigat Energy

139 Nico Kanter Head of Country BP Indonesia

153 K.B. Trivedi President Director ESSAR

142 Madhu Koneru Executive Vice Chairman MEC Holdings

156 Hasto Kristiyono Managing Director Sewatama

148 Henkie Leo President Director ZUG

159 Vinod Laroya President Director Akraya International

151 K.K. Ralhan President Director Kaltimex

162 Jacobus Busono President Director Pura Group

166 Abadi Poernomo President Director Pertamina Geothermal

transport 173 – 192


168 Ihham A. Habibie Chief Executive Officer & President Director, Ilthabi

179 Emirsyah Satar President & Chief Executive Officer Garuda Indonesia

Mike F. Gray Regional Director Rolls-Royce

184 Richard J. Lino President Director Pelindo II

information & communication technology 193 – 202

187 Jakob Friis Sorensen President Director Maersk



Djarwo Surjanto President Director Pelindo III

Rinaldi Firmansyah President Director Telkom

water & waste 203 – 212

construction 213 – 228

201 Sutanto Hartono President Director Microsoft

199 Richard Kitts President Director Nokia Siemens Networks

207 Philippe Folliasson President Director Palyja

219 Sudarto Chairman Indonesian Contractors Association 7

who’s who indonesia 2011

banking & financial services 229 – 248

221 Ray Hodgson President Director Leighton

224 Colin J. Davies President Director Laing O’Rourke

238 Tom Aaker Chief Executive Officer Standard Chartered Bank



Daniel Lavalle President Director Indocement

240 Arviyan Arifin President Director Bank Muamalat

Rakesh Bhatia Chief Executive Officer HSBC

242 Harry Naysmith Country Executive The Royal Bank of Scotland

244 Suresh Narang Chief Country Officer & Head of Global Markets, Deutsche Bank

246 Eko Yuliantoro President Director Bahana Securities

consultancy & advisory services 249 – 264

250 67

253 Eugene van de Weerd Country Director Frost & Sullivan

Jusuf Wibisana Chairman PricewaterhouseCoopers



James Harris Head of Infrastructure and Project Finance, Hogan Lovells

Scott Younger President Commissioner Glendale Partners

Dedy Supriadi Priatna Deputy Minister for Infrastructure Affairs/BAPPENAS

Hongjoo J Hahm Infrastructure Coordinator World Bank

other contributors2 17 – 36

261 Windhu Hidranto President Director PPP Indonesia

263 Achmad Noerzaman President Director Arkonin


Adam Sack Country Manager, International Finance Corporation (IFC)


At the time of Infrastructure Focus’ interviews in Indonesia this individual held the position stated but has subsequently left this post. 2 These contributors participated in our Investing in Indonesian Infrastructure and Industry roundtable debate. (See pages 17-36.) 1

Infrastructure Focus would like to thank all the leaders from government and the business community who have participated in and contributed to our definitive Who’s Who of the Indonesian infrastructure market.

ABOUT BRITCHAM INDONESIA The British Chamber of Commerce in Indonesia (BritCham), is now in its second decade of establishment building on a British business presence that extends more than hundred years. Over those years, we had the pleasure of welcoming the most influential politicians, business leaders, world news commentators, renowned experts in various fields and academicians as guests to our various forums. In 2009, we hosted more than one hundred events that provided broad platforms for business development amongst our member. Working cooperatively with the British Embassy (UKTI) and the British Council, whose senior representatives sits on our Board of Management, BritCham is committed to developing a services infrastructure that supports all stages of business development right from their inception in Indonesia. C




To our members and a much broader data network, we represent an independent and reliable source of information on issues. This covers politics, current affairs, security, health, inside-track analysis from our business sector groups, advocacy, personal and social development.





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Liverpool Legend Ian Rush is BritCham's guest for "Giving Kids A Sports Chance", 2010

Our dynamics are strong and exemplified by our leading role in the development of BISEA (Britain In South East Asia), the rapid growth of our community portfolio - 'Giving Kids A Sporting Chance', and the establishment of the Professional Women at BritCham group. Although British in name, our BritCham community is far from exclusively British. The integrity of the BritCham brand attracts members, sponsors and advertisers with roots from all over the globe - and most pleasingly, from our host country, Indonesia. We look forward to many more decades of serving the interest of our members from the British, domestic and international business communities in Indonesia.

indonesia at a glance




Region: East Asia Pacific

Population (2009): 229,964,723

Capital: Jakarta

GDP (2009): US$540,277,000,000

Currency: Rupiah

110˚E GNI per capita, Atlas Method (2009): US$2,230

Life expectancy at birth: 71 years Literacy1: 92%

Poverty headcount ratio at national poverty line (% of pop.): 16.7%

Income Level: Lower middle


Labour & Social Protection, Unemployment2:8.4%

Langsa Binjai


Padangsidempuan Kotanopan







Singkawang Mempawah


Bangkinang Bukittinggi Sumatera Barat Padang Djambi


Pontianak Nangpinch







Banjarmasin Lampung


Kalimantan Selatan


Rail lines (total route, km, 2008): 3,370

Semarang Pati

Roads, paved (% of total roads, 2005): 55.4%


Garut Jawa


Surabaya Malang Lunjuk-besar

Passenger cars (per 1,000 people, 2007): 42

Information & communication technology expenditure (% of GDP): 6.0%

Container port traffic (20 ft equivalent units, 2008): 6,787,824


Mobile & fixed-line telephone subscribers (2008): 75.2%

Rural population with Improved water source access (2008): 78%

Internet users (per 100 people): 23.9







indonesia at a glance






capitalisation of listed companies (% of GDP): 80.8%

Private sector, Merchandise trace (% of GDP): 39.1%

FDI, net inflows: US$1,116,270,000,000

Energy use (kg of oil equivalent per capita): 1,819


andjungselor Tandjungselor

andjungredeb Tandjungredeb Manado





135˚E Energy production (kt of oil equivalent, 2007): 331,100.0



urban population with Improved water source access (2008): 89%

Energy imports, net (% of energy use): -2%

0 500 M 0 KM 500

500 M

500 KM

Parallel scale at 0˚ 0˚ Parallel scale at 0˚ 0˚

nda Manokwari Manokwari M a l u k u


Irian Jaya

ngpandang Ujungpandang



k u l u M a


k u l u a M

East Timor East Timor

Renewable internal freshwater resources per capita (cubic metres): 6,442




Irian Jaya



urban population with Improved water source access (2008): 89%

Source: World Bank Notes 1(%of people ages

Improved sanitation facilities (% of population with access, 2008): 52%



15 & above)

2(% of labour




140˚E 11

indonesia 2011 overview

working out the rules of engagement After a series of unsuccessful attempts to bring flows of foreign investor capital into the infrastructure sector, Indonesia seems now to have got things worked out with policy and regulatory reform and new institutions aimed at catering for investors’ requirements Indonesia, Southeast Asia’s largest economy with a GDP of US$650 billion, has all it needs to become the next regional powerhouse. The country offers a stable political environment, good macroeconomic indicators and is rich in natural resources. It is the world’s third-largest democracy after India and the United States, and is a member of the G20.

Prudent fiscal and monetary policy is hoped to have paved the way for the nation to see its sovereign debt rating improve to investment grade during the course of 2011


Strong domestic demand from a population of around 240 million and a low dependency on exports provided solid ground when the global recession dragged down the financial markets and the export performance of neighbouring and developed nations, making Indonesia’s economy one of the most resilient in the world. A healthy current account surplus further strengthens Indonesia’s position and enables it to reduce external debt. Also, prudent fiscal and monetary policy is hoped to have paved the way for the nation to see its sovereign debt rating improve to investment grade during the course of 2011. Infrastructure requirements It is generally agreed that a massive revamp of Indonesia’s infrastructure sector is the key to a better standard of living and stronger growth. However, infrastructure investment had fallen to a level equivalent to three-and-a-half per cent of GDP in the years 2007 to 2009. That compares to around seven per cent before the Asian financial crisis more than a decade ago. In comparison, China and Vietnam spent nearly ten per cent of their GDP on the sector during this period. This underinvestment is reflected, for example, by the fact that the country’s electrification rate is only around 60 per cent. Indonesia’s monopoly power supplier, PT Perusahaan Listrik Negara (PLN) has a capability to generate 25,000 megawatts (MW)

indonesia 2011 overview

of electricity, but output in daily operations is far from its maximum capacity due to aging and inefficient plants. In the roads sector, a joint study by the Asian Development Bank (ADB), the International Labour Organization (ILO) and the Islamic Development Bank (IDB) in August 2010 showed Indonesia ‘has one of the lowest road densities among major economies in Southeast Asia, both per 100 people and per square kilometre’. In the rail sector, the network is currently essentially limited to the two most populous islands, Java and Sumatra. Whereas in the water sector, according to a report by the ADB released in March 2006 but revised in March 2010, more than 100 million Indonesians do not have adequate access to safe water, and only two per cent have access to sewerage in urban areas. Private sector The government has established that the country needs around US$150-160 billion of investment during the period of 2010 to 2014 to revamp its ailing infrastructure. Of this figure, the government can afford to provide US$50 billion, leaving around two thirds of the financing to come from private sector investors, both domestic and overseas. To engage investors the government is implementing a number of public private partnership (PPP) schemes, where private investors are expected to provide the bulk of financing required for projects. It considers PPP the most appropriate way to involve the private sector in financing vital infrastructure without ignoring a mandate in the country’s constitution that states the fundamental infrastructure must be controlled by the state.

Reforms in infrastructure The government has launched major cross-sector regulatory reforms in the last few years to create a more market-friendly regulatory framework. The goal is to improve bureaucracy by trying to create better coordination among ministries and regional government. Guidance on the preparation and contracting of PPP projects has been set out by a presidential regulation, number 67/2005, which states a requirement to hold an open tender process for the selection of private participants. It also determines the type of engagement with the private sector, for example, whether a private entity should be given a cooperation agreement or a specific issuance business license. It also sets guidelines for risk sharing and asset co-ownership agreements between the government and investors. The government has also addressed difficulties in land acquisition, project financing and the problem of guarantees on investment return by introducing a ‘land revolving scheme’ and a ‘land capping scheme’. Land revolving allows the government to acquire lands before the tender process, while land capping is a commitment from the government to cover the risk of rising land prices with a defined maximum cap. The Indonesia Infrastructure Guarantee Fund (IIGF) will play a role to guarantee investment in infrastructure from any policy risks and the Indonesia Infrastructure Fund Facility (IIFF) is tasked to help finance infrastructure projects through equity participation, credit enhancement as well as debt instruments.

The government has also addressed difficulties in land acquisition, project financing and the problem of guarantees on investment return

In a bid to strengthen the legal basis for land procurement the government is drafting a new bill for land procurement for the public utilities that will override the current law dating back to 1961 and 13

indonesia 2011 overview

a presidential decree issued in 2005 and revised in 2006. The government hopes this new bill will cut the time to acquire lands for public infrastructure utilities by half as it simplifies and shortens negotiations and appeal processes in any dispute. In the draft bill, landowners are given the right to appeal to the court system, but once an area is designated for infrastructure facilities that serve the public, the government would have the right to seize the property and begin work while the case is being decided. The seizure can happen after 60 days of negotiation, by which time landowners must receive compensation. Previously negotiation could take up to 120 days. Broader reform and an investor friendly environment In 2007 the House of Representatives passed a law that integrated previous investment laws. It set out the principle that foreign and domestic investors are equal before law, although foreign investors may need to meet certain regulatory criteria before investing in the country. The investment law also offers tax incentives for companies willing to invest in labour-intensive and innovative projects. The incentives include: income tax reduction, customs exemption to capital goods such as machinery, value-added exemptions or accelerated amortisation or depreciation of assets to reduce tax basis calculations. Importantly, the law also gives a mandate for the Indonesian Investment Coordinating Board (BKPM) to provide ‘one roof integrated services’ by becoming an authoritative body that can process investment permits (excluding those in mining, oil and gas and the banking sector). Even though solving central/ regional government synchronisation for permits will be a big issue for BKPM to manage, its provision of ‘one roof integrated services’ defines it as having a bigger role in promoting PPP projects. Also in 2010, the government took its liberalisation of investment policies further by issuing a presidential decree that overrode the 2007’s ‘negative investment list’ decree, and eased restrictions on foreign investors to invest in 40 sectors in the economy. Among the highlights are that foreign investors are allowed to invest more in healthcare, education, as well as in the food sector. Indonesia also passed a law on Special Economic Zones, which enables the government to give certain tax incentives and special business licenses in designated industrial areas. Opportunities for private participation In the electricity sector, the government has


removed the monopoly of state-power company PLN in power generation, distribution and transmission, although it assumes the role of offtaker of power generation. Independent Power Producers (IPPs) are allowed to participate through open tender and compete with other bidders for the tariff agreement proposed for the projects. In sea transport infrastructure, the operation of a port is now open for investment by private entities. Under a new policy, port authorities will issue concessions and regulate the service provided by the private sector, with licenses being issued centrally and by regional governments. In the airport sector, the government also has removed the monopoly of state-airport operator,

Indonesia has all it needs to become the next regional powerhouse PT Angkasa Pura, and a new regulation that will allow the private sector to acquire concessions is on the way. In rail, the state-railway company PT Kereta Api Indonesia, also no longer has a monopoly. The concessions to carry out construction and operation by the private sector will be granted by government, through ministers and local governments. In the toll road sector, the government a long time ago scrapped the monopoly of PT Jasa Marga, the state toll road company. A specific toll road regulatory body, called BPJT, conducts toll road tenders and recommends tariffs with approval from the Minister of Transportation. Waste processing in Indonesia’s swelling cities also offers significant opportunities for environmental technology and services providers, and the excess of waste creates opportunities in the energy sector as waste can be used as a source of renewable energy. Water too offers an array of potential projects such as new treatment plants, and the rehabilitation of existing plants and water distribution systems. Indonesia has come a long way in just over a decade. It is listening and adapting to the needs of investors and its reformist political leaders have set themselves the task of attracting and engaging with the world’s investment elite. With a GDP that is expected to reach US$1 trillion by 2014, it won’t be too long before this goal is achieved.

Strengthening the economy and alleviating poverty President Susilo Bambang Yudhoyono outlines his government’s commitment to develop the country’s infrastructure and PPP market

We hope Indonesia is a welcoming place in which to stay and to invest. There is no doubt that, with togetherness, we could share our common future vision and work in harmony. Indonesia will attain prosperity for its people by maintaining a conducive investment climate through beneficial partnership between the government and the business world. Two and half years ago, the Asia Pacific Ministerial ConferenceUNESCAP concerning Public Private Partnerships for Infrastructure Development was held in Seoul, South Korea. The conference

Indonesia has made two important transitions: from autocratic to democratic state; and from centralised to decentralised governance deliberately discussed infrastructure development and construction in Asia Pacific region, which concluded with the Seoul Declaration on Public Private Partnerships along with UNESCAP Resolution Number 64/4. The Seoul Declaration recommended cooperation between Pan-Asia/Pacific countries on Public Private Partnerships and was used as the foundation of the Jakarta Declaration announced in April 2010. Today, Indonesia is a middle-income developing country with self confidence and optimism for its future. The 1998 financial crisis turned the foundation of national and state life upside down. At that time, there was great concern that Indonesian society could disintegrate. However, this did not happen. More than ten years after the crisis, Indonesia has become the third greatest democratic country in the world with consistent economic growth. Indonesia has made two important transitions: from autocratic to democratic state; and from centralised to decentralised governance.

Decentralisation has been our choice for the state on account of the fact that we are the largest archipelago state in the world. Managing public services for a population spread across thousands of islands is apparently impossible to accomplish in centralistic manner. Decentralisation has characterised us as a sovereign state. Indonesia is the leader among Southeast Asian nations and a key player in the G20. Indonesia has also transformed into a regional leader in the fields of democracy and human rights. As the country with the largest Muslim population in the world, Indonesia demonstrates how Muslims can live in diversity and become a leader in the modern world. In the past five years, Indonesia has been experiencing economic growth. During this period, GDP increased up to 17% from US$827 billion into US$968 billion. Unemployment decreased from 9.2% to 7.7% and the proportion of the population living below the poverty line declined from 27% into 18%. However, democracy and economic growth have not yet brought prosperity for the whole society. Despite the fact that poverty has declined, prosperity in Indonesia is not yet evenly distributed

Further developing the country’s infrastructure and the achievement of Millennium Development Goals are keys to alleviating poverty, and in turn, keys to opening business opportunities because of income inequality. Further developing the country’s infrastructure and the achievement of Millennium Development Goals are keys to alleviating poverty, and in turn, keys to opening business opportunities. 15

infrastructure focus indonesia 2011

Infrastructure provision has been the government’s priority. To reiterate, our country is the biggest archipelago state in the world. We are confident that infrastructure is necessary to our success as a nation. Infrastructure will bring us the prosperity that will put us on the same level as other developed countries. In the past five years, the telephone network has increased from 7.8 million to 30 million lines. The number of cellular phone lines

We have a target to develop the quality and quantity of service in all national infrastructure sectors through investment development has grown from 12 million lines to 140 million lines. Internet users have mushroomed from 8 million people in 2004 into 30 million people today. Meanwhile, in the transportation sector, the government is continually improving road development, from 343,000 km in 2004 into 391,000 km in 2009. In its medium term development plan for the next five years, the government has a vision and mission to create a prosperous, democratic and just Indonesia. We have a target to develop the quality and quantity of service in all national infrastructure sectors through investment development in the infrastructure. Infrastructure investment is very important for Indonesia to create the growth that stimulates employment and reduces poverty. We have a big population of more than 220 million people. In Asia, we are the third largest population after China and India. Providing services for our people fairly and adequately is the biggest challenge for my government. Road infrastructure development not only connects factories to markets, but also brings doctors and teachers to remote areas in Indonesia. The development of electric power not only helps industrial interests, but also gives lighting for students doing their assignments and for their parents who accompany them studying at night. We enormously require a reliable telecommunication system when disaster wipes out an Indonesian area. The supply of clean water can protect children from infectious diseases. For us, infrastructure is one of the biggest challenges for the current generation. We must work together hand in hand to ensure that we can develop and invest for the next generation. At a regional level, for example, Indonesia supports UNESCAP Resolution Number 62/4, the Intergovernmental Agreement on the Trans-Asian Railway Network. To support the network development plan, the Government of Indonesia has prepared one network component project, the Java-Sumatera Bridge. The government proposed the bridge construction project in the preparation of public-private partnerships (PPP) Book 2010-2014. For your information, every


year, the Government of Indonesia releases a PPP Book: a list of infrastructure investment projects on which the government seeks to work with private parties. To invite private investment in the infrastructure sector through PPP, the government has worked tirelessly for several years to deal with basic weaknesses in the framework of PPP regulation. At the beginning of 2010, the government issued Presidential Regulation Number 13 Year 2010, which confirms that there will be no PPP projects offered without providing the necessary land. This regulation also gives firm details of risk sharing, between the risk borne by the government and that borne by private sector in line with international business practices. In addition to the above problems, the solution for the infrastructure financing in Rupiah, which has been a financial constraint, has been found. The government is collaborating with the World Bank, Asian Development Bank, International Finance Cooperation, and German Donor-KFW, to develop financing and guarantee facilities to support PPP projects. In this connection, the government has established two State Owned Enterprises (BUMN), PT Indonesia Infrastructure Facility and PT Penjaminan Infrastructure Indonesia. Professional experts manage the two enterprises. Therefore, for the first time, Indonesia has provided financing facilities that can ensure financial closure before construction begins. Another problem that requires serious attention is the inadequate ability of government institutions responsible for Cooperation Projects to comprehend the private sector’s needs, and the ability as an equal partner to negotiate effectively in order to achieve a mutually beneficial deal structure. Therefore, we have

To invite private investment in the infrastructure sector through the framework of public private partnerships (PPP), the government has worked earnestly for several years to deal with the basic weaknesses on the framework of PPP regulation developed the PPP institution, comprising the PPP Center and PPP network, to work with relevant technical agencies supported by qualified and professional human resources to be able to prepare qualified Cooperation Projects. Infrastructure is the top priority to support a country’s capacity to increase global competitiveness. However, more important is the infrastructure becomes the key to improve people’s welfare by increasing productivity, developing a healthier environment, growing a high and qualified economy, and reducing poverty. Adapted from a speech on April 15, 2010.

IT & Telecoms Roundtable



roundtable indonesia 2011

Gita Wirjawan Chairman Indonesia Investment Coordinating Board (BKPM)


Gita is a Harvard-educated investment banker who has held key appointments at Goldman Sachs and JPMorgan. He was most recently founder and chairman of Ancora Capital and has been involved in advising the government and private sectors in many Asian countries. As a philanthropist, he has endowed scholarships for Indonesians to attend the world’s best universities.

Jusuf Wibisana Chairman Pricewaterhouse Coopers Indonesia

Jusuf joined PricewaterhouseCoopers in 2003 and led Industrial Product Services from 2005 through 2007. Jusuf has significant experience in leading audit and assurance engagements on listed companies as well as large private entities. He serves clients in Industrial & Consumers Products as well as Financial Services. He is also the chairman of the Shari’a Accounting Standards Board.

Hongjoo J Hahm Infrastructure Coordinator World Bank

Hongjoo, a Korean national, heads the infrastructure unit in the World Bank Jakarta. He is responsible for overseeing the World Bank’s transport, energy, urban and water and sanitation sectors, as well as the infrastructure and housing reconstruction efforts in post-tsunami Aceh and post-earthquake Yogyakarta. He is also in charge of PPP development in Indonesia as a whole.


DEDY SUPRIADI PRIATNA Deputy Minister for Infrastructure Affairs Ministry of National Development Planning Agency (BAPPENAS)

In addition to his role as deputy minister, Dedy is a senior lecturer at the University of Indonesia (since 2003). Having obtained his Master of Science and PhD in Energy Analysis & Policy at the University of Wisconsin, USA, he joined the above Ministry in 1988 and started his career as electric planning staff at the Bureau of Electricity, Energy Development and Mining.

James Harris Head of Infrastructure and Project Finance Hogan Lovells

James heads Hogan Lovells’ infrastructure and project finance practice for Asia. He is the Singapore office managing partner with experience in PPPs, project finance, privatisations, asset finance, general banking and real estate finance. James is Chairman (Asia) of the International Project Finance Association. He is widely recognised as a leading project finance lawyer.

Adam Sack Country Manager International Finance Corporation (IFC) Indonesia

Adam Sack’s nine years with IFC have been in advisory programmes in South East Asia including living and working in Vietnam and Cambodia. Before IFC, Adam was a partner in a European private equity firm and prior to that, an investment banker with JPMorgan. He has an MSc in Development Studies and a BA in Politics, Philosophy and Economics from Oxford University.

roundtable indonesia 2011


Sinthya Roesly Chief Executive Officer Indonesia Infrastructure Guarantee Fund (IIGF)

Before IIGF, Sinthya worked at PT PLN (Persero) for 16 years, ranging from corporate finance, funding, corporate planning and strategy, power system operations and project construction. Sinthya graduated with an MBA from Monash University, Australia, and an MEngSc in Power Systems from University of New South Wales, Australia, and has a Bachelor degree in Electrical Engineering from the University of Indonesia.

Rakesh Bhatia Chief Executive Officer HSBC Indonesia

Rakesh Bhatia joined The Hong Kong and Shanghai Banking Corporation Limited in 1987. During his three years as CEO Indonesia, he expanded HSBC’s local network from 17 to 104 outlets across 10 major cities. He contributed to the group’s acquisition of a controlling stake in Bank Ekonomi, which nearly doubled HSBC’s presence to more than 200 outlets in 26 cities.

Philippe FOLLIASSON President Director PALYJA

Philippe Folliasson, a French national, is the president director of PALYJA, the water supply operator of western Jakarta, a partnership between Suez Environnement and Astra Group. He is also the GDF SUEZ’s representative in Indonesia across the entire energy value chain. Graduated in engineering and in business administration, Philippe spent 14 years within Suez Environnement and joined PALYJA in 2004.

Madhu Koneru Executive Vice Chairman MEC Holdings

MEC Holdings is a joint venture between Trimex, a global mineral and metals conglomerate, and the government of Ras Al Khaimah. MEC’s US$5 billion development of integrated industrial facilities includes a coal-fired power plant, an aluminum smelter, a fertilizer plant, a coal mine, Indonesia’s first private railway and a new port, all in East Kalimantan.

bappenas 19

roundtable indonesia 2011

investing in indonesian Infrastructure & industry Introduction Held on July 23rd, 2010 this live roundtable debate brought together leaders from government, development institutions and the private sector to discuss and analyse the how Indonesia should best advance its ambitious infrastructure plans. What are those who have helped define the market in recent times thinking? This report on their very candid discussion provides a unique insight into the way Indonesia intends to deal with its infrastructure development issues, how it has learned from the past and how it will cater for international investors going forward. Agenda n Government resources and structures: what developments aimed at international investors will simplify and co-ordinate process? n Land acquisition issues: new legislation and experience on the ground n Domestic and international financing: what roles will different financial institutions adopt? n Country branding: Indonesia changing?




n Development strategy: what needs to be done to attract more foreign investors?

GOVERNMENT RESOURCES AND STRUCTURES Gita Wirjawan, BKPM: Someone asked me recently about Jakarta’s Mass Rapid Transit (MRT) train system. I told them that we were talking about it when I was in fifth grade and we are still talking about it today. There is a realisation now within the government that unless a certain amount of rethinking is done, infrastructure development in Indonesia is going to continue to fall far short of where it should be. The government is allocating about US$50 billion for infrastructure projects in the next five years, but the overall figure needs to be US$150 billion. So the question is how are we going to be able to get that extra US$100 billion of private capital? That is the challenge. It may involve a loan from an international bank, a loan from development agencies such as the World Bank or some equity from a capital firm perhaps, but the process is still not ideal. Essentially what we need to do is to build up our skills in constructing public private partnership (PPP) schemes.

Gita Wirjawan Chairman Indonesian Investment Co-ordinating Board (BKPM)

We also need to make sure that the process in dealing with the government is clear. At the moment, when somebody comes to Indonesia and, say, wants to build a bridge, he comes to see me at BKPM, he goes to see the Minister of Finance, sees Dedy at BAPPENAS, goes to see Sinthya at the Indonesia Infrastructure Guarantee Fund (IIGF) and maybe the Risk Management Unit at MOF. Then he goes to the National Land Agency (BPN), he goes to the Ministry of Public Works, the Ministry of Transport. Everybody has their own 21

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views. When he walks out, he is probably more confused than when he came in. Ideally there would be simplicity.

I have high hope that in having a champion to perform this co-ordination, which may be BKPM, this can improve quickly.

It means the bridge he wants to build ought to be listed in ‘the book’. We call it the PPP Book, which is a catalogue of government PPP projects and related data for investors. More importantly, it means that everything that relates to public

GW, BKPM: Going back to ‘the book’ for a moment, I would prefer to have very few items in it as opposed to a large number of projects that may amount to, say, Rp450 trillion-worth of projects, but do not have much traction. So projects we can focus on and use to demonstrate capacity.

The government is allocating about US$50 billion for infrastructure projects in the next five years, but the overall figure needs to be US$150 billion

As for BKPM’s role, BAPPENAS has come up with a great idea of treating itself as a ‘back end’ and BKPM as a ‘front end’ in this whole process. That is the current thinking in the organisations. There needs to be more work done on it though, because we want this to be a good system. We don’t want this to just be political rhetoric again, as it has been in the past.

works, transport, the Investment Coordinating Board (BKPM), the Ministry of Finance, the governors and others, all are sorted out and coordinated, so he is not bouncing round different agencies getting confused. Sinthya Roesly, IIGF: That has certainly been a problem. In my experience for the past five or six months there has not been very good co-ordination between the ministries to put together the projects that are due to come on-line. Government agencies and ministries tend to work in silos. They sometimes seem to work just on their own initiative. Actually, this is a government issue that has to be settled.


If we at BKPM are a true front end, it means that when somebody comes to us, we can tell them how to execute the project, within reason and with simplicity. That is the goal – the creation of a ‘one stop shop’. In fact, there are projects that have worked like this. The Kalimantan Coal project being done by MEC, for instance. That is a PPP project that worked well. The challenge is how to duplicate that on a large scale. Dedy Priatna, BAPPENAS: I agree totally. The President has given his backing to putting in place a ‘one gate’ policy, where there is a single, competent point of contact for investors to understand what the process of putting together a project would be. At the moment, the process can be slow.

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Also, let us not forget that investors, foreign investors especially, mostly need a financial guarantee to get involved. The only one that we have is the RMU, the Risk Management Unit in Ministry of Finance. Right now, if we have big projects where most of the investment is coming from foreign investors, if we have one or two or three projects, the IIGF of Rp1 billion will not be enough. I hope it will be increased in some way.

It means that everything that relates to public works, transport, the Investment Coordinating Board, the Ministry of Finance, the governors and others, all are sorted out and co-ordinated LAND ACQUISITION ISSUES DP, BAPPENAS: One of the biggest challenges is land acquisition. There is some progress being made on this front, and I have help from Gita, who I believe has discussed with the President that this issue is given more priority and speed. There is law on land acquisition for public use being drafted at the moment. The final draft should be ready by the close of 2010. Then it will be put to the parliament. After that we will have to meet with parliament and other interested bodies. We also have the new

Presidential Decree, number 30/2010, regarding co-operation between the government and the private sector in providing infrastructure. In that Presidential Decree, we changed the rules to make it so that all land should be free of ownership before we have an auction, because we have long experience in Indonesia if we don’t do that, then after we sign with investors, and have the financial close, the land is still not free to be developed because of continued ownership issues. Money and signatures are needed first. It is the National Land Agency (BPN) that has a responsibility to work out how to do this. The land required would not be bought by the government, but paid for initially by the government. If the project is financially viable then the government will be reimbursed by the investors.

Dedy Priatna Deputy Minister for Infrastructure Affairs Ministry of National Development Planning Agency (BAPPENAS)

Madhu Koneru, MEC Holdings: In India there is already a government policy where in any PPP; the government has to buy the land first. However, in this case, it is very important to understand what you are dealing with. It’s not about policy, who is going to pay, or who is going to reimburse whom. In MEC’s experience the first constraint is getting the people on your side. When you are dealing with the villagers in a remote area such as East Kutai, it is important to understand what is considered fair compensation. Money is not necessarily what the villagers want. I have heard stories of village women refusing cash because their husbands will just spend it. Instead, they may want projects that will help the development of the community. Projects they can be part of. We are talking about basic needs that have a long-term positive impact such as infrastructure, schools, clean water and 23

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healthcare. So buying land at a fair price is not necessarily the best way to gain the people’s trust. You need to listen to their needs and wants. If I can just mention something about my experience elsewhere: doing business in the Middle East and living there for a long time, as I have, there are some countries like Saudi Arabia and Abu Dhabi which have plenty of money, to say the least, yet they are still having issues with infrastructure. So

The President has given his backing to putting in place a ‘one gate’ policy, where there is a single, competent point of contact for investors to understand what the process of putting together a project would be

MEC he effectively played that role at the start of our Kalimantan Coal project and we went to him and said, ‘We are entitled to a licence, the Ministry of Public Works has to issue us this licence, we are ready to start land acquisition, please help us out’. Although, it was not his mandate he said, ‘Okay, I am going to go and talk to the Ministry about this’. In the first week of October, they no longer issued the licence and in April we started land acquisition. Many of the issues we have faced did not relate to BKPM, but Gita helped us anyway. It gave us a comfort level to keep moving. It is good to know that there is somebody behind you and who is there to support you. Just knowing you have this kind of support is more important than financial muscles or clear regulations. This is especially true for land acquisition.

going back to the question of payment: it is indeed not always about the money. It’s also not necessarily about policies, although that is important. In my experience, it comes down to having the right entrepreneurial skill sets and being in tune with local market conditions and needs of the people.

GW, BKPM: I don’t see creating relationships with ministries and agencies as a major issue now. We have sat down with them several times and we have a common understanding. With respect to toll roads, I think the big issue is that all the concessions have been given out to brokers and this is what I think the Minister of Public Works is having difficulty dealing with. He is aware he needs to determine a way of how to deal with brokers who have been sitting with all these concessions for 15 years and every time a Madhu or anybody comes to town say, “Yes, okay, you can have it; but give me 30 per cent”. That is what ruins Indonesia. That is not good for any of us.

We were talking earlier about the one gate policy, the ‘one stop shop’. Potentially with Gita at BKPM being the de facto single window for investors. For

Rakesh Bhatia, HSBC: There is a wider point about international perceptions of how well a country’s infrastructure development is working. I was reading


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roundtable indonesia 2011

a report recently on infrastructure development which looked at countries including Singapore, Hong Kong, China, India, Philippines, Malaysia, Thailand and of course Indonesia. They did a report and a ranking of the different countries. I was absolutely stunned that Indonesia, which ought to have a very high level of attractiveness from a market point of view in terms of potential, in terms of the ranking, the publication placed it below Pakistan. Cambodia was the only country lower. In order to have enough entrepreneurs willing to come this perception needs to change, and making it clear that basic infrastructure is being put in place is crucial. That is one, very important hurdle that needs to be crossed by the country. We do need to change this view, so that it doesn’t rank so low in future. Some of the things which have been just now discussed in terms of the infrastructure fund, the guarantee fund, and some of the other initiatives on land acquisition – all these will filter through, but it will take time for the perception to change. RISKS, FUNDING AND INDIA MK, MEC Holdings: I agree to a certain extent, but this is business. There are risks, and it is not correct to just blame the government’s actions, or lack of them, for an industry’s problems. There are risks in developed as well as developing countries. For instance, take the biggest mining companies in Australia. It is by any measure a very mature market. The stock market is very mature; it is a very safe investment environment. However recently, following comments made by the Prime Minister, mining companies’ stock prices fell by 40 to 50 per cent. Have we seen stability in policies in developed countries? It is the same problem when


it comes to infrastructure. It may be different types of risks, but risks exist in India, Indonesia and Australia. You can’t blame the government for all of these things. Having said that, in Australia the government says, ‘You can build this railway, but before you start the land acquisition you have to come and show us how you plan to acquire the land. If we like the process, then we will let you go and buy it’. Nobody says

The land required would not be bought by the government, but paid for initially by the government. If the project is financially viable then the government will be reimbursed by the investors that in Indonesia, it is just a matter of, ‘Go buy it; it’s your problem’. From an entrepreneurial point of view, there is inherent risk. For 40 years that is the business we have been in. If there is a mine in the middle of the forest, we are expected to go there, that is it. There is nothing dangerous about the infrastructure investment we are doing, like I said, it is what we do. The banks’ sentiment is important, too, and it can change. Two years ago a lot of banks said to me,

Madhu Koneru Executive Vice Chairman MEC Holdings

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‘This is risky. Whatever you are doing, you are going to lose all of your money’. In the last six months the same banks have been chasing us every day, saying ‘How can we buy this?’ The same bankers who two years ago said, ‘Sorry, this is not going to happen’. It’s a change of sentiment. Its driving India’s growth today and it is very important when coming into infrastructure projects in Indonesia. RB, HSBC: I just want to make two or three points from what Madhu said. There was a point in time, perhaps about 10 to 15 years back when even India had a very negative perception as well. There was the Enron Power Project where everything was signed, sealed, delivered and work started and then things were changed post facto. There was a huge negative perception to deal with in that. I agree that today there are still a lot of problems, so it is not as if the infrastructure in India is booming, but the general perception is a lot better. If you see the number of projects being done, it is much higher than what it used to be 10 years ago, although nowhere near close to what is required. So there are infrastructure problems almost everywhere. Until the government stands behind some highprofile projects, whether it is in China or in India or Indonesia, it becomes very difficult. In terms of the funding, the first thing is you need to have is enough foreign investors of the kind who are willing to be entrepreneurial. On the bank funding and financing, I agree, the banks have been very careful and cagey about committing in recent years. There are two or three issues around that; some of it is very well known from a legal perspective, Indonesia is a very difficult market to

assess. What will be the legal issues that will come up for such projects going forward? Also most of the funds from domestic banks – 80 to 90 per cent – are short term, so there is no long-term market from that financing stream to speak of. We start with an

In my experience, it comes down to having the right entrepreneurial skill sets and being in tune with local market conditions and needs of the people

Rakesh Bhatia Chief Executive Officer HSBC Indonesia

infrastructure fund with US$270 million, but India almost 20 – 25 years ago had IDBI, IFCI, ICICI, there were a number of local development institutions and perhaps that needs to be accelerated here. We need to put in place more local funding which can then be joined together with private funding, provided foreign entrepreneurs are willing to come in the numbers that we require. MK, MEC Holdings: I think it’s worth clarifying that if we are comparing the situation with what happens in India, we must recognise that Indian banks are very aggressive there. In fact, much more active than foreign banks. When you ask the international banks, ‘Why are you not participating in this project?’, they say they just cannot compete with the Indian banks because they are so big and so aggressive. At the moment, international banks 27

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have a big advantage in Indonesia because the local banks are not that aggressive. At least not when compared to Indian banks. I will give you an example. There are four or five Indonesian banks that came to us recently and expressed their interest to buy into this project. However, the

In terms of the infrastructure fund, the guarantee fund, and some of the other initiatives on land acquisition – all these will filter through, but it will take time for the perception to change problem was that they don’t have the necessary skill sets internally to put together proper project finance structures. I believe the local expertise will develop and that international banks will come in and structure deals in such a way that they take the lead, but get the local banks along with them so that they learn. RB, HSBC: It is absolutely true that there is a certain role that an international bank or international consultancy can play in terms of helping to structure deals and provide best practice. In terms of the deep pockets needed to fund eight to ten year plus projects, it is very difficult to compete with the local banks.


GW, BKPM: The liquidity is there, but the implementation is not. It boils down to two things: first, entrepreneurship as has already been said. Second, creating the right sentiment in the market. That takes country branding, and we have not done that in the way that India has, for instance. If that is what it takes for Indonesia to get coverage in the Financial Times or the New York Times in a good way, as opposed to being known as a country of natural disasters, corruption and people burning flags, then it needs to be done. The difference between Indonesia and India, as much as there is a lot of policy symmetry, is that India has been able to show do-ability. They are going to work 25 hours a day to get the cables installed, to get the oil and gas pumping through the pipes. That is what we need to show. It really boils down to just being able to show two, three or four projects that worked in Indonesia. Then you get the right branding, and an improved international profile. James Harris, Hogan Lovells: The way to achieve this is that you need to identify the most strategically important projects that can be done, but start simple. How these things will happen is through doing them. That’s how you get a good profile and good branding. We can sit around the table two or three times a year, and all agree what the clever approaches are, but it doesn’t mean anything until people actually within the line ministries, the executing agencies, are asking ‘What are the consequences if this or that happens? What do we need to factor into our RFP process? How do we evaluate bids? Do we have enough technical competence on the engineering side or the legal side or the financial side or the insurance side?’ In other words, until they are

James Harris Head of Infrastructure and Project Finance Hogan Lovells

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singing from same song sheet, it won’t happen. So you need to pick a few projects and get them done, and as I say, start simple. Keep the land issue as small as possible on these first ones, because that has been a big problem historically, so choose something like a process plant or a water treatment facility that doesn’t need a whole lot of land. Harness all of that. I would argue the same for the legal and regulatory aspects: you will always have a large number of lawyers saying ‘We’ll solve that for you’, but essentially you just want adapt models that have been used elsewhere and not try and reinvent the wheel. That can include putting together capacity building within government to develop the financial markets and to standardise things. Keep investors interested: 80 per cent of each deal should be the same as the previous one, so investors who have lost a bid last time round feel comfortable and confident enough to have another bid, because they are not going to have to spend another million or several millions just to participate. Furthermore, there needs to be somebody at a senior level who is a political champion, who inspires not only the people within the government, but also outside investors. He or she is the one who will be able to see the big picture and who will then marshal everything that is needed to get things done. Unless you have that champion, you are not going to get where you need to go. Finally, you also need to have a PR machine. Not only to improve banker sentiment and investor perception, but also public support for them.

That comes back to the international profile and branding issues we were talking about just now. Philippe Folliasson, PALYJA: I would agree on how critical it is for a country to have a showcase. I can say, though, that today micro-economically Indonesia is becoming much better regarded worldwide, so things can change. The long-term desire to develop PPP structures does require trust and media coverage and coverage with the authorities. It is not just about getting the money and then saying ‘goodbye’. You are going to have to stay in the country for 25 or 30 years, and perhaps even longer. It is a long-term partnership. The capital injection in the first place is one thing, but unless there is this trust and long-term cooperation, then it is going to be very difficult to make it work.

Philippe Folliasson President Director PALYJA

This is business. There are risks, and it is not correct to just blame the government’s actions, or lack of them, for an industry’s problems SR, IIGF: When it comes to PPP, I agree we need one or a few very good projects to showcase. We need to pick some good and workable projects, maybe one or two projects in every sector, as models to show that PPP schemes can work well in Indonesia. For IIGF, we are currently working along with the 29

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Ministry of Finance on the PPP coal-fired power plant in Central Java with project costs of US$3 billion, which is being helped by IFC. I believe this is a good PPP example in the energy sector, though we are struggling with the structure of the guarantees on the project, which are still pending the necessary presidential regulations. However, I can say that we are mostly going in a good direction – and I hope we can copy the model to other sectors. STRATEGIC INFRASTRUCTURE Jusuf Wibisana, PwC: I would like to classify infrastructure into two types. One is those investments that can be easily done because they are commercially viable. For example: energy, mining, telecommunications and water. The other category is infrastructure that probably is not commercially viable without adequate support from the government. The difficulty we have at the moment is how to identify the infrastructure which will certainly benefit Indonesia in the long term, but at the moment doesn’t guarantee adequate returns for investors. In that case we have to make an extra effort to invite investors and to give incentives in terms of the business, but also taxation incentives so that capital spending doesn’t expand. Infrastructure that is strategic is quite difficult to construct at the moment, but we need persistence. The obstacles are obvious. In Indonesia today, we have one small island, Java Island, with close to 140 million people living there, but we know the development of roads in Java Island is not that great. Probably all of Java will be so crowded and jammed within the next five years, if that is not


overcome, it may well then be very difficult to invest in infrastructure there in the next 10 years, because buildings and housing will be everywhere. How do you deal with these issues? If investment in the public sector in infrastructure, like toll roads, sanitation and public transportation is not viable from a micro perspective, then we need to prepare a feasibility study from a macro perspective. The feasibility study must be robust enough in order to highlight that even though from a corporate point of view, such investment in toll roads or in just common roads or in water and sanitation is not currently financially viable, from a macro perspective it is very viable indeed.

Local expertise will develop and that international banks will come in and structure deals in such a way that they take the lead, but get the local banks along with them so that they learn In that case, government can identify how much they must contribute in that specific project. All this is normal practice in other countries. Hongjoo Hahm, World Bank: There are two challenges to do with PPP: ownership and financing. First the ownership part. The government can come

Jusuf Wibisana Chairman PricewaterhouseCoopers Indonesia

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up with whatever scheme it wants to buy land, but the bottom line is you have to do it. The law has to change, but regulatory and implementing guidelines still take time, so guys like me just go out and do it themselves and that is the norm of Indonesia today. Can we change that? Can we for example

You are going to have to stay in the country for 25 or 30 years and perhaps even longer. It is a long-term partnership help create project appraisal documents, feasibility studies, EOIs and RFPs that are good? BAPPENAS has more than enough money to do something with that. It is a matter, however, of creating incentives for local government and state-owned enterprises (SOEs) to play this game, and play it all the way to the end. Not go a certain distance them jump out of this process, at the end or whenever they see fit, as we saw with the monorail, the MRT, and of projects that never came to fruition. The second part is the role of things that are not in your domain and you have to really harness, which is the Infrastructure Investment Fund (IIF), IIGF, among others. However, the issue for most of the strategically important infrastructure investment is lots of public support; then and only then would you get the right type of investor to make it a true partnership. Right now the amount of public support in the PPP structure is pretty much zero. If you can somehow focus on strategic

PPPs and on doing one or two deals and galvanise public backing, that is going to do a hell of a lot for Indonesia’s credibility. RB, HSBC: From a pure commercial, private enterprise perspective I have three comments to make. I read that in 2005, the government announced that they would do 120 infrastructure projects. From 2009 until now the report says none of them were done. That is a huge branding issue. That is your challenge really: if no project gets done, then it is very difficult to get and sustain external credibility. The second thing is while we agree we have to put up three or four big projects and not 120, we also need to see how the model will be scalable. Even with the best will in the world, if there are three great projects, it will still take 36 months to get them off the ground. If you

Hongjoo J Hahm Infrastructure Coordinator World Bank

We need to pick some good and workable projects, maybe one or two projects in every sector, as models to show that PPP schemes can work well in Indonesia need to do 120 projects, or whatever we have now declared, this US$150 billion of investment, if it takes three years to prove to the world that we can get the projects going, we have already lost 36 months. The third thing – what Madhu said earlier, 31

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if you can get private enterprise motivated, they will find a way. Governments find it very difficult to find a way whereas private enterprise does not.

that. That is where you are as a brand ambassador. Once the private sector, mainly the foreign private sector, gets motivated, things can happen.

GW, BKPM: I agree with you that it is going to take 36 months to get a project completed, but if, in the next six months, whatever framework we can carve for these three projects, is sound enough as to create confidence, then I can talk to the guys who are not as crazy as Madhu! Out of the 120 projects, none happened, but we need to

HH, World Bank: PPP in the infrastructure world is quite different from FDI and the target is not London, it is the line ministries, SOEs and the provinces. The biggest issue is that the risk for these guys to play the PPP market is very low and there are few disincentives for them to submit a poor project, there are no repercussions. That is why you have 120 projects that you have to wade through to figure out which one is the best shot.

We are currently working along with the Ministry of Finance on the PPP coal-fired power plant in Central Java with project costs of US$3 billion, which is being helped by IFC. I believe this is a good PPP example in the energy sector send a signal to everybody in London, New York, Washington DC, Tokyo, that there are these three projects that work and we, I think, can get a lot of people to be interested. RB, HSBC: There have been other projects in this country – there is a lot of investment which has happened, financed both from foreign investment and government investment. You can showcase


Adam Sack, IFC: In terms of pushing forward these three headline projects, it is important to push, but in the right way. There is no need for speed for speed’s sake, which was the mantra a while ago, because for example in the Central Java power plant there are some regulations that are needed. If you apply your political capital and the political capital of your allies in getting these regulations done, not only do you have one good deal, which is an excellent deal, but also you have the precedents in place to make replication much easier – push, but in the right way. The second, very quickly, is regarding the Ministry of Finance (MOF). IIGF will be the single window for guarantees, which is great, but we also need MOF, so really there should be a third seat because if a large guarantee is needed – it is going to need the balance sheet of the government. GW, BKPM: I sit down with Agus Martowardojo, Minister of Finance on a weekly basis. Agus understands the business and there is a much

Adam Sack Country Manager International Finance Corporation (IFC) Indonesia

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greater degree of connectivity with what needs to be addressed in the business world. I do agree, I think MOF needs to be part of the process. DP, BAPPENAS: I want to make some small corrections – Rakesh says that 120 projects have already been offered, but not one has happened. However, the mechanisms for these have been formed using international best practice. That is why they have not happened quite yet. However, we have a lot of projects with PLN, with Independent

The issue for most of the strategically important infrastructure investment is lots of public support Power Producers (IPPs), with toll roads, with public works and in the supply of drinking water that we can call PPP. We have 740 km of toll roads, we have 3,400 megawatts produced by IPPs, we have 25 drinking water PPPs already, and that is also including PALYJA. However, these happened before our adoption of international best practice, which we are doing now to ensure projects going forward are valid examples for international investors. Yet by following 100 per cent international best practice projects are taking a long time to happen. JW, PwC: One problem is that regulations are sometimes overlapping and even conflicting among regional governments and central government.

GW, BKPM: There will always be a perception of overlaps. I don’t think it can ever be perfect. However, that is not a total excuse. At least from a BKPM standpoint we are taking a 10 to 15 year view of the country. If I am talking to someone who is taking a three to six month view of the country, I am Indonesia – Critical success factors for improving infrastructure project delivery

Start simple • Eggs not all in one basket • Quick results • Clear the decks (old concessions) • Don't have land as a big component • Scaleable Political champion • Harnessing relationships and stakeholders

Public relations • Banker sentiment • Investor perception (track record and flexibility of government) • Public support (eg provincial road shows)

Execution • Bottom-up approach? • Recognise there is a 36-month time delay to financial close

Factor in all local (including cultural) aspects • Human elements

Sort out legal and regulatory aspects • Geothermal Central Java • Trans Java Highway • Water/port • Budgets needed • Government guarantee (from MoF and IGF) • Market confidence • Differentiate between commercially viable and inviable projects Capacity building • Incentivise line ministries to play the PPP game • Within GoI (proactive decision-markers) • To develop local financial markets • Standardise – FS – EOI – RFP

Source: Hogan Lovells 33

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talking to the wrong person. It is important for the person on the other side of the table to know that there is a positive trajectory here. It is easy to cling to the idea that there is an overlap of regulations,

We have 740 km of toll roads, we have 3,400 megawatts produced by IPPs, and we have 25 drinking water PPPs already but let’s not forget the earlier point about entrepreneurship here. If it is there, you will make no issue of whether or not there is a perception of overlap or whether or not there is in reality. It is a burden of one or two agencies or personalities within the government who can be the clearing house for this sort of feedback and this socialising, with all of the relevant interdepartmental personalities. Just show continual capacity building. SR, IIGF: Can I just raise the point of what incentives there are for each of the related ministries and other government agencies to deliver PPP infrastructure projects. We need to create an appropriate incentive system to ensure PPP infrastructure project delivery. We can start with the model projects first, then maybe we need to put it under the Presidential Working Unit for Supervision and Management of Development (UKP4) or the government monitoring unit to ensure it is progressing.


GW, BKPM: Well, we need to make sure that the institutional infrastructure, whether it is in BAPPENAS or BKPM, is ready from a budgetary standpoint and from a human resources point of view. I know a little bit about corporate finance and project finance, but we are going to need a team that is knowledgeable in project finance. Perhaps four months ago I knew nothing about PPP, but as soon as I sat down with some of you, then it started registering that this thing, if it doesn’t get accepted in a big way it is not going to happen and we could have three more infrastructure summits – we would be talking and dancing around the same issues. James has been a lot more diplomatic today than he has been in the past about some of the issues necessary to get the private sector involved in infrastructure.

From a BKPM standpoint we are taking a 10 to 15 year view of the country. If I am talking to someone who is taking a three to six month view of the country, I am talking to the wrong person JH, Hogan Lovells: If I can summarise to capture the themes that have come through in what people have said in terms of lifting it above the discussion and focussing on the elements that go towards creating

Sinthya Roesly Chief Executive Officer Indonesia Infrastructure Guarantee Fund (IIGF)

roundtable indonesia 2011

a road map to getting things done. I mentioned about starting simple. Rakesh, you talked about scaleability, I mentioned about keeping the land issue as simple and as straightforward as possible and everyone knows the land issue needs to be addressed. There are legislative steps in process to address that. It is great to have that happen and a possible push through. Political champion: that is a game changer, frankly. Someone who has an understanding of the private sector as well as public sector capacity. I talked earlier about the need for a PR campaign, internally as well as externally to get internal buyin as well as getting people at the grass-roots level on board. Various people also mentioned the idea of improving banker sentiment, investor perception, public support and including the local and cultural aspects. The legal and regulatory aspects are under way, thankfully they should mostly be there by the end of 2010. Capacity building – it is only really going to be as good as the weakest link, so you really need capacity building within government, particularly at the decision maker level. Create capacity building and people will then

be able to move that forward, as there is greater understanding of how this all works to developing financial markets. That has a tremendous spin-off, which the government may or may not even realise. The MAS, the Monetary Authority of Singapore, recognise this, and recognise they will be able to create a secondary market for projects, will be

Political champion: that is a game changer, frankly. Someone who has an understanding of the private sector as well as public sector capacity able to have project bonds, will be able to have multiple tiers of investors, and that creates a heck of a multiplier effect, bigger than just a couple of billion dollars on one power project. Also, it is hugely important to standardise things.

ROAD MAP Clear the decks • Make decisions and put things into action now • Start simple • Keep project land requirements small

Project preparation Implement: three projects • Legal and Regulatory • Central Java Power • Political champion (and support team) • Trans Java Highway • PR campaign • Others - Internal - Water - External - Port • Capacity building • Standardise things (and replicate)

Source: Hogan Lovells 35

roundtable indonesia 2011

PF, PALYJA: I think then the Jatiluhur project, to treat raw water near the Jatiluhur dam, bringing the bulk of the treated water 70km to Jakarta, would be an excellent project to do. BAPPENAS and the Ministry of Public Works support it, we already have the PPP takers and it is mature enough technically.

The legal and regulatory aspects are under way, thankfully they should mostly be there by the end of 2010 JH, Hogan Lovells: Also, you can also do the coalfired power plant in Central Java, which is twothirds of the way there, so that is an easy, huge bid that can happen long before your 36 month period. As to the Trans-Java Highway – I’m not sure how far along that is. Generically, a treatment plant would be easy, you get lots of international interest, as long as there is a piece of land in which they can build a water treatment facility with enough connectively you will have support. GW, BKPM: Unfortunately, we have to finally wrap up our debate now. I just want to say that this is probably one of, if not the most open democratic conversations we have had on infrastructure development and I have got a lot of mileage out of this, probably more than any conference I have attended on infrastructure this year and I’d like to thank Infrastructure Focus for organising this


debate today. We have had honest, straightforward comment from everybody around this table, to the extent that we know not only what the problems are, but the scale of each one of the problems and how best to move forward. I am a glass half full guy; I am not a glass half empty guy. Although there are limitations, with all the capital that we have accumulated, I do believe that if we work hard enough we can get things solved. There will be imperfections, I caution you, but we can keep on remedying those imperfections. If I could sum up for my part: what is important in all this is the spirit of entrepreneurship. Also, forming sentimental ownership on the part of an increasing number of participants, particularly from the banking community. Of course, then there is the importance of getting a proper regulatory framework in place. It is important for us to send

It is important for us to send the signal to the international community that we mean business, that we are changing the way the game is played the signal to the international community that we mean business, that we are changing the way the game is played. With government support, and from a funding standpoint with respect to key strategic anchor transactions, then we can get it done.

public private partnership business intelligence

public private partnership in indonesia PricewaterhouseCoopers provides analysis of how public and private sectors are working together to advance Indonesia’s infrastructure

Executive summary Providing suitable infrastructure is a core responsibility of any government, whether it is electricity, water, sanitation, roads and bridges, railways, seaports, airports, hospitals or schools. To meet the country’s economic growth target of 6-7 per cent per annum, the current Indonesian government has an aggressive infrastructure development plan calling for investment of approximately Rp1,429 trillion/US$150 billion (or 3 per cent of GDP) during 2010-2014. The Indonesian government estimates it can only currently finance about 31 per cent of this development plan and will be looking to the private sector to cover the gap through public private partnership (PPP). A PPP is a contract between government and the private sector for the provision of assets and delivery of services – often over the long term – that allocates responsibilities and business risks among the various partners. PPPs take a variety of forms, with varying degrees of public and private sector involvement – and varying levels of public and private sector risk. In fact, risk transfer from the public to the private sector is a critical element of all PPPs. The goal is to combine the best capabilities of the public and private sectors for mutual benefit. Indonesia’s PPP market is evolving. In today’s globally competitive market, it is important for Indonesia to develop the frameworks fundamental to the success of their PPP market, so that they can compete for investment. This article will detail these fundamentals before briefly drawing upon some of the recent experiences in the Indonesian market and concluding with a consideration of the most important next steps to progress.

PPP market fundamentals With the government’s ambitious pipeline of PPP projects it is important for the current administration to establish the appropriate systems and frameworks to allow PPPs to flourish. While PPPs are not new to Indonesia the systems and frameworks have evolved since the initial PPP projects in the early 1990s.

With the government’s ambitious pipeline of PPP projects it is important for the current administration to establish the appropriate systems and frameworks to allow PPPs to flourish

While outside the scope of this article it should be noted that the best frameworks will not overcome deficient macro-economic conditions such as weak currencies, high interest and inflation rates, and illiquid funding markets. Fortunately Indonesia has experienced relatively stable macro-economic conditions over the past five or more years, which facilitates investor confidence for investing in long-term infrastructure projects through a PPP framework. The following sections outline highly recommended and government-induced conditions that will enhance private sector interest in PPP infrastructure projects and build the foundations for a successful PPP program. Government commitment Ideally there should be an explicit policy that clearly commits government to the infrastructure program. Investors and sponsors will also look for a substantial program rather than one-off projects. Furthermore, they will look for assurances from the government that no projects will be developed in competition to their PPP. Government commitment is also fundamental to shaping public perceptions. Given the public are the end users, their widespread support plays a critical part in any infrastructure-related project. Without this support PPP projects can end prematurely. 37

public private partnership business intelligence

Legal framework Governments should construct a credible legal framework to facilitate a PPP strategy, addressing certain fundamental legal issues including: ■ laws protecting property rights against expropriation and nationalisation ■ a legal framework for intellectual property protection ■ contract enforceability ■ adequate corporate laws ■ legislation on leasing and financing ■ bankruptcy legislation ■ commercial banking and insurance legislation ■ environmental and labour laws. Furthermore, there may be a requirement for adequate security legislation to protect the additional types of security that are typically found in PPPs; for example, offshore revenue and retention accounts or performance undertakings from the government of the public agency’s obligations under the project agreement. To meet this end there should be legislation that can be introduced to promote foreign direct investment, principally to allow reasonably fluid access by people, equipment and finance into and out of the country without material impediments. A weak legal framework undermines the private sector’s confidence in the scope of their rights; this can result in extensive negotiations and thus lead to delays which drive up the cost of a PPP project. Administrative Framework Governments should construct a credible administrative framework empowering one government body with the legislative authority to originate and implement PPP projects. This body should be able to resolve


issues as they arise on projects in a timely manner. Such an organisation may undertake activities such as formulating policy, developing a program, defining procurement processes, assisting in evaluation and providing training. In addition to having an institutional body responsible for origination and management it is valuable to empower a separate organisation with the right of oversight. The ability to audit PPP projects allows for lessons to be learned and processes to be streamlined. Implementing a PPP program without these strong administrative frameworks can lead to the technical support and checks and balances outlined above not being appropriately applied. Fiscal framework Incentives and other forms of government support to encourage the private sector to participate in PPP projects, coupled with a pragmatic approach to riskreward issues, greatly enhance the attractiveness of a country’s PPP program to international sponsors. Tax incentives and concessions that are of specific benefit to PPPs have been implemented in many of the mature markets. Such support is of fundamental importance to the success of a PPP program and can extend to governments providing guarantees and stand-by financing. When considering the provision of a favourable fiscal framework it is important to consider the time frame of such support. A short-term solution runs the risk of distorting the market and when withdrawn can result in an economically unfeasible project; given the long-term nature of PPP projects a stable fiscal framework is necessary to encourage investment.

public private partnership business intelligence

Procurement process Private sector investors look for an orderly and transparent PPP procurement process, which will typically include: ■ a feasibility study to demonstrate economic viability, which will include confirmation that the project is affordable to government ■ a clear request for proposals ■ a transparent, well-defined bid process ■ a clear government commitment to conclude PPP deals within a reasonable time The procurement process must be capable of driving out an appropriate solution to the problem. As such, rather than being prescriptive, the process of awarding a PPP project must be dynamic, with the authority and the sponsors being able to engage in discussions. Improving the speed and transparency of a procurement process will encourage sponsors to bid on future projects, increasing competitive

Improving the speed and transparency of a procurement process will encourage sponsors to bid on future projects, increasing competitive tension and consequently ensuring best value for the government tension and consequently ensuring best value for the government. An uncompetitive procurement gives the private sector a far stronger negotiating position, which can not only result in increased cost to the government but also project delays as the private sector lacks any economic motivation for timeliness. Indonesia infrastructure market analysis The Indonesian government recognises that the provision of sufficient infrastructure, such as energy facilities, seaports, airports, railways and roads, is in line with its overarching goal of achieving faster economic growth; and is fundamental to its ability to attract foreign investment, support the growth of businesses and communities and reduce income inequality and poverty. According to the National Development Planning Board (Bappenas), around Rp1,429 trillion/ US$150 billion (or 3 per cent of GDP) will be needed for

infrastructure development during 2010-2014 to meet the country’s economic growth target of 67 per cent per annum during 2010-2014. Of this amount, the government budget can only cover around 31 per cent (or Rp451 trillion) of total planned infrastructure investment, leaving around 69 per cent (or Rp978 trillion) of the needed investments expected to come from the private sector under the PPP scheme. Bappenas has set up the Government and Private Sector Cooperation Center (PKPS) to facilitate cooperation in infrastructure projects between the government and private investors. The Bappenas “Public-Private Partnerships Infrastructure Projects in Indonesia 2010-2014” report shows 100 projects valued at around US$47.3 billion available under the PPP program. These include one marine transportation project ready for offer valued at US$36 million; 27 priority projects (18 toll roads, six water supply and three sanitation projects) valued at US$8.3 billion; and 72 other potential projects valued at US$38.9 billion. Private investor participation in the Indonesian infrastructure sector started in the early 1990s. By the end of 1997 it had attracted over US$20 billion in investment, dominated by electricity (US$10.2 billion), telecommunications (US$8.4 billion) and transport (US$2.1 billion). In the wake of the Asian financial crisis in the late 1990s and a much more competitive global PPP environment elsewhere, the government was forced to reassess its PPP framework to attract investment to Indonesia and compete with other countries. Regulatory reform was initiated with the purpose of allowing more competitive and transparent private sector participation in infrastructure development. Several challenges, however, hampered the progress in PPP development in Indonesia. The main impediments can be categorised as follows: ■ Political, legal and regulatory (decline in institutional strength and/or adverse policy or rule changes) ■ financial (unfavourable changes to the fiscal regime, inability to bill customers and collect cash) ■ construction and operation (environmental risks, land acquisition risks, social risks, water supply risks, construction risks, performance risks) ■ market risks (new entry, demand risks, price or service competition) Of all of these challenges, land acquisition remains the most significant challenge because of cost uncertainties and timing risk. The government has several initiatives in order to address these issues and to attract more private 39

public private partnership business intelligence

Below is a summary of services PwC can offer to both the public and private sectors Below is a summary of services PwC can offer to both the public and private sectors Serving the Public Sector Serving the Public Sector Feasibility Feasibility • Establish objectives and • Establish optimal riskand objectives allocation optimal risk • Identify suitable allocation projects • Identify suitable • Assess market projects appetite • Assess market • Design legal and appetite regulatory • Design legal and framework regulatory • Cost benefit framework analysis • Cost benefit • Prepare analysis outline public sector • Prepare outline comparator public sector • Project comparator management • Project

Marketing Marketing • Develop an attractive • Develop an package attractive • Prepare package marketing • Prepare information marketing • Identify potential information bidders potential • Identify • Discuss biddersproject with potential • Discuss project bidders and with potential obtain biddersfeedback and

Tender Tender • Design process • tender • Prepare Design process documents • Prepare tender • Develop documents evaluation • Develop criteria evaluation • Evaluate criteria bids from private • Evaluate bids sector from private • Interviews with sector bidders • Interviews with bidders

obtain feedback

Evaluation Evaluation • Risk analysis • for money • Value Risk analysis • • Affordability Value for money threshold • Affordability • Contractual threshold qualifications • Contractual • Deliverability qualifications of financing • Deliverability of • Negotiations with financing bidders and with • Negotiations financiers bidders and • Recommendation financiers of preferred bid • Recommendation

Implementation Implementation • Input to documentation • Input to • Supervision of documentation syndication of • Supervision /underwriting syndication process /underwriting • Place contract process • to • Assist Place up contract financial close • Assist up to financial close

of preferred bid

management Achieve best value for money - Optimise risk allocation - Ensure deliverability Achieve best value for money - Optimise risk allocation - Ensure deliverability Serving the Private Sector Serving the Private Sector Feasibility & bidding Feasibility & bidding • Risk analysis • • Financial Risk analysis modelling • Financial • Commercial modelling issues • • Contract Commercial issues structures • Contract • Funding options structures • Preparation of bid • Funding options document of bid • Preparation • Project document management • Project management

Financial structuring Financial structuring • Risk allocation • strategy • Funding Risk allocation – Bank debt • Funding strategy –– Leasing Bank debt –– Bonds Leasing –– Export Bonds credits –– Ratings Export credits and credit – Ratings enhancement and credit • Taxenhancement structuring • Security structure • Tax structuring • with • Negotiation Security structure public sectorwith • Negotiation counter-party public sector

Arranging finance Arranging

finance • Manage competition • Manage between funders competition • Negotiate term between funders sheets • Negotiate term • Bring sheetsin underwriters • Bring in –underwriters Banks –– Institutions Banks –– Bond Institutions underwriters – Bond underwriters


Optimise Funding Package to achieve a winning bid and maximise equity returns Optimise Funding Package to achieve a winning bid and maximise equity returns


Closing the deal Closing the deal • Completing financing • Completing documentation financing • Managing the due documentation diligence the process • Managing due –diligence Legal process –– Technical Legal –– Insurance Technical –– Modelling Insurance • Assist up to – Modelling financial close • Assist up to financial close

public private partnership business intelligence

sector participation. The initiatives regulatory reform and financial support.


Regulatory reform Indonesia expended efforts to improve the legal and regulatory framework at all levels. The umbrella regulations for each sector have been amended and are now more amiable to private investors. Perpres 13/2010, superseding Perpres 67/2005, provides a cross-sector regulatory framework for private sector participation in infrastructure projects. The framework provides a clear, transparent and accountable basis for PPP. Procurement of the PPP concessionaire or business licensee must be done on a competitive basis, and the unsolicited approach discouraged. It stipulates that proper due diligence must be conducted by the government contracting agencies (GCA) before any PPP project is put out to tender. Perpres 13/2010 keeps in place the fundamental principles laid down by Perpres 67/2005; however,

The Guarantee Fund functions as a commercially managed fund so that PPP investors will have more flexibility and will follow best commercial practices the amending regulation is an improvement to the PPP legal and regulatory framework. It clarifies the government support issue with direct government support being provided by the GCAs. Perpres 13/2010 also simplifies the PPP tendering process, and stipulates that the GCA should acquire land for a PPP project before it is tendered out. Financial support The government, through the Ministry of Finance (MOF), has established several financial instrument agencies to support the PPP program in the infrastructure sector. These are: ■ Land Capping Fund ■ Land Revolving Fund for land clearing ■ Guarantee Fund (PT PPI) ■ Infrastructure Fund (PT Sarana Multi Infrastructure – or PT SMI) Land Capping Fund The Land Capping Fund is currently available for toll road investors and provides private investors with downside risk protection should land acquisition

costs significantly exceed initial estimates. The government will cover any changes in land acquisition costs above 110 per cent of the agreed price in the Perjanjian Pengusahaan Jalan Tol or 2 per cent of investment costs, whichever is higher (Regulation of the Minister of Public Works No. 12/ PRT/M/2008). The Land Capping Fund is currently targeted at toll road projects but it is uncertain if a similar mechanism would be available for other non-toll road projects. Land Revolving Fund The Land Revolving Fund is to fund land acquisition for toll road projects. The government provides a revolving fund to acquire land in advance of a project and the fund will be reimbursed by investors once the land for one toll road section is acquired (Decree of the Minister of Finance No. 44/ KMK.05/2007). In 2010, the government provided Rp6 trillion (approximately US$667 million) for the land revolving fund for the trans Java and Jabodetabek toll roads. Guarantee Fund The Guarantee Fund is aimed at reducing the cost of finance to infrastructure projects in Indonesia. Investors will have to pay premiums for this coverage but it will likely be less than premiums charged by traditional insurance firms. The fund functions as a commercially managed fund so that PPP investors will have more flexibility and will follow best commercial practices. The Remote Management Unit (RMU) is in charge of designing the concept (ie setting up legal vehicle, identification of assets, obtaining technical assistance, procuring management fund). PT Penjaminan Infrastruktur Indonesia (PII) was recently established and will function as an insurer to private sector investors. PII is owned 100 per cent by the government with Rp1 trillion (approximately US$111 million) initial capital. PII is supported by multilateral agencies, including the World Bank, which will provide soft loans amounting to Rp1.5 trillion. PII has three main objectives: to reduce the cost of financing PPP infrastructure projects; to help the government in managing its fiscal risk by ring fencing government obligations against guarantees; and to improve the quality of PPP projects, establish a consistent framework and make decisions regarding provision of government guarantees to PPP projects. Infrastructure Fund The Infrastructure Fund aims to accelerate infrastructure funding through partnerships with the private sector or multilateral financial 41

public private partnership business intelligence

institutions. The source of funds is from national assets that are separate from the national budget. PT Sarana Multi Infrastruktur (SMI), a company for the infrastructure fund was established by the government on February 26, 2009. SMI is to function as the facilitator and catalyst for infrastructure development in Indonesia. The need for infrastructure funds is predicted to reach Rp1,429 trillion until 2014, while the government estimates it can only provide approximately Rp451 trillion of this amount. The World Bank and the Asian Development Bank (ADB) will contribute around Rp2 trillion (US$170 million) to help fund the country’s infrastructure development, which would be placed with the Infrastructure Fund. MOF through SMI established PT Indonesia Infrastructure Finance (IIF), an infrastructure financing company, on 15 January 2010. IIF establishment is to support the

Rp978 trillion, or 69 per cent of the needed investment, is expected to come from the private sector under the public private partnership scheme acceleration of commercially viable infrastructure projects including PPP projects in the infrastructure sector. IIF will forge a strong synergy with other previously formed institutions, such as SMI and PII. SMI will become the holding company for IIF. How can PwC help? PricewaterhouseCoopers in Indonesia (PwC Indonesia) offers a full range of advisory services for both public and private sector stakeholders in infrastructure development. Our Indonesia-based team is supported by a 550-plus strong global team of experts specialising in providing advice on large capital project procurement, project finance raising and refinancing, infrastructure strategy advice and developing complex payment mechanisms. We provide advice to public sector stakeholders to ensure the public sector achieves the best value for money and optimises risk allocation to ensure deliverability of an attractive investment package. While for private sector stakeholders we provide advice to ensure the investor wins the bid and maximises equity returns. Conclusions The long gestation period for the regulatory reform and financial support initiatives contributed to the


slow-down of PPPs in post-crisis Indonesia. Now that much of the regulatory reforms have taken place it’s a matter of whether the government’s internal institutional ability is capable of properly implementing and coordinating PPP activities. Recent pronouncements by the President and several ministers demonstrate the government’s seriousness about tackling Indonesia’s infrastructure deficiency through the use of PPPs, although proclamations alone will not guarantee success. Creating and implementing specific procedures and standard operating procedures for PPP activities across government, and capacity building and promotion of PPP within the various ministries and regional governments are key to the future progress of a sustainable and greatly expanded PPP program. We believe that with the right leadership and focus Indonesia can achieve its infrastructure needs through the PPP framework.

Contact details Agung Wiryawan Senior Manager Tel: +62 (0) 21 521 2901 Email: agung.wiryawan@

William Deertz Technical Advisor Tel: +62 (0) 21 521 2901 Email: william.deertz@

PricewaterhouseCoopers Indonesia

Plaza 89 Jl. H.R. Rasuna Said Kav. X-7 No.6 Jakarta 12940 Indonesia PricewaterhouseCoopers Indonesia is comprised of KAP Tanudiredja, Wibisana & Rekan, PT PricewaterhouseCoopers FAS and PT Prima Wahana Caraka, each of which is a separate legal entity and all of which together constitute the Indonesian member firm of the PricewaterhouseCoopers global network, which is collectively referred to as PricewaterhouseCoopers Indonesia.

Government & Politics



Supported by: The Government of Indonesia

Asia-Pacific Ministerial Conference for Infrastructure Development 2011

Developing Sustainable Infrastructure across the Provinces

Connecting Asia-Pacific through Sustainable Infrastructure

12 - 14 April 2011 Balai Sidang Jakarta Convention Center Jakarta, Indonesia

8-11 June 2011 IMPACT Convention Center Bangkok, Thailand

A KADIN Initiative Organized By: PT Infrastructure Asia Kantor Taman A9 Unit C7 Lt. 4 Kawasan Mega Kuningan, Jakarta 12950 - Indonesia T +62 21 576 4440 | F + 62 21 576 4552

Organized By: PT Infrastructure Asia Kantor Taman A9 Unit C7 Lt. 3 Kawasan Mega Kuningan, Jakarta 12950 - Indonesia T +62 21 576 4440 | F + 62 21 576 4552 UBM Asia (Thailand) Co Ltd. 503/23 KSL Tower 14th Floor Sri Ayuthaya Road Kwaeng Thanon Phayathai Khet Rajathewee, Bangkok 10400, Thailand T +66 0 2642 6911 | F +66 0 2642 6919-20

government & politics overview

Indonesia’s road to democracy From autocracy to democracy and centralisation to decentralisation, Indonesia has come a long way since the devastating Asian financial crisis of 1997 and 1998

Indonesia’s political stability, supported by steady growth in the past few years made the country, which is estimated to have a population of more than 240 million, one of the most attractive investment destinations throughout 2010.

Today the nation has emerged as one of the most stable democracies in Southeast Asia

The country’s current condition is in contrast to what some international analysts might have predicted back in 1997 and 1998. A number of important transformations took place within the last decade, the results of which are apparent in the Indonesia we see today. At the height of the Asian financial crisis, some saw a huge potential for division of the archipelagic nation, with its 17,000 islands stretching along the world’s equator in Southeast Asia and more than 300 ethnic groups, similar to what happened to Balkan countries in the 1990s to 2000s. However, the prediction was proven inaccurate. Today the nation has emerged as one of the most stable democracies in Southeast Asia, comparable to Thailand, Malaysia and the Philippines, despite the fact its population is much bigger and more diverse. One of the significant milestones that marked the country’s political history was when democracy was installed after the tenure of Soeharto, the second President who ruled the nation for more than three decades with an authoritarian style. He resigned in May 1998 following political and social unrest that caused riots that cost many lives in some parts of the country. The crisis unveiled Indonesia’s fragile economy, which relied on too much foreign debt, and was plagued with cronyism, corruption, as well as inefficient bureaucracy. 45

government & politics overview

Voices from the public calling for a wide structural reform in the government were getting stronger. The country has had four Presidents since and has a new face with reforms that have taken place in its bureaucratic as well as legal system. Decentralisation and democratic elections Soeharto’s successor, B.J. Habibie received the handover of power in May 1998 but lasted in office only until 1999. However, during his short term, he smoothed out the transition to democracy by paving the way for freedom of the press, delivering a revision of electoral law that allowed multi-party elections, and slashed the number of seats granted to the military faction at the higher house, known in Indonesia as the People Consultative Assembly (MPR).

Almost two million civil servants transferred to the provinces, regencies as well as municipalities from the capital city of Jakarta. They have control over more than 40 per cent of government expenditures Still under Habibie’s term, in May 1999, Indonesia’s lower house, the House of Representatives (DPR) passed new laws on regional autonomy as well as inter-governmental fiscal relations. The laws, which formed the embryo of regional autonomy and decentralisation, were the cause for almost two million civil servants transferred to the provinces, regencies as well as municipalities from the capital city of Jakarta. They have control over more than 40 per cent of government expenditures. In October 1999, Abdurrahman Wahid, an Islamic scholar with strong supporters from Nahdlatul Ulama, the nation’s biggest Muslim organisation won the presidency with Megawati Soekarnoputri, a daughter of Indonesia’s first President Soekarno, installed as Vice President. It was considered the first democratic election after the Soeharto regime, which from 1971 had only allowed three parties to contest them. Forty eight parties participated in the election. Wahid continued the reform agenda, including paving the way to giving more opportunities to the regions in managing their revenue and natural


resources, as well as policies aimed at increasing the welfare of the local people. He did not finish his term as political turmoil led to his impeachment by the MPR in July 2001. Megawati assumed his position, accompanied by Hamzah Haz, a politician from the United Development Party (PPP), as Vice President. Megawati, also, continued the reform mandate by pushing through constitutional changes that put term limits on the office of president. Incumbents can lead the country for a maximum of two terms of five years from no limit previously. The structure of the MPR was also changed. Non-elected seats were abolished and a new body was created, called the Local Representative Council (DPD), which is similar to the Senate in the United States. The DPD at that time represented 32 provinces of Indonesia. The council members are all elected through regional election and they represent the Indonesian provinces, with each province having four members. The other major change was Indonesia introduced direct presidential elections. In April 2004, Indonesia held an election for representatives at the national, provincial, as well as regency levels. Contestants were fighting for 550 seats at The House of Representatives and 128 seats at Regional Representatives Council. The results for the national representatives election came in with the Golkar party, the old political machine of the Soeharto regime, winning the largest number of votes by securing 21.6 per cent of the total 113 million votes, beating the PDIP led by Megawati, which secured 18 per cent. The rise of Yudhoyono Indonesia then had the first presidential election by the people in September 20, 2004. The shrinking popularity of Megawati’s party in the legislative election was also reflected in the presidential election. Megawati and her partner Hasyim Muzadi, who were endorsed by the PKB, lost the presidency and vice presidency to Susilo Bambang Yudhoyono and Jusuf Kalla. Yudhoyono’s popularity had previously skyrocketed after resigning from Megawati’s administration from the position of Coordinating Minister for Social, Politics and Security Affairs in March 2004 when the general election was nearing. Yudhoyono and Kalla defeated Megawati and Muzadi with 60.6 per cent of the total votes in the second round and Yudhoyono was installed as Indonesia’s sixth President on October 20, 2004. No major clashes, riots or violence emerged from this processes, which were previously feared by

government & politics overview

some observers. Foreign media, news agencies called the election ‘one of the most democratic’ in the world. Yudhoyono, who left the army to be fully engaged in a political career in 1999, galvanised support by creating a large coalition cabinet that catered to the interests of different parties. His partner Jusuf Kalla strengthened his administration’s political support when he was elected as the chairman of the Golkar party, which controlled the largest number of seats in the DPR. During his first term in 2004 to 2009, Yudhoyono impressed the majority of Indonesians. His decision to appoint reformist technocrats, including Sri Mulyani Indrawati and Boediono, to lead in the nation’s economic ship was proven to be a good one, and the administration have managed to bring growth to the economy of over five per cent annually on average between 2004 and 2009. Sri Mulyani was a former executive director at the International Monetary Fund (IMF) and Boediono, who was appointed as the chief economics minister, was previously the finance minister during Megawati era. He had been involved in the administration for more than a decade and advised government when it faced the difficult Asian financial crisis. A commodity price boom as well as healthy household spending, the backbone of the domestic economy, contributed strongly to growth. The country managed to post a targeted growth of four-and-a-half per cent in 2009 when neighbouring nations such as Singapore experienced recession due to the global financial crisis that ignited in 2008. Political stability, supported by positive macroeconomic indicators, led to the fastest take off in the wake of global recession after China and India and has brought the country on to the radar screens of global investors. However, the public has most appreciated efforts related to Yudhoyono’s massive anti-corruption campaigns to combat the graft-ridden activities inside the nation’s executive, legislative as well as judicial system, even at the lowest level. His fight against chronic corruption certainly made headlines in 2008. As the election loomed, the campaign indeed became a key political theme. The public were amazed when the country’s anti-graft body, known as KPK, repeatedly made spectacular arrests of corrupt officials in the upper echelons of government, of central bank officials, governors as well as lawmakers.

Yudhoyono’s challenge In July 2009, Indonesian voters trusted Yudhoyono for a second five-year term, now with Boediono as Vice President. The news underlined the message that the public was expecting, to see a continued strong economic growth and further bureaucratic reform. Yudhoyono-Boediono defeated two pairs of contestants - Megawati and Prabowo Subianto, former commander at the Army Special Forces Commande, known as Kopassus and Jusuf Kalla and Wiranto, former Army forces commander – via a single round. Yudhoyono’s grip at the DPR was stronger this time with his political machine the Democratic Party controlling about a quarter of the seats after April 2009’s legislative election. The early formation of the cabinet seemed promising with Vice President Boediono, who was known to share the same vision with re-appointed Finance Minister Sri Mulyani Indrawati and re-appointed Trade Minister Mari Elka Pangestu. The cabinet was strengthened by Kuntoro Mangkusubroto, a veteran bureaucrat, who led a new unit that would monitor performance of government bodies and solve bottlenecking issues often cited by investors. Sri Mulyani Indrawati made many bureaucratic reforms before she resigned from the cabinet in May 2010 to take a new position at the World Bank. Subsequently, Yudhoyono appointed Agus Martowardojo to her post. Martowardojo was previously the president director of PT Bank Mandiri, the nation’s largest lender by assets. He was famous for his tough stance in dealing with debtors that caused the bank to have bubbling bad loans. Analysts praised the decision, but it needs time now before he can prove his commitment in leading the reform and work started by Indrawati.

Yudhoyono’s popularity had previously skyrocketed after resigning from Megawati’s administration

Yudhoyono has also given serious attention to the position of the central bank governor, which has been vacant since Boediono joined his campaign back in 2009. He proposed Darmin Nasution, a former tax director general, who was well known as reformist. Lawmakers approved his nomination in July 2010. Now the battle continues to the next level, as Yudhoyono evaluates his cabinet’s performance at the time of writing this piece. Investors are still bullish about investing in Indonesia and Yudhoyono’s reformist agenda, but in the next few years Indonesia will have to answer this very important question: who will they trust to continue the country’s transformation and be the leader after Yudhoyono? 47

Infrastructure, connectivity and inclusive growth Gita Wirjawan, chairman of Indonesia’s Investment Coordinating Board (BKPM), tells the story of infrastructure in Indonesia and its strategic importance

Indonesia is known as the world’s largest Muslim nation, Asia’s largest exporter of energy resources, Southeast Asia’s largest economy, and the wealthiest country in terms of biodiversity, accounting for the largest share of the world’s most beautiful and breathtaking flora, fauna and ecosystems. Indonesia also is the world’s largest archipelago. Depending on the tide level, Indonesia is made up of around 14,000 to 17,500 islands, stretched across the distance between New York and London. About 9,000 of these islands are permanently inhabited, populated by different ethnic groups, which practice different customs and speak different dialects. Indonesia’s diversity has been a function of its dispersion.

Even now with newfound political and economic stability, Indonesia only spends 2.7 per cent of GDP on infrastructure However, life on an island can present limitations. Most importantly for many parts of Indonesia, remoteness constrains the movement of goods and services and of people who seek to contribute to the production of these goods and services. Simply put, Indonesia lacks infrastructure that can enable interconnectivity, allowing for broader participation in economic activity and more equitable sharing of its benefits. Decline in infrastructure spending In 1997, Indonesia spent 6.1 per cent of GDP on infrastructure. This falls in the range – 5-7 per cent of GDP – that the Commission on Growth and Development claims can achieve the economic growth rate that potentially delivers deep-reaching social benefits, such as alleviation of poverty and absorption of excess labour. However, by 2001 Indonesia’s spending fell sharply to 2.8 per cent of GDP, as a result of the toll wrought by a regional financial


crisis and fiscal pressures arising from rapid democratisation and decentralisation. In absence of the requisite level of investment, Indonesia’s infrastructure fell into disrepair. Even now with newfound political and economic stability, Indonesia only spends 2.7 per cent of GDP on infrastructure. This is lower than India, Malaysia, Thailand and Vietnam, regional peers that respectively spend around 3.6, 4.6, 6 and 5.9 per cent of GDP. It also pales in comparison to the aggressive investment China makes, at 7.3 per cent of GDP, in infrastructure. As one would expect, the difference in infrastructure spending is reflected in the gap in infrastructure quality. The Global Competitiveness Report has consistently shown that Indonesia fares rather poorly on infrastructure quality, even when compared to neighbouring Malaysia, which approximately 30 years ago looked to Indonesia as a model for catalysing economic development. Of the 133 countries ranked, that report now places Malaysia 17th for quality of roads, 16th for quality of seaports, and 17th for quality of railways, whereas Indonesia respectively ranks 105th, 104th and 58th in these categories. It is telling how the fortunes of countries can vastly change if they choose to continue to underinvest in their infrastructure needs.

Projections suggest Indonesia’s economy will hit US$1 trillion by 2014 and pass that of Japan by 2024 Deteriorating hard and soft assets Infrastructure is a broad term, encompassing different sectors. Increasingly, it is distinguished further by being categorised as either “hard” or “soft”. As is commonly understood, hard infrastructure refers to physical assets such as railways and toll

government & politics perspective

roads, while soft infrastructure describes less tangible assets such as quality of health and education. Both types of infrastructure are key to economic development. Indonesia unfortunately receives poor marks on both sides of the ledger. The following indicators are illustrative of how Indonesia remains a laggard in infrastructure: Electrification: Electricity powers homes and industry. China has around 800 gigawatts (GW) of power generation capacity and adds 70,000 to 90,000 megawatts (MW) per year, whereas India has more than 150 GW of power generation capacity and is targeting close to 16,000 MW per year in installation. By contrast Indonesia has 30 GW of power generation capacity and aims to add 3,000 MW per year. Roads: Roads connect nodes of economic activity. China has 3.5 million kilometres (km) of roads, whereas India has 3.3 million km of roads. Indonesia has 390,000 km of roads. While China has added tens of thousands of km of roads per year (69,000 km of roads in 2006 and 53,900 km of roads in 2007) and India is targeting 7,000 km of road construction per year, Indonesia is planning to build around 4,000 km of roads per year. Railways: Rail is an important intermodal link in trade. China has approximately 77,800 km of rail, whereas India has 64,000 km of rail. Indonesia has 8,500 km of rail. While China moves 2.2 billion tons-km of freight per year and India transports 480 million tonskm of freight per year, Indonesia moves just over 10 million tonskm of freight per year. Education: Education empowers people, producing a labour force equipped to face the challenges of modern business. In technical fields of study such as engineering, computer science and information technology, China mints 517,000 graduates with bachelor degrees per year and India produces 170,000 graduates with bachelor degrees per year. Indonesia produces about 65,000 graduates with bachelor degrees per year in these fields.

3.6 per cent of GDP on health. China has 1.5 doctors and 2.4 hospital beds per 1,000 people, whereas India has about 0.6 doctors and 0.9 hospital beds per 1,000 people. By contrast Indonesia only spends 2.5 per cent of GDP on health and has 0.1 doctors and 0.6 hospital beds per 1,000 people. Internet: In an increasingly networked world, internet access also increases productivity and contributes to GDP, particularly broadband access, which adds 1.38 percentage points to GDP for every 10 percentage point increase in broadband access. China has 30 per cent broadband penetration at 420 million connections and India has 7 per cent broadband penetration at 81 million connections, while Indonesia has 12 per cent broadband penetration at 30 million connections.

The cost of transporting a container from main industrial sites is twice that in Malaysia and Thailand The cost of Indonesia’s infrastructure gap is significant. Some facts about doing business in Indonesia are particularly astonishing: The price of a bag of cement in areas of one province in Indonesia is as high as 20 times that in another. Many commodities from certain provinces in Indonesia cannot be commercially processed on the main island of Java, and are ultimately canned abroad because it is cheaper to ship them to Malaysia. The cost of transporting a container from main industrial sites is twice that in Malaysia and Thailand. A truck on a round-trip from Bandung to Jakarta may spend up to 75 per cent of its time parked due to customs processes, warehouse delays, and lift-on and lift-off queues. Partly as a function of differences in quality of education and health, Indonesia has had 2.5 per cent growth in labour productivity, compared to China at 8.3 per cent and India at 5.1 per cent.

Given that the US is seen as a competitive destination for educational attainment, it also is notable that India has more than 100,000 students in the US in any given year and China has about 98,000 students there each year, while Indonesia has 7,000 students there in any given year.

In reaching for its target of at least 6.3 per cent GDP growth per year, Indonesia aims to attract around US$2 billion in investment per year. However, the largest share of this figure will come from foreign capital which is highly sensitive to these infrastructure cost considerations.

Health: Health clearly contributes to the productivity of labour. China spends 4.6 per cent of GDP on health, whereas India spends

As a result, to achieve this economic growth and ensure it is inclusive, benefiting as many households as possible across the 49

government & politics perspective

archipelago, Indonesia is focusing on investment in infrastructure, both for hard and soft assets. In fact, infrastructure development is one of Indonesia’s 11 national priorities over the medium term. Policy targets and reforms Indonesia is planning to spend about US$150 billion for infrastructure, spread across five years. This allocation for infrastructure averages to between 5 and 6 per cent of GDP per year. However, Indonesia only can account for between 2 and 4 per cent of GDP from state coffers.

Indonesia is planning to spend about US$150 billion on infrastructure, spread across five years This means that the lion’s share of the ramp-up in infrastructure spending will necessarily come from private capital. Because of the limitations in domestic financing capacity, particularly given the penchant of domestic banks to hoard liquidity, much of this spending furthermore will come from foreign sources. If private capital from domestic and foreign sources is successfully wedded for infrastructure roll out, that much-needed infusion would help achieve, among other targets, the following: ■ Install 15,000 MW in power generation capacity by 2014. ■ Increase electrification ratio from 62 per cent in 2010 to 80 per cent in 2014. ■ Reduce transmission line losses to less than 10 per cent. ■ Pave close to 20,000 km of additional roads by 2014. ■ Grow domestic air travel by 9.7 per cent per year and foreign air travel by 12.3 per cent per year. ■ Expand access to drinkable water to 70 per cent by 2014. ■ Increase internet penetration to at least 50 per cent by 2014. ■ Increase broadband penetration to at least 30 per cent by 2014. This disproportionate emphasis on the development of hard assets stems from studies suggesting that the crowding-in effect of infrastructure development mainly comes from their availability. An extensive network of roads and reliable supply of electricity, for instance, tends to better pull in private capital over the short term than a healthy and educated labour force considered in isolation. Therefore, while it is certainly welcome news that Indonesia has allocated 20 per cent of its state budget to education and is liberalising the health services sector, there also remains a fundamental need to build the roads, power plants and railways necessary to get large-scale industrialisation off the ground.

projects. Public monies have been set aside for this task. Now Indonesia is clarifying risk allocation, streamlining government agency execution and strengthening its legal framework for the efficient deployment of those funds. Momentum for this structural reform has been built and sustained by wholesale changes in processes, including simplification of permit and licensing applications, electronic automation of several investment procedures, coordinated action between central and regional governments and research-driven, service-oriented investment promotion and facilitation, to name just a few. When all of this change takes shape and full effect, it will maximise Indonesia’s economic potential and open the door to more investment prospects, as economic opportunities usually increase in tandem with rising economic prosperity, for which infrastructure and interconnectivity act as twin engines. Infrastructure as development strategy However, that door will not remain open forever. Indeed, Indonesia’s economic size and continued growth, even in the grips of a global recession, have recaptured investor attention. With political, monetary and fiscal stability, its future – with projections of the economy hitting US$1 trillion by 2014 and passing that of Japan by 2024 – looks bright, boosting confidence in the country as a premier investment destination. Despite the enthusiasm, with some analysts going as far as to argue that Indonesia is the next natural investment destination after China, history has demonstrated that Indonesia can fall spectacularly off its economic trajectory if critical investment in infrastructure is not made. Continued poor management of infrastructure assets also will have the effect of hampering economic performance.

Reconfiguring Indonesia’s economic composition from agriculture to industrialisation to knowledge-driven services will raise per capita income from US$2,000 in 2009 to US$18,000 by 2030 Now Indonesia sees that infrastructure and interconnectivity are vital to expanding the opportunity set for private capital and to enhancing returns for follow-on investments.

Reconfiguring Indonesia’s economic composition from agriculture to industrialisation to knowledge-driven services will raise per capita income from US$2,000 in 2009 to US$18,000 by 2030. Infrastructure and interconnectivity are absolutely critical to a process leading to higher standards of living.

However, the sector is being elevated to serve as a central pillar of policymaking not only because it will accelerate growth but also because it will help distribute its benefits across the population at large.

One policy thrust Indonesia is pushing through the pipeline toward this end is restructuring its public private partnership (PPP) model, a common financing scheme for infrastructure

Indonesia is therefore taking infrastructure development very seriously. The sector has become a key component of Indonesia’s present development strategy for achieving inclusive growth.


government & politics interview

Djoko Kirmanto Minister of Public Works


Djoko Kirmanto: I was born in 1943 and raised in a small village called Pengging in Central Java. After completing my higher education at the civil engineering department, faculty of engineering, Universitas Gadjah Mada Yogyakarta, I started work as a site engineer of the Bridge Abutment Construction in 1969 and then went on to become a public servant and a government employee at the Department (now the Ministry) of Public Works in January 1970. I also received a postgraduate diploma from the Institute for Water Education (IHE) in Delft, the Netherlands, and was awarded a Doctor Honoris Causa (Dr. HC) in Water Resource Engineering from Diponegoro University in Semarang City. Throughout my own professional career, I was a government employee at this Ministry, which means that from 1970 until 2003 when I retired from the Ministry, I participated in the 33 years of this Ministry’s evolution. My last position at the Ministry was as a Secretary General, the highest government administration

Under our new Presidential regulation we listed 15 toll road projects. For many investors, toll roads are the preferred investment because we already have a long history of toll road development

of infrastructure and construction projects. The experiences gained during my work as a government employee have helped me sensitise myself to the current and future challenges in the public works sector. Developmental challenges and priorities IF: Can you please tell us which sectors are the most important for Indonesian infrastructure development and where the Ministry of Public Works is most heavily involved? DK: Looking ahead to our future development challenges, I believe infrastructure will be the key to our social and economic progress. Not only does it help us in addressing the Millennium Development Goals (MDGs), but also in ensuring that goods and services produced by our country are competitive in the global market. Provision of clean water and adequate sanitation facilities will be instrumental in achieving MDGs by 2015, our irrigation is important in securing food and energy resilience, transport infrastructure enables growth and distributes social and economic opportunities to our community. We are also responsible for flood control and mitigation of/adaptation to the impact of climate change, mainly on waste treatment and peat-land. Water resources, human settlement and road development are the mandate and currently the largest portfolio of the Ministry of Public Works.

position. After retiring from the Ministry, I was appointed as a Commissioner and Supervisor of the State Owned Companies in Housing, PERUMNAS Public Company and a private property development company.

Another important field that we are responsible for is the development, implementation and monitoring of the national and island-based spatial plans. We also have an agency to promote and develop Indonesia’s construction industry to be competitive in the domestic and international market.

Most of my government career has been in the water resource sector and later in the human settlement sector, and I have been involved in policy development and program implementation

IF: At the Infrastructure Asia conference in April 2010 you announced 27 priority projects available for private investors: including 18 toll roads and three water projects. 51

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Can you please give us an example of a project from each category to help illustrate the technical and financial scale of the projects currently on offer? DK: In the area of economic development, Indonesia is facing a serious challenge in reducing our distribution costs. We need to address this issue strategically and effectively at the same time. Our road network is currently responsible for accommodating more than 90 per cent of people and commodity flows. The disruption of traffic flows will lead to inefficiency that in turn will make our goods and services uncompetitive. The development of Indonesia’s toll road system will address this issue and relieve some of the burdens from the farmers and the industry. Obviously other transport projects such as airports, railway lines, seaports and inland waterways are necessary to sustain the economic growth that we want to achieve in the longer term. Investing in the infrastructure development with assistance from the private sector will help us targeting our limited financial resources; ie government budgets at places and projects which are economically and socially feasible but not financially justified. We plan to build 3,087.8 km of toll roads as part of the national network. 741.9 km of roads are in operation and 768.65 km are

The Umbulan Water Project aims at producing 4,000 litres of water per second at an investment cost of US$204.20 million. Our estimate of the project’s financial IRR is 14.54 per cent with a 25 years concession period under the concession agreement. We are currently constructing 152.47 km of toll roads while the remainder is in the process of land acquisition and preparation. Out of the 18 toll roads offered during the Infrastructure Asia Conference, seven of them are in Jakarta aiming at facilitating through traffic and movement of goods to Tanjung Priok port. Five of them are in West Java as parts of the Trans Java toll road network. Others are located in Sumatra, East Java and Bali. Under our new Presidential regulation, however, we listed 15 toll road projects instead of 18 projects. For many investors, toll roads so far are the preferred investment because we already have a long history of toll road development. Using an estimate exchange rate of US$1 = Rp10,000, the project size ranges from US$102.15 million for 15 km (Pasir Koja - Soreang, West Java) to US$976.07 million for 22.9 km (SunterRawa Buaya-Batu Ceper, Jakarta and West Java). Their traffic levels are between 9,500 and 22,200 vehicles per day. With the growing demand for land transport, we are confident that the


Career defining moment I have served as a Minister of Public Works in President Susilo Bambang Yudhoyono’s Cabinet since 2004. We have accomplished several major projects during 2004-2010 of which we are very proud. I can mention some of them: Keuliling Dam in Aceh, Suramadu Bridge connecting Java and Madura Islands, community empowerment programs targeting poor communities in urban and rural areas, four toll road segments of Waru – Juanda Airport, Cipularang II Phase and Kanci – Pejagan in West Java, and W II toll roads as well as a few sections of the Jakarta Outer Ring Road as a part of the Jabodetabek connectivity program. Motivation My work and my enthusiasm are always with development issues. I believe that a development progress should be based on a thorough understanding of engineering and technology solutions. Through understanding the physics and the environment, we can plan and design with our future not against the forces of the nature, but with them. In civil engineering we work directly with the people. It is the people that we serve with our built environment. Biggest challenge faced Human development is a complex undertaking. It is why understanding development process is a life-long learning. Climate change and environmental sustainability are now in our development agenda, besides strengthening our local economy as well as food, energy and water resilience. Our infrastructure should address those challenges with a wellgoverned public expenditure. We need to continuously change in response to the internal and external challenges, be more accountable in our spending, and contribute better in our development process. At the project implementation level, the biggest hurdle is still land acquisition. We are working with the governors, mayors and local government officials to overcome the difficulties in acquiring land for our infrastructure. However, I believe that we are now making progress in developing a law and regulations allowing an elegant land acquisition process for public purpose. Most interesting project For me, every project has its own challenge and beauty. Most important lesson in business We should work together with the stakeholders. We need to address the needs of the users and beneficiaries of our infrastructure. We have to treat the private sector as our development partner. Also, we need to make sure that our scarce resources such as our pristine environment, precious human resources, available technology and financial resources should be utilised for the best built environment we can pursue.

government & politics interview

toll road investors, once they have them constructed and up and running, will enjoy profitable business during concession periods. Now, on to the water sector. The provision of clean water is basically a responsibility of local governments. Indonesian government has stated in the medium-term development plan that by 2014, 10 million new water connections should be achieved. This will be undertaken through, among other things, central and local government partnership and public private partnership (PPP) schemes. Three water projects you mentioned are proposed by local government to be financed as PPP projects. However, since we have the mandate for developing Indonesia’s water sector, our role is to facilitate and promote PPP schemes for water projects. Our BPPSPAM will supervise and assist local government or local water companies to plan and set up concession agreement schemes for the proposal. One of the most promising projects is perhaps Umbulan Water Project, located in East Java serving the greater Surabaya region, one of the fastest growing regions in Indonesia. The project aims at producing 4,000 litres of water per second at an investment cost of US$204.20 million. Our estimate of the project’s financial Internal Rate of Return (IRR) is 14.54 per cent with a 25 years concession period. PPP projects IF: Why are the projects classified as “Priority Projects”? From an investor’s perspective, how do they differ from other infrastructure projects you have planned? DK: We have actually three categories of PPP project when it comes to, for example, toll roads. Under the new Presidential Regulation (PR No. 13/2010), those three categories are: (1) ready for tender, (2) priority projects and (3) potential projects. The difference is on the status of land acquisition and feasibility analysis. Projects that are in the category (1) have their feasibility study completed and all required lands already acquired. At the moment we do not have category (1) PPP projects. Priority projects or category (2) projects are projects that are parts of government toll road development plans and have their feasibility study completed, but the required land has not been totally acquired.

Land capping facilities are provided when the cost of land acquisition exceeds the earlier estimate Category (3) or potential projects have undergone pre-feasibility study. A full feasibility study is required if they want to be upgraded as priority projects. IF: The majority of these projects are toll road projects. Can you give us a good example of where private sector participation is working in this sector? DK: PPP projects are dynamic in nature. They evolve in accordance with the regulatory environment that was developed 53

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to meet the government policy objectives. It is not easy to compare various toll projects and give them “good” and “bad” labels, since they might be developed in different business and regulatory environments. The earliest toll, Jagorawi toll road operated by PT Jasa Marga Tbk, is perhaps an example of a financially feasible project and one that is technically well designed. The quality of the pavement and alignment is well above the other existing toll roads. However, Jagorawi toll road is an exceptional case because of its history as the first generation of Indonesian toll road that cannot be replicated elsewhere. We have an example of privately funded toll roads such as Kanci – Pejagan that was on schedule. The investor was very active in developing a partnership with both central and local government agencies to ensure the land acquisition schedule was kept on time. Another example is Semarang – Solo toll road that demonstrates local government initiative in promoting PPP. PT Jasa Marga Tbk and a local-government-owned investment company formed a joint-venture toll road company constructing and operating the toll road connecting Semarang and Solo city. The project is progressing well despite the adjustment made on the schedule to start constructing the Solo – Bawen segment. All of the examples I mentioned illustrate that although we do have some obstacles in implementing PPP projects, we are pretty sure that the toll road business is still a profitable business for infrastructure investors. Improving the environment for investment IF: How has the government improved the way it interacts with foreign investors? What new facilities are now in place to make investing in Indonesian infrastructure easier? Specifically, what has the government done regarding capital financing and land acquisition? Please also tell us more about the APBN fund? DK: We believe we are making progress in several aspects. The previous Presidential Regulation No. 65/2006 has been amended with Presidential Regulation No. 13/2010, which we hope can give a clearer guidance for investors when it comes to the contracting authority. The new structure of the Ministry of Public Works is also more investor friendly and clearer by separating the PPP policy making agency and toll road authority. We have secured funding for land acquisition in the form of the Public Service Agency (Badan Layanan Umum) which we can use to purchase land and then receive funding from investors when land acquisition completed. Land capping facilities are provided when the cost of land acquisition exceeds the earlier estimate (currently set at 10 per cent above the agreed initial estimate). We are making progress on the 24 stalled toll road projects by issuing a Ministerial


Decree allowing further analysis of the (revised) project’s financial feasibility and evaluation of the financial health of the toll companies. Already two newly established companies specialising in infrastructure investment and guarantee assist several projects. PT Sarana Multi Infrastruktur (PT SMI) and its subsidiary company PT Indonesia Infrastructure Finance are already developing a partnership with several project proponents. PT Penjaminan Infrastruktur Indonesia is now in operation to provide guarantees for several production risks. Now, let me also talk about the government budget. In the past five years, the budget for the Ministry increased from Rp13.74 trillion in 2005 and reached more than Rp40 trillion in 2009. Our budget for the next five years will be increasing to reach an estimate of Rp62.12 trillion by the year 2014. The road

In the next five years the infrastructure sector must attract another Rp173 trillion, mainly in toll road projects, to sustain and support our 6.3-6.8 per cent annual economic growth target development budget is the largest portfolio, followed by human settlement and water resources. Even with such a significant budget increase, the BAPPENAS forecast reveals that in the next five years the sector must attract another Rp173 trillion, mainly in toll road projects to sustain and support our 6.3-6.8 per cent annual economic growth target. IF: How has the role of the Ministry of Public Works evolved under the policy of decentralisation? How do you see it developing in the future? DK: Decentralisation of infrastructure development has been our commitment, even before 1998 when the historic Law 22/1998 on decentralisation was enacted. We have decentralised provincial, district/city and village roads. Human settlement infrastructure is mostly the responsibility of district/city governments. Water resource management and flood control requires cooperation from different local governments, and therefore the concept of one river one management is promoted throughout Indonesia. Already several financial schemes can be utilised for local governments’ infrastructure financing. The Ministry of Finance has developed an infrastructure Special Allocation Fund (DAK) and also local government grants available for infrastructure development at district/city level. We see our role as an enabler and a facilitator for strengthening the role of local governments in managing their infrastructure assets. We are providing technical assistance and funding support to help local governments in developing their public sector investment plans, including infrastructure investment plans.

government & politics interview

Darwin Zahedy Saleh


Minister of Energy and Mineral Resources

Infrastructure Focus: The energy sector is a very exciting area in Indonesia today. Can you please give us an idea of the scale and diversity of opportunities in the energy sector in Indonesia? Darwin Zahedy Saleh: The energy sector continues to play the important role in the Indonesian economy, particularly in supplying energy and feedstocks. Moreover, the sector is also a main source for state revenue and a major area for investment. Energy investment has grown significantly, supported by favourable energy commodity prices. This also indicates that the investment climate in Indonesia remains conducive. Indonesia has several comparative advantages for attracting investment in the energy sector. It is endowed with energy resources and potential yet to be exploited and it is also a large energy market. In addition to that, Indonesia is also the main backbone for the Trans ASEAN Gas Pipelines and ASEAN Power Grid. There are many potential areas for investment in the energy sector in Indonesia. On the upstream side, there are opportunities in the exploration and exploitation of oil, gas, coal and coal bed methane (CBM), including the services industry and in carbon capture and storage implementation. On the downstream side, various investment opportunities are available in oil and gas pipelines, power generation, oil refineries, LPG processing plants. The government has established a series of fiscal and non-fiscal incentives for investment. Among others, they include exemption of duty on imported goods for upstream oil, gas and geothermal activities. Certain fiscal and non-fiscal incentives on marginal oil field development projects, as well as on power generation, have been also introduced. In line with those incentives, the government is also developing more streamlined bureaucracy and supporting contract sanctity. Opportunities in geothermal, gas markets and renewables IF: Indonesia has the world’s largest geothermal reserves. Can you tell us about your goals for developing the geothermal industry in Indonesia and how you will go

about achieving them? How is this market developing? DZS: Indonesia has a huge geothermal potential, at more than 28,000 megawatts (MW) – which is around 40 per cent of world total geothermal potential. However, the existing installed capacity of geothermal is only about 1,200 MW, or a tiny 4.2 per cent of the available potential. Development of geothermal energy is much in need, to cope with the increasing demand for power generation to improve energy security and to support economic growth. To that end, the government has committed to enhance the total capacity of geothermal power plants. To realise the commitment, as stated in the national energy policy, the government has set the road map for geothermal development, targeting projected total capacity of geothermal power plants at 9,500 MW by 2025. In this regard, implementation of the Secondphase Fast Track Development programme of 10,000 MW has also included 3,977 MW of geothermal power plants. Several regulations have been issued to create a conducive business climate in geothermal development, including Law No. 27/2003 on Geothermal, government Regulation No. 59/2007 on Geothermal Business Activities and Ministerial Decree No. 32/2009 on Ceiling Purchasing Price of Geothermal Power Plant by PT PLN (Persero). IF: Since 2007 the government has campaigned to replace the use of kerosene with natural gas. This campaign has worked well, with universal completion expected in a year or two. Not only has this saved billions of dollars each year in reduced kerosene subsidy costs, but it is creating big demand issues and Indonesia has huge natural gas reserves. Can you tell us more about the opportunities in the gas sector (coalbed, shale-bed, etc) and about your plans to develop these reserves? What projects involve the private sector today? DZS: Total conventional and unconventional gas resources in Indonesia are currently estimated at over 700 TCF (trillion cubic feet). Through firm commitment and creative initiatives, we 55

government & politics interview

believe that we will be able to utilise those resources and reach the target of 25 per cent share of natural gas in the national energy mix by 2025. In addition to the continuous exploration and development of conventional natural resources, to meet the robust expansion of domestic gas demand we promote the development of nonconventional gas, especially coal bed methane (CBM). The estimated resource of CBM is 453 TCF and currently there are already 20 CBM production sharing contracts (PSCs). IF: What other sectors within energy and natural resources are priorities for development? In what ways can private investors become involved? DZS: Currently, we are prioritising renewable energy, including biofuel where Indonesia also has a big potential. To boost biofuel development, we have issued Ministry Regulations No 32/2009 concerning mandatory utilisation of biofuels. We have targeted biodiesel utilisation to reach 20 per cent in transportation, industry and commercial and power plant sectors by 2025, while utilisation of bioethanol is targeted at 15 per cent in the same sectors. We encourage the private sector to invest in biodiesel and bioethanol production and to increase the utilisation of biofuels in industrial sectors. Tariffs IF: Tariff level is one of the issues investors use to gauge whether there is sufficient risk reward for them. How do you see tariff levels evolving? How will you ensure investment opportunities are viable and competitive? DZS: In the electricity sector, tariff level is not an issue for investors. Although the tariff is set up by government below its economic value, government gives margin to the state operator (PT PLN) through the subsidy scheme, hence equalising the electricity selling price to its economic value. In the oil and gas sector we offer several incentives for investors, such as the Value Added Tax Break (PPN DTP), during the exploration phase (upstream) and incentives to investors in


constructing new refineries (downstream). The same condition could also be applied in the biofuels industry. As for coal pricing, the regulation no tariff which is recently applied to CCoW/PKP2B includes a mechanism of coal price approval for each contract. The government coal price analysis for these coal companies refers to International Coal Price Reference (ICPR). The government issues a monthly average coal price and circulates it to local governments as a reference for all coal mining companies in Indonesia. Public private partnerships IF: How do you see the PPP market evolving? DZS: The public private partnership (PPP) scheme is a feature often endorsed by multilateral development agencies and foreign donors to accelerate economic growth. This scheme is to engage the private sector in the development of the main economic sectors protected by Article 33 of the 1945

Indonesia has a huge geothermal potential, at more than 28,000 megawatts – which is around 40 per cent of world total geothermal potential Constitution of the Republic of Indonesia, which states that such sectors must be controlled by the state. Under the PPP scheme, the Indonesian government remains in control of such vital sectors, but would manage to maximally accumulate the required capital and expertise from the private sectors for its development. The PPP market currently has not evolved as the government wishes it to do, among other reasons due to issues on risk allocation and tariffs. The government has put the acceleration of PPP implementation in the current national development plan.

government & politics interview

Freddy Numberi Minister of Transportation


Infrastructure Focus: Indonesia is the biggest archipelago state in the world. What are the transport challenges this situation creates? Freddy Numberi: I think it’s clear that a well-functioning transport system is one of the basic, necessary elements of infrastructure for any nation – and especially a country like Indonesia, which aims to grow its economy quickly in the coming years. We simply need to put in place good transport infrastructure. Apart from basic economic development needs, there is the fact that Indonesia is a huge nation: the largest archipelago in the world, spanning over 4,500 kilometres from east to west, with five main islands and some 30 smaller archipelagos. That is a total of about 17,500 islands, so you can see what the challenges might be. Imagine trying to transport goods and services, not to mention people, across these sort of distances without adequate transport links! Furthermore, we need to put in place all the main types of transport system: road and rail, of course, but especially sea transport, which, given the physical nature of Indonesia and its desire to increase foreign trade, is going to be crucial. It is a sad fact that the weak transport infrastructure that we have at the moment is becoming a real problem for Indonesia and it is effectively putting a break on economic growth. So what do we need to do? Well, we need lots of investment in the coming years. However, I believe we will not be able to finance it all out of government coffers; we need to get private capital involved too. For years, however, the amount of private capital flowing into the sector has been quite small compared with the market size and domestic demand for transport infrastructure. Total investment in the transport sector amounted to US$177 billion, yet the state budget allocation could only cover seven per cent of the total. Therefore, to fill this gap is the most challenging task we face. air transport IF: In December 2009 you requested that Indonesia be permitted to delay its full participation in the “open-sky” policy among members of the Association of Southeast

Asian Nations (ASEAN). Could you please tell us the reasons behind this decision? FN: The roadmap for integration of ASEAN Air Travel Services consists of the Roadmap ASEAN Multilateral Agreement on the Full Liberalisation of Air Freight Services and ASEAN Multilateral Agreement on Air Services. The goal is to achieve a single aviation market across the countries involved by 2015. This roadmap was signed by all members of the ASEAN countries on May 20, 2009, including Indonesia. The point behind the creation of a single market is to boost economic activity and ease of movement among the countries. We hope it will lead to gains in trade, investment and tourism. It is a central plank of the sort of coherent transport system we are aiming to create. So why are we asking to delay? Well, alongside this opportunity there are some significant threats that we must take into account.

Indonesia is a huge nation: the largest archipelago in the world, spanning over 4,500 kilometres from east to west, with five main islands and some 30 smaller archipelagos. That is a total of about 17,500 islands, so you can see what the challenges might be The main one is that once an open skies agreement is reached, competition between national airlines becomes that much more intense. So the main reason for us delaying the agreement is that we feel our national air carriers still need some time to prepare 57

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themselves for the inevitable increase in competition from neighbouring countries’ carriers. Furthermore, shuttle tariffs will be higher than multi-leg tariffs (meaning connecting flights). Moreover, there is still a weakness in the oversight policy for direct and indirect investment in air transport, so foreign airlines could potentially control the national market, which is something we do not want to see happen. This delay does not mean that we want to be continually protected from competition, far from it, we just need more time to provide a step-by-step strategy for us to fully participate in the open sky policy. At the moment, we have decided that among 29 international airports in Indonesia, only five will be suited for the open sky arrangement. (Based on Ministerial Decree Number 11 of 2010 on National Airport Structure, there are 29 international airports in Indonesia, among them five main international airports, 28 regional international airports, 11 haji airports and seven cargo international airports). We will have work to do here as well. The stages for the ASEAN Multilateral Agreement on the Full Liberalisation of Air Freight Services consists of: ■ The

ASEAN memorandum of understanding on air freight services (in place since November 2004) with seven designated airports; Batam, Biak, Balikpapan, Makassar, Manado, Pelembang and Pontianak.

■ The

Multilateral Agreement on the Full Liberalisation of Air Freight Services and its implementing protocol, which consists of: l Protocol 1 – Full liberalisation (third, fourth and fifth freedoms) among designated cities in the ASEAN region. l Protocol 2 – Full liberalisation (third, fourth and fifth freedoms) among international airports in the ASEAN region based on ratification. The stages for ASEAN Multilateral Agreement on Air Services (MAAS) consists of: l Protocol 1 – Unlimited third and fourth freedom traffic rights within the ASEAN sub-region (IMT-GT: Medan, Banda Aceh, Padang, Nias; BIMP-EAGA: Menado, Pontianak, Tarakan, Balikpapan). l Protocol 2 – Unlimited fifth freedom traffic rights within the ASEAN sub-region. l Protocol 3 – Unlimited third and fourth freedom traffic rights between ASEAN sub-regions. l Protocol 4 – Unlimited fifth freedom traffic rights between ASEAN sub-regions. l Protocol 5 – Unlimited third and fourth freedom traffic rights between ASEAN capital cities. l Protocol 6 – Unlimited fifth freedom traffic rights between ASEAN capital cities.

IF: What are the main challenges linked to air transport? Could you please give us an outline of both the international and domestic levels? FN: The main challenges surrounding air transport (especially for pioneer flights) is the number of planes available and the existing airport capability in place. For international and domestic flights, in some airports, the fire fighting is not suitable for the airport classification, for example. It is worth briefly outlining the network of international flights from March 28, 2010 to October 30, 2010, just to give you an idea of where we stand: ■

By domestic airlines: 14 cities in Indonesia, 24 foreign cities, 11 airlines (nine passenger carriers and two cargo operators). ■ By international airlines: 15 cities in Indonesia, 37 foreign cities, 45 airlines (37 passenger carriers and eight cargo operators). In addition, the situation with regard to the network of domestic flights over a similar period is: 183 routes, 87 cities, 16 airlines. And the pioneer flights situation is: 118 routes, 117 cities, 14 provinces. Developing land transport IF: How do you propose to develop land transport, given the geographical nature of Indonesia? FN: At the moment, land transport is the dominant mode of transport in the country and accounts for about 92 per cent of

The energy and transport sectors are two extremely important sectors for the economic life of this country. A good transport system will support the development of the energy sector and vice versa

The next stages to ASEAN Single Aviation Market 2015 is ASEAN’s Multilateral Agreement on the Full Liberalisation of Passenger Air Services (MAFLPAS), which consists of: l Protocol 1 – Unlimited third and fourth freedom traffic rights between all ASEAN cities. l Protocol 2 – Unlimited third, fourth and fifth freedom traffic rights between all ASEAN cities.


the distribution of goods. In addition, 84 per cent of domestic passengers are served by this sector. The vision and mission of land transport are the following: ■

Vision: To be a professional governmental organisation that can facilitate and support the mobility of people, through land transport services, which guarantee the values of humanity and justice, security, safety, quality, high levels of competition, providing value-added benefits and integration with other transport modes. ■ Mission: Creating a system of land transport services that is safe, secure, and reachable by all communities within areas all over Indonesia. A key thing we need to do is to create competitiveness within the sector. We need to encourage the road transport industry to behave in a transparent and accountable way. Also, we need to build the

government & politics interview

and services that exist throughout the country, all of which, as I have argued, support economic growth. ■ To upgrade or complete any deficiencies that may exist in each system, in line with a defined strategic level of service and other requirements which are specific to each region. ■ To develop the land transport infrastructure in terms of facilities and services. ■ The education and training of staff. Overall, we need to improve the infrastructure of the road transport system based on a high basic minimum standard, so as to improve overall road safety and increase the accessibility of this particular public service for the whole community – principally by means of pioneer buses. The ferry system needs looking at as well. It needs a lot of work doing on it to develop it to a satisfactory standard. As with the roads, the existing infrastructure needs quite a bit of rehabilitation in order to bring it up to a good standard. For example, we need to help in the provision of up-to-date navigation equipment for the ferry transport facilities, especially in isolated regions and along the border.

transport infrastructure in such a way that it is properly integrated with other forms of transport – airlines, railways and shipping. In order to achieve the above vision and mission, I will describe our plans for land transportation improvement: ■

The development of traffic and road transport facilities and infrastructure; the implementation of high level management systems; good traffic engineering and traffic safety facilities installed on all road transport facilities; and the development of road transport nodes. ■ The development of inland waterways infrastructure, facilities, and their management. ■ To develop urban transport by creating a master plan for urban transport; a master plan for an urban traffic information system; a Bus Rapid Transit (BRT) system including school buses; and a fuel conversion facility as well as an urban public transport gasification program. ■ The management and improvement of a transport safety system with the implementation of land transport safety policies, including the enactment of certain technical guidelines for land transport safety; putting certain monitoring and evaluation systems in place to oversee land transport safety; the enactment of a master plan for road traffic safety and also the enactment of a master plan for inland waterways with a Five Es approach (engineering, education, enforcement, encouragement and emergencies). IF: What are you current priorities? FN: Our current developmental priorities are: ■ To

maintain and rehabilitate the existing transport infrastructure in Indonesia, continually working on the facilities

Additionally, the government’s strategy is to accelerate the development of the land transport sector by means of continuous investment by the central government, especially in noncommercial areas. We also want to request that local government participates in the development of land transport affairs as much as possible in order to decrease the financial burden on central government. Finally, it is imperative that we do all we

We face growing demands for speed, reliability, efficiency, and highly effective competition from the rest of the world. In a united world, a national transport system can be looked at as a subsystem of regional and global networks can to encourage private sector companies to get involved in the whole process of developing a transport system fit for the 21st century. Government money alone can not achieve the significant outcomes we want. Make no mistake; the government is intently focused on creating the right sort of framework for these public private partnerships (PPPs) to flourish. IF: What most excites you about the transport sector in Indonesia today? And what are the biggest challenges it faces? FN: Increasing the ability of the exporting sector of the economy to power the country’s economic growth. Exports are extremely important, as you know. Second, helping to bring about the development of more sustainable forms of energy. To do this we need to look at tailoring certain aspects of the transport infrastructure accordingly. Put another way, it means we cannot 59

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look at any part of the transport infrastructure in isolation from the wider economy, and from certain significant sectors within it. And that goes for our place in a globalised world as well. We need to be looking at Indonesia’s transport infrastructure not just in a national context. Our integration with the rest of the world needs to be taken into account as well. We face growing demands for speed, reliability, efficiency, and highly effective competition from the rest of the world. In a united world, a national transport

Once investors see that PPPs can work in this country, other projects will come along. I am confident of it. I think you will see much activity in the near future system can be looked at as a subsystem of regional and global networks. It all has to work together; and of course none of it will work like this without a coordinated approach from both public and private sectors. The right regulatory frameworks have to be put in place. IF: What is the role of the Minister of Transportation for the 21st century? FN: The role is essentially that of strategic planning. It involves dealing with globalisation and, in Indonesia’s case, the decentralisation of government. The challenges and the demands are not easy or simple. The problems faced by each transport sub-sector are complex and dynamic. Therefore, serious attention and thought is needed to improve our human resources. The Ministry of Transportation needs to prepare education and training programmes in order to have a competent and professional workforce. The development of Indonesian society, in particular the economic life of the nation, needs to be supported by a highly competent transport infrastructure. We do not have this at the moment, but I hope I have outlined some of the ways in which we have been putting plans in place, and continue to do so. We are certainly making progress. private participation in transport infrastructure IF: What do you believe are the biggest transport projects open for private participation at the moment? FN: The details of transport projects open for private participation are listed in the PPP book launched in April 2010 during the Asia Pacific Ministerial Conference (APMC). Some of the projects listed are as following; ■

Tourism Port Of Tanah Ampo Profile 2010, with an estimated project cost of US$16 million. Project Status: Ready to offer ■ Shipping Lane Development of Belawan Port, North Sumatra province with an estimated project cost of US$4.94 billion. Project Status: Potential


Business Plan of Kertajati Airport-Majalengka with an estimated project cost of US$2.16 billion. Project Status: Potential ■ Bojonegoro Port Development Plan with an estimated project cost of US$1 billion. Project Status: Potential IF: Transport has been identified together with energy as one of the two sectors that require the most investment. How do you see private sector participation and PPP projects developing in Indonesia? FN: The energy and transport sectors are indeed two extremely important sectors for the economic life of this country. A good transport system will support the development of the energy sector and vice versa. The more progress you have in the wider economy, the more energy is consumed and the more you need a viable transport infrastructure in order to facilitate its smooth flowing. So it’s clear that these are two sectors that need, if not the most investment, then something approaching that. Just to give you a bit of background: the PPP concept was introduced in early 1990 (Presidential Decree No.37/1992 on private electricity; Presidential Decree No.55/1993 on land acquisition). It covers toll roads, water, electricity generation, and the port sector. Between 1998 and 2004, this concept was in a consolidation period following the Asian financial crisis, which had some obvious effects on the ability and desire of private sector companies to get involved. Changes in the Indonesian political system had an impact as well. In other words, we can say that the progress of PPP projects in Indonesia until 2004 was very slow. I think this is changing. Based on our experience during the periods mentioned above, the government has now laid the foundations for PPP project implementation through widescale policy and regulatory reform in order to meet international best practices. In 2005, for example, the Indonesia Infrastructure Summit was launched, followed by the Infrastructure Forum in 2006. The latest measure we have put in place is the establishment of a guarantee fund for infrastructure projects known as the IIFF (Indonesian Infrastructure Facilities Fund) and the IIGF (Indonesian Infrastructure Guaranty Fund). Within these institutional frameworks, the government is working with the World Bank and the International Finance Corporation to create investment vehicles. The aim is to introduce financing options to attract private capital. I am confident that this will happen. The focus now has to be on seeing the development of infrastructure as a partnership between the public and private spheres. There is no other way, I believe, that we can achieve the ambitious goals we have set ourselves without this sort of relationship. Luckily, it seems clear that there is a strong interest out there, in the private sector, in the sorts of PPP projects that are on the table; and with many endeavours such as this, success will breed success. Once investors see that PPPs can work in this country, other projects will come along. I am confident of it. I think you will see much activity in the near future.

government & politics interview

Tifatul Sembiring


Minister of Communication and Information

Infrastructure Focus: In April 2010, you announced the construction of 50,000km of new fibre optic cables. Please update us on its progress. Tifatul Sembiring: This is a new version for Indonesian connection. We have more than 17,000 islands, but we have five main islands. The five biggest islands of Sumatra, Java, Borneo, Sulawesi and Bali are already connected. We want to expand this network to include the other islands. Three months ago we started on the first stage, from Mataram in West Nusa Tenggara to Kupang in East Nusa Tenggara, Bali, which I think is already finished. From there we want to hook it up with Makassar to make a loop. From there we go from Manado to Ternate, North Maluku to Papua and make another loop. After that we will connect Makassar to Kendari, Kendari to Ambon, and Ambon to Papua. Then we connect Kupang to Darwin, where we want to have an alternate route to the United States. At present, we only have one route to the US, which runs from Jakarta to Singapore to Taiwan to the US. When an earthquake happens in Taiwan, it disrupts all of our services. If we have another connection, we have another alternative to reach the US. Developing partnerships for communication infrastructure IF: Recently you declared that a US$3.6 billion investment would be needed in the telecommunications industry over the next two years for communication infrastructure. Are there any special partnerships going on with this? TS: There is the Palappa Ring Project. Another project we have is to develop another 25,000km in ring villages, so 100 internet villages will go online. The Palappa Ring Project will actually be built by the private sector, and not by the Government. It is a public private partnership (PPP) initiative and the only one

currently operating under that structure. However, on the other side, we also want to build Cybercity. IF: Why do you think this project is so important for Indonesia? TS: All of our islands are home to natural resources. In Papua, for example, there is gold, copper, gas and oil. However, we have a vision of how to connect all of our islands, and information is very important for us. A relatively small investment in one area of ‘I-City’ can increase the local economy by three to five per cent. This is very important for us, especially for the border areas. In Kalimantan, we have a lengthy border with Malaysia, but our people near the border do not receive information from Jakarta. They get it from Malaysia because there are no connections. We have five satellites to connect to television, communications and the internet, but it is not enough. We also want to increase

We want to connect another 10,000km. Although, this will not come from the state budget. It has to come from the private sector speed. The population of Java makes up more than 64 per cent of the national population. In Sumatra it is 20 per cent, 5.4 per cent on Kalimantan, 7.6 per cent in Sulawesi, and only 1 per cent in Papua. The digital fight between populated cities is very high. We want to solve that. Policing the internet IF: What about regulating the internet? How are you planning on introducing controls there? 61

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TS: The internet today is very important for our young generation, for our students, for our researchers and for our workers. So we are trying to increase the quality, speed and connectivity. One solution, or the backbone of it, is the fibre optic submarine cable with support from satellites. However, we also want to promote a ‘healthy internet’. I think globally, it is a problem that we are facing for our young generation. During the last survey conducted by the child protection community, the results they brought back were truly surprising. The research carried out in 12 big cities and on 4,500 junior high school and senior high school students found that 97 per cent of teenagers have accessed or viewed pornographic material. Foreign investment: open and closed shops IF: Investment in telecom towers in Indonesia remains closed to foreign investors. What is the reasoning behind that? TS: For towers, this is true. It is closed. The volume of I-City business in Indonesia from 2009 to 2010 was more than 3 trillion rupiah, or about US$30 billion. Our capital expenditure was between 70 trillion rupiah and 80 trillion rupiah. However, more than 90 per cent of that was going back to foreign interests. The tower business is only two per cent of that total. It is not a high technology deal. We have the steel, the resources, and the builders. It is very simple. IF: Is there room for a private company to come in and provide that service, by using that network? TS: The talent is more for the operators. It is done by the foreign companies. The biggest player here is Hwa Hwe, and the second is Ericsson. In February I visited Sweden, and I asked Ericsson to move their branch office from Malaysia to Indonesia, and they agreed. I also asked them to recruit our workers, our local people and local partners. Ericsson agreed to these requests.


We want to stimulate the local content industry. If you make a line from Indonesia to other countries with a fibre optic submarine cable, all of them go to the United States. I think this is the

We have a lengthy border with Malaysia, but our people near the border do not receive information from Jakarta. They get it from Malaysia because there are no connections problem. Most of the content comes from the US; HBO, Cinemax, Google, Yahoo and Facebook. There is no local content. IF: Do you have any other comments on the telecommunication sector? TS: I think the development of the I-City is a trend technology. It is a creative industry, with no pollution. It is a challenge for us to create a new industry like this. However, Indonesia still needs more infrastructure. From Mataram to Kupang is about 1,200km and it will cost about US$600 million. We want to connect another 10,000km. Although, this will not come from the state budget. It has to come from the private sector. It will have to be a 100 per cent private sector investment. Granted, they will use it. However, the advantage for Indonesia is we will have the connection, the speed, and the communication. In Lombok, when we launched the Ringing village, we had a teleconference call with a farmer. He was so happy. He said, ‘Thank you so very much’, because they used to have to bring the vegetables and other agriculture products into the city to be seen. They had to walk about 14 kilometres to get there. But now they just call and confirm.

government & politics interview

Armida Alisjahbana Minister of National Development Planning and Head of Bappenas


Infrastructure Focus: What are the main challenges facing the government in infrastructure provision and how is the government acting to create a better investment climate for the private sector? Armida Alisjahbana: Government budget limitation is one of challenges in infrastructure provision; it is estimated that the government is only able to provide Rp510 trillion (36 per cent of the total investment requirement) over the next five years. Government has been encouraging private sector participation through public private partnership (PPP) in infrastructure provision, which is economically and financially viable. Lack of institutional capacity in developing PPP projects is a challenge. Another challenge is the low interest of domestic capital resources to finance infrastructure projects. Indonesia is looking for Rp920 trillion private sector investment in infrastructure. These funds would be channeled to several institutions that support the streamlined PPP process. Government is now in the process of finalising an integrated government support scheme consisting of the Land Fund, Guarantee Fund and Infrastructure Investment Fund. The Fund, Guarantee Fund,Fund, and Infrastructure TheGovernment’s Goverment’sLand Land Fund, Guarantee and Infrastructure now support the procurement process Fund now supportFund the procurement process Government

Land fund

Guarantee fund (PT. PII)

Land acquisition & clearance

Cost recovery/ policy risks



Capital market and regulatory reform

Cost of

Infrastructure fund (PT. SM-IIFF)

Project financing


Private investor/ Lenders



We have invited investor participation in designing, financing and operating in many areas of infrastructure projects. Significant efforts have been done to attract private sector participation, such as: ■ Provision of government support in Anggaran Pendapatan dan Belanja Negara (APBN) (the Indonesian state budget): 44.3 per cent of infrastructure financing is under PPP schemes (Rp407 trillion out of Rp918 trillion). 30 per cent of Rp407 trillion (Rp122 trillion) committed for government support. ■ Encouraging PPP Book implementation. ■ Institutional strengthening: P3CU and PPP Nodes. ■ PPP process streamlining. ■ PDF revolving fund development. ■ Utilisation of Infrastructure Fund, Guarantee Fund, Land Revolving and Land Capping Fund. IF: What are the key sectors of infrastructure development in the short to medium term in Indonesia? How are you balancing the requirements of both economic and social infrastructure development? AA: Infrastructure sectors that will be provided for in the short to medium term in Indonesia are: roads and bridges, water supply, solid waste, air transportation, marine transportation, land

Lack of institutional capacity in developing PPP projects is a challenge. Another challenge is the low interest of domestic capital resources to finance infrastructure projects transportation, railways, telecommunications, power, oil and gas. Government budget and private investors will fund development of infrastructure services. Infrastructure projects that are able

Source: BAPPENAS 63

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to exercise full cost recovery will be developed through public private partnerships (PPP) schemes, while others will be funded by the government budget. As the government could efficiently spend the budget for infrastructure, more funds can be allocated for social infrastructure, such as education and health. However, there has been lots of discussion to exercise PPP schemes in the social infrastructure arena too. IF: Please give us an example of a recent initiative that portrays how the infrastructure market is developing in Indonesia? AA: Central Java Independent Power Producer (IPP) is one example of a PPP project implemented under the new regulatory

PPP ready projects are PPP projects that already have tender documentation, market sounding reports, PPP procurement schedules and government support PPP framework (Presidential Regulation Number 67/2005 and Presidential Regulation Number 13/2010). The project is offering a Build Own Operate (BOO)/Build Operate Transfer (BOT) scheme. Investors are invited for financing, designing, constructing, operating and maintaining the project. The project will consist of a coal-fired power plant and associated facilities. The plant size is expected to be up to 2,000 megawatts (MW). The project forms part of the Power Development Plan Electric Power Supply Business Plan (RUPTL) for the period 2009-2018. The PPP Book IF: Bappenas published the public private partnerships (PPP) book, detailing projects on offer to the private sector. Can you please tell us more about the profile of the projects contained in the PPP Book and projects currently on offer? AA: The PPP Book contains PPP infrastructure projects that are regulated by Presidential Regulations No.67/2005 and No.13/2010 regarding public private partnerships on infrastructure provision. The PPP infrastructure projects in this book are divided into three categories: potential project, priority project and project ready for offer. Potential projects are projects planned by government but still need pre-feasibility documentation and risk analysis completed, while priority projects are projects that already have prefeasibility studies, PPP modality, risk analysis and government support (if necessary). PPP ready projects are PPP projects that already have tender documentation, market sounding reports, PPP procurement schedules, and government support (if necessary). PPP infrastructure projects that have or will be offered soon are an IPP for Central Java (2,000 megawatts); Airport Sukarno-Hatta


– Manggarai Railway; Puruk Cahu – Bangkuang Railway (Central Kalimantan); Tanah Ampo Cruise Terminal (Bali); Waste to Energy Gedebage (West Java); and Umbulan Spring Water Supply project. Initiatives and regulatory change IF: We understand you met with Lawrence Greenwood, Vice President of the Asian Development Bank, in March 2010, and one of the areas of discussion was co-operation on the development of PPP schemes. Can you please tell us more about the development of PPP schemes in Indonesia? AA: The government, with support from the Asia Development Bank (ADB), has been implementing the Infrastructure Reform Sector Development Project (IRSDP) to assist the line ministries and local government to prepare PPP projects in infrastructure development. The government is aware that such large-scale private sector participation (PSP) – preferably through PPPs – cannot be taken for granted, unless serious structural and institutional reforms are implemented. Broad-ranging policy reforms are critical to improve the investment climate, including: ■ liberalising markets to allow competition and entry by new service providers ■ improving legal and regulatory certainty and strengthening regulatory arrangements ■ introducing tariff regimes based on full cost recovery or providing compensation to meet public service obligations (PSOs) ■ establishing effective mechanisms for dispute resolution Since the 2000s, the government has conducted some efforts to include the policy and regulatory reforms, and launched the infrastructure development program. On the cross-sector level, the government has issued a number of regulations. The Presidential Regulation (Perpres) No.67/2005 provides greater certainty to the private sector by clearing the rules of game, providing the legal framework for all projects - those that are

The government is aware that such large-scale private sector participation – preferably through PPPs – cannot be taken for granted, unless serious structural and institutional reforms are implemented under the responsibility of the national government or contracting agency as well as those that come under the purview of local governments. This Presidential Regulation has been revised to Presidential Regulation No.13/2010 to tackle debottlenecking infrastructure provision, which has not been solved by the old Presidential Regulation. The Minister of Finance Decree No.38/ PMK.01/2006 also provides clearer project risk allocation and risk

government & politics interview

guarantees. In addition, the Perpres No.65/2006 and No.36/2005 have provided a clear direction and mechanism in land acquisition process. The government Regulation No.8/2007 provides greater opportunities for the central and regional government in supporting the private sector. Additionally, Law No.32/2003 gives greater responsibility to the regional/local government in planning, financing, implementation and management of local infrastructure services. Recently, new laws in rail, ports, airports, land transport and electricity have been issued to represent a greater shift toward private sector participation in infrastructure. However, the progress of transaction and implementation of development is still below expectation. One factor that affects it is the lack of adequate preparation of PPP projects, such as the absence of adequate and reliable technical and financial information, particularly detailed analysis of risk sharing and government contributions. Without the possibility of such support, reputable investors, especially from overseas, will continue to be wary of investing. In order to address the lack of project preparation - which also occurs in the bidding process, and hampers effective risk allocation - and to create a more conducive investment climate for PPP in infrastructure, the government with the ADB’s support established the Infrastructure Reform Sector Development Project (IRSDP); this is under the management of the Project Management Unit (PMU) at Bappenas. One of the IRSDP’s objectives is to provide the Project Development Facility (PDF), a project preparation service provided by Bappenas, to assist in selection of appropriate private partners in infrastructure services. The PDF will ensure project preparation and transaction will meet PPP principles: transparency, accountability, competition and public-private

equality. The PDF will retain consultants to assist the line ministries and local governments in PPP project preparations. The Indonesia Infrastructure Fund Facility IF: Can you tell us about the Indonesia Infrastructure Fund Facility (IIFF)? How does it work, and what role is it playing today? AA: IIFF is to serve as a leading catalyst in the national infrastructure development acceleration program. Its roles are: To become a strategic partner of government in promoting and accelerating infrastructure development growth in Indonesia To establish synergies with third parties - eg private institutions, the banking sector, local governments, state-owned enterprises or multilateral organisations - in order to increase the capacity of the infrastructure fund. Please refer to the accompanying diagram to see how it works. IF: What important developments are planned that global investors and infrastructure companies should be aware of when considering Indonesia investment potential? How is Indonesia becoming a more attractive investment location? AA: Government has issued Presidential Regulation No.13/2010 which revises the Presidential Regulation No.67/2005 to overcome bottlenecks in infrastructure provision. It is also part of a comprehensive plan to facilitate an investment climate that encourages the participation of the private sector in the provision of infrastructure, while protecting and securing the needs of the consumer, community and private enterprise. The government is also working on land acquisition regulation, which has been one of the impediments in infrastructure development. Indonesia is ready to be a more attractive investment country by preparing investment schemes, procedures and providing a climate that best accommodates international practices.

How the Indonesia Infrastructure Fund Facilities (IIFF) works


US$200 million US$200 million subsidiary loan

Equity: IDR1 trillion

Loan from multilateral agencies (World Bank & ADB) @ US$100 million each

PT SMI IDR600 billion* *Paid up capital IDR40.3 billion Convertible subordinated loan: IDR559.7 billion


US$200 million subordinated loan

Investor Paid up capital on the establishment of IIF (Rp) PT SMI 40,300,000,000 IFC 19,900,000,000 ADB 19,900,000,000 DEG 19,900,000,000 Total 100,000,000,000

Shareholders: 1. PT SMI 2. International financial institutions (ADB, IFC, DEG) Max commitment (Rupiah equivalent) 600,000,000,000 400,000,000,000 400,000,000,000 200,000,000,000 1,600,000,000,000

Source: Bappenas 65

government & politics interview

Gita Wirjawan Chairman


indonesian investment coordinating board (bkpm)

Infrastructure Focus: Indonesia has seen improvement in its sovereign debt ratings this year. What conditions are supporting this upgrade? Gita Wirjawan: If you peel the onion, the reason for upgrades and positive outlook by the international rating agencies was predominantly because of our ability to improve and show prudent fiscal management in the last five years. Our debt to GDP ratio was at 83 per cent in 2001; it has now fallen to 28 per cent and it is going to fall further by the end of this year to around 26 or 27 per cent. That’s only going to help us in

rate of six to seven per cent within that period of time. The total infrastructure investment requirement is US$140 billion to US$150 billion, with approximately one third coming from government and two thirds from private investors. The key is to get everybody to understand, take ownership and create a sense of belonging for the common goal to build the necessary 20,000 kilometres (km) of roads, the 15,000 megawatts (MW) of power generation, upgrade airports, and all the other priorities within the infrastructure sector; which to some extent may include upgrading refineries in the oil and gas sector.

The total infrastructure investment requirement is US$140 billion to US$150 billion, with approximately one third coming from government and two thirds from private investors

At the end of a recent national coordinating meeting in Bali in April 2010 – which was presided over by the President and attended by the Vice President, Cabinet members, the 33 provincial leaders, world academics, economists, prominent members of the business community and legislative members of the provinces – everybody understood that this is “no small potatoes”; and everybody recognised the need to simplify the process of doing business in Indonesia to make this US$140-150 billion investment materialise. It succeeded in educating and socialising the issue with all the relevant stakeholders.

terms of moving in the right direction from a ratings perspective. However, I am pretty sure the ratings agencies evaluate with other criteria such as monetary stability. Again, I don’t have a problem in terms of monetary stability as I think we are able to continue to show stable performance in this area.

Outside of the government’s contribution we all recognised that without proper coordination and crystallisation of that role within any particular ministry, whether it is Bappenas, the Ministry of Finance, or in the BKPM, not much of the private capital contribution would happen.

A common goal IF: How optimistic you are of achieving the US$90 billion of infrastructure investment from the private sector needed during 2010 to 2014 to help the government achieve its economic growth target?

“One stop shop” IF: What has happened since then in terms of creating this coordinating role within government?

GW: That’s the figure we gave to the National Development Planning Board (Bappenas) and I am quite optimistic of reaching that target as we aim to achieve an average economic growth


GW: We have done a lot recently in terms of taking this to the next level. One of which is the implementation of the “one stop shop”. There is a presidential decree that enables the BKPM to take care of business permits for investors that previously were in the hands

government & politics interview

of 14 ministers as well as the Chief of Police. So that when you come to Jakarta to invest, you don’t have to go through all the different 15 government offices. You just need to come to us here at the BKPM, under one roof, and we will do the coordination

We have done a lot recently in terms of taking this to the next level. One of which is the implementation of the “one stop shop” with respect to all permits, such as the labour-related permits, immigration-related permits, among others. In regards to coordination with regional government, I proposed in the Bali meeting to create a government unit in every region that will also coordinate Jakarta with the regional leaders for permits. Apart from those efforts, we have been conducting more intensive communication with international agencies such as the World Bank and its investment arm, the International Finance Corporation (IFC), and the International Monetary Fund (IMF), for the purposes of supplying them with all kinds of information about what we have done and to demonstrate a narrowing of the gap between the political rhetoric and reality. We are also delivering information on what is actually going on the negotiation table. This sort of communication with these important investors and stakeholders was somewhat lacking over the last five years. I believe all these combined efforts will yield a better investment climate and I am comfortable that it will help raise our investment grade status further in the next 12 to 24 months. IF: With respect to coordination with the regions, at the moment investors who have interfaced with Indonesia complain that decentralisation has simply created more layers of bureaucracy. How are you going about solving this? GW: Firstly, I like to point out that I believe decentralisation will turn out to be a positive thing for Indonesia. In terms of the investment hurdles often mentioned, what we are seeing today is that there is a lack of coordination between what’s happening in the regions and what is happening in Jakarta. My pitch is that the BKPM could offer help in coordinating this process. That’s why we came up with this theme: the regional champions. We sat down with seven governors from the provinces of Riau, South Sumatera, East Kalimantan, East Java, West Nusa Tenggara and Papua. We proposed that we could simplify the investment decision-making process, and could simplify the realisation of one, two or three big projects. We told them if we could deliver those big ones, then the rest would be relatively straightforward. They accepted this and bought into the idea. Now the challenge is how the governors coordinate investment activities down to the regents’ level. This is the coordination that

needs more attention. When that happens, I think we should have no reason to worry about decentralisation and we should actually be proud of economic development that is driven by investment activities in the country’s regions. Development strategy IF: What sectors are foreign investors most active in and how do you see development rolling out? GW: First, you must ask yourself where is the low hanging fruit? These are definitely in natural resources. Many investors have gone into the coal mining business. They understand that Indonesia may not have the kind of investment climate that perhaps countries like Singapore would offer, but they have taken a view on commodity prices. Second is a build out around these industries improving and creating infrastructure such as toll roads and power generation. I believe more investors are increasing their interest in these sectors and we cannot achieve the next level of investment, which is in industrialisation, before having gone through this step. It is only when the nation’s connectivity is established, then you could start building more factories and all other types of industrial facilities. Due to poor supporting infrastructure, a sack of cement that costs Rp70,000 in Jakarta costs Rp1.2 million in Papua province! That’s not because of a smart trader, it is because of the lack of connectivity. However, I am glad there is already some improvement in regards to acknowledging the current obstacles and further efforts to boost investor appetite are being taken.

We should have no reason to worry about decentralisation and we should actually be proud of economic development that is driven by investment activities in the country’s regions IF: Indonesia has revised the negative investment list this year. It gives more chances to foreigners to invest in, for example, health and in the education sector but with a limit on ownership. How do you see these market evolving? GW: These have been hazy areas for years, and the presidential decree that revised the previous regulation should have sent out a signal that we are hospitable to the international community in these sectors. On healthcare, there is a rapidly growing interest from foreign investors who wish to invest in Indonesia. As you know many Indonesians go overseas for health treatment, and I think it is good if we can have more foreign investment in our hospitals and generally make our health sector become more competitive. 67

government & politics interview

On education, we are not prohibiting anybody from investing in this sector. The only reason for limitation is due to the fact that there is a law on education legal entities, which does not

We are talking about, by this year end, a US$650 billion economy that, if you fast forward five years, is going to be near US$1 trillion. We are already a member of the G20 and we have got a population of over 240 million allow foreign ownership in the form of a profit-making, limitedliability company. However, there is the possibility to provide an educational service via an independent entity. For that purpose we are under intensive discussions and dialogues with the Minister of Education, and I believe there is going to be open-mindedness on this issue. You can imagine a scenario where a prominent university from the UK


or the US would set up a legal entity here that would perhaps provide lecturing services to universities or to other tertiary education facilities. IF: What feedback have you had from investors about what the government has done to promote more investment? GW: I think initially some were a bit sceptical but I think there are more who are getting optimistic about where things will go. There are more now who are keen to participate in the country’s economic development. Let’s put this in the context of the economy. We are talking about, by this year end, a US$650 billion economy that, if you fast forward five years, is going to be near US$1 trillion. We are already a member of the G20 and we have got a population of over 240 million. If you have a business mindset we are a market you have to take a serious look at. As long as we do the right things in terms of the regulatory framework, in terms of improving investment climate, and assuring the commercial aspects of the game are given the regard they deserve, I don’t see any problems going forward in terms of winning new investors.

infrastructure market business intelligence

Indonesia infrastructure market analysis With strong macro fundamentals and a policy of major infrastructure development, Indonesia’s economy has a very promising future

Indonesia’s appeal as an infrastructure market lies in strong positive macro fundamentals. Indonesia is widely expected to become one of the world’s top 10 economies by 2020 and it seems to be almost inevitable that BRIC (Brazil, Russian, India and China) will be redefined as BRIIC (Brazil, Russia, India, Indonesia, China) soon. Changes are already afoot, and with mid-2010 performance showing that Indonesian and Turkish stock exchanges had greatly outgrown those of the BRIC countries, Indonesia may not need to wait until 2020 to be a top 10 global economy, . With a population of around 240 million people, decentralised government policy, a stable political situation and a growing middle class, it appears that Indonesia is on the tipping point of major growth and opportunities. Infrastructure, as in most Asian countries, will provide tremendous opportunities for investment, and will be a key driver and enabler of growth for Indonesia. However, with these opportunities also come major challenges that need to be met head on. Among Asia-Pacific sovereigns, Indonesia has been ranked first by Standard & Poor’s for best fiscal balance. In addition, its total debt to GDP ratio fell from 83 per cent in 2001 to 29 per cent by the end of 2009. In January 2010, Fitch Ratings upgraded Indonesia’s credit rating to BB+ with a stable outlook, putting Indonesia only one notch below investment grade – an enormous vote of confidence for investment. Also, UNCTAD World’s Investment Prospects Survey 2009-2011 listed Indonesia as one of the top 10 most attractive destinations for foreign direct investment (FDI). Indonesia has the fourth largest population in the world, with more than 50 per cent of its 240

million people below the age of 29. Indonesia is expected to enjoy this demographic dividend in the next decade, with the dynamic labour market participation growing at 2.3 million a year. In addition, Indonesia is also endowed with abundant natural resources, being the world’s largest coal exporter, the number one exporter of palm in the world, the world’s number two in tin and the world’s number three in cocoa production.

With mid-2010 performance showing that Indonesian and Turkish stock exchanges had greatly outgrown those of the BRIC countries, Indonesia may not need to wait until 2020 to be a top 10 global economy

With respect to growth however, the story is not a uniform success story. A lack of development in key infrastructure segments has held back further economic development. Achieving high economic growth is not possible without adequate investment in infrastructure. The fast pace of urbanisation is expected to increase the need for infrastructure in the country, along with the trade of Indonesia’s numerous high volume commodities. The absence of adequate infrastructure, be it power, roads, ports, airports, etc, would increase the cost of production in the country, thus affecting the overall competitiveness of the country. Other countries such as China, although still having a long way to go, have nonetheless committed serious funds towards resources and this has helped to stimulate growth. India and China have thus witnessed growth levels of 7.3 and 9.5 per cent respectively in 2008 and 5.6 and 8.7 per cent in 2009, and are expected to grow at 8.7 per cent and over 10 per cent in 2010. In contrast, Indonesia lags behind with a growth of 6 per cent in 2008, 4.5 per cent in 2009 and an expected growth of 6 per cent in 2010. It is nonetheless stunning what Indonesia has been able to achieve 69

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in such a short space of time since the crippling economic downturn. The future is also bright. Improving credit ratings and the opening up of the economy for private sector participation are the leading indicators of better prospects for the nation. Declining debt to GDP ratio from 83 per cent in 2001 to 29 per cent in 2009 has led to better credit ratings. The improved confidence in the economy among global infrastructure companies is also reflected in the success of the infrastructure summit earlier this year in 2010, compared to its predecessor summits in 2005 and 2006 that received, at the best, lukewarm responses. For the infrastructure sector, the lack of welldeveloped infrastructure and the low base from where investments are taking place leaves much scope for growth in greenfield investments in transport, energy and utilities, adding to the market’s appeal for investors. During the period 2010-2014, the government’s 7 per cent growth target would require better infrastructure, better institutions and better investments. To achieve 7 per cent growth target during this period would require about US$150 billion in infrastructure investment. However, the government budget can only cover 30-40 per cent of total infrastructure investment, which thus leaves a huge opportunity for investments through public private partnerships (PPPs). In the grand scheme, Indonesia and its various sectors have much to offer potential investors. Indonesia is serious in attracting investors to


invest in infrastructure under PPP schemes, since lagging infrastructure is the second largest problem confronting businesses in Indonesia. The government has recognised the need to improve business conditions, and fundamental changes have been implemented at the various levels, and across sectors, to strengthen the framework, and make doing business in Indonesia not only viable and feasible, but attractive and highly “do-able”. From the first PPP project in the 1990s in the power and roads sector up to today, the PPP model has evolved in Indonesia and is ready for active implementation. In general, the evolution of Indonesia’s PPP market has consisted of three phases. Initially, before 1998, was a phase when the concept of PPP was introduced to infrastructure projects. The second phase from 1998-2004 was a consolidation period, following the Asian financial crisis and changes in the Indonesian political system. The third phase happened between 2005-2009 when the government laid foundations for PPP project implementation through policy and regulatory reforms to adopt international best practices. Under these new business conditions, the PPP market in infrastructure is poised to grow quickly. Priority and Focus of Infrastructure Development 2010-2014 To ensure provision of basic infrastructure to support welfare improvement ■ Enhancement of infrastructure services according to the Minimum Standard of Services (SPM) ■ Rehabilitation ■ Accessibility ■ Safety

infrastructure market business intelligence

To ensure smooth distribution of freight, services and information to improve national competitiveness ■ Infrastructure support to the enhancement of Real Sector Competitiveness ■ New development ■ Enhancement of infrastructure investment through PPP Initiatives by the government to encourage PPP ■ Legal and regulatory developments. New sector laws passed: Rail (2007), Port (2008), Airport (2009), Land Transport (2009), Electricity (2009), Waste Management (2008) and Energy (2008); Cross-sector Presidential Regulation (Perpres) 67/2005 amended to Perpres 13/2010, and provides greater clarity and harmonisation with other regulations. ■ Launching of the PPP book to inform potential investors. ■ PPP Operational Guidelines Manual (OGM) is being updated and issuance is imminent. ■ Introducing support facilities such as Public Private Partnership Central Unit (functioning under Ministry of National Development Planning/ Bappenas), Risk Management Unit (under Ministry of Finance), Infrastructure Guarantee Fund and Project Development Facility. ■ National Land Agency is drafting new law to address the land issue vis-à-vis PPP implementation. ■ Changes to land acquisition rules. ■ Improved eminent domain rules; Government has right to acquire land for public use. ■ Provides fair compensation to land holders. ■ Implementing a one-stop-shop system by the Indonesia Investment Coordinating Board (BKPM) to reduce red tape to facilitate faster licensing. (National Single Window for Investment (NSWi). ■ Establishing PT Sarana Multi Infrasruktur (Indonesia Infrastructure Facility) and PT Penjaminan Infratruktur Indonesia (or Indonesia Infrastructure Guarantee Fund – IIGF). The former is responsible for providing loans to the private sector involved in infrastructure projects, while the latter provides a financial guarantee if the projects require more funding than initially projected in order to complete. ■ Land Fund (currently for toll road projects only, in the future to fund land acquisition for PPP projects), managed by Ministry of Public Works. Remaining Issues The major challenge facing the government is to create an overall enabling environment that assures investors of predictability, a level playing field, low transaction costs and fair rates of return. This will require sector reforms to allow increased competition; credible and independent regulatory oversight; clear rules and regulations for the solicitation and evaluation of infrastructure project

proposals; tariff regimes based on cost recovery; and efficient mechanisms for dispute resolution. Given its commitment and its progress to date, there is good reason to believe that Indonesia’s climate for investment in infrastructure will continue to improve. Recommendations and conclusions The projects developed by PPP models enable the government to access much required capital to expand and also extend control over the operations of such projects.

Segmentation of planned and potential PPP projects worth US$47.29 Bn (Indonesia), 2010-2014 Toll roads (56%) Railways (20%) Power (9%) Marine transportation (6%) Water supply (4%) Air transportation (3%) Land transportation (1%) Sanitation and waste mgmt (1%)

As we see, infrastructure development in Indonesia is moving forward in the right direction. The question now is: how can the government ensure these efforts succeed? Based on the challenges Indonesia faces and also lessons learnt from Asian countries such as Korea, China, India and Vietnam, several key success factors should be considered. One of the basic problems facing private investors is the lack of good quality information on projects. This is the case not only in Indonesia, but also generally across developing Asia. Government needs to assure PPP projects are well prepared before bringing them to investors. Solid legal framework corresponding to international standards. A firm, clear and consistent adherence to such sound and internationally accepted principles will provide much greater, and much needed, clarity to investors. PPP can only work when the public and private sectors play on the same field, as equal partners. Each has a crucial and unique role to play, and for both, the spirit and practice of collaboration is essential to provide infrastructure services efficiently, and at the least cost to consumers. Strong government commitment and support. Government support can be divided into two categories: program and project support. To provide program support, a government willingly adopts and implements a PPP program that is fair, transparent and reflects international best practices. The second category, project support, must be used with care. PPP project support can take a variety of forms: tax holidays, low-cost benefits or cost sharing, performance guarantees, pricing tariffs and profit repatriation, and government subsidies and equity participation. The first four types of support can be useful; subsidies and equity participation, while frequently requested, should be avoided. Streamline to appropriate process and procedure for implementing PPPs, including effective management 71

infrastructure market business intelligence

over their whole life cycle, with a one-stop mechanism. Experiences show that too many doors discourage investors, especially genuine investors who have capital as well as technology. On the other side, a structured approach does not infringe upon provincial and local governments’ autonomy. Special PPP monitoring task force reviews the status of the implementation on a regular basis. Capacity building to implement PPPs and evaluate their impact on development. Core teams in concerning agencies would be well trained on multiple facets of PPP, keeping up to the national standards and further enhancing dissemination of PPP knowledge. Scope for PPP in Indonesia Telecommunications, oil and gas, railways, sea transport, air transport and water are the key sectors that have been opened for private participation in Indonesia. Aviation and airport infrastructure The transport sector in any economy is vital, with aviation being critical in Asia. Passenger growth in Indonesia has been stunning in the past six years and during 2004-2009 domestic traffic demand achieved an impressive Compound Annual Growth Rate (CAGR) of 21 per cent. Though, it seems that there is still the possibility to further increase this. It is estimated that up to 80-90 per cent of the population have never set foot in an aeroplane. Domestic traffic demand is predicted to be double in 2015 with a 15 per cent CAGR from 2010 to 2015, and it is expected that by 2015, 103.4 million people will fly. While affordability may seem to be the issue, it is more a case of having access to flights and the infrastructure to fly from. A ferry ticket can cost easily between US$25-40 one way in Indonesia, so affordability is present. Airlines and airline infrastructure are absolutely critical to a region, as they both have a positive correlation. It is estimated that for every 1 per cent of GDP growth, airline growth is at least 1.5 times that. This works vice versa as well; transport has a large impact on GDP. With so many islands, and poor road infrastructure reducing the time that it takes to transport goods and services from one point to another, it is clear that there exists a high level of inefficiency that needs to be resolved. This would therefore seem to be a priority sector to focus on. Indeed, Garuda Indonesia has made tremendous strides, Lion Air has mushroomed into a serious Indonesian and regional player, and other airlines such as Mandala continue to grow from strength to strength. On the infrastructure side, while the infrastructure numbers would appear adequate – there are 683 airports in Indonesia (2009) and only nine countries


in the world have more airports than Indonesia the numbers, however, don’t tell the full story. Of the 683 airports only 164 have paved runways, or runways long enough to land a jet aircraft. Previously, airport management was a closed sector, but this is no longer the case, and opens the door for significant opportunities. The whole aviation value chain is therefore one to look at in Indonesia, though certain parts of it, such as airlines, need to retain a majority Indonesia ownership as they are considered an integral part of a country’s infrastructure, and can never be wholly owned or managed by a private entity. By law, Indonesia’s Presidential Regulation 36/2010 on the investment negative list also stipulates that foreign investment in airline shares cannot be more than 49 per cent. Road infrastructure While Indonesia claims to have the 13th largest road network in the world, more than 40 per cent of this network is unpaved. Indonesia is an archipelago of 17,000 islands of which 6,000 islands are uninhabited. Due to its geographic structure, a well linked road network assumes significant importance, and to date has been underdeveloped, causing logistics to be high in many cases and consequently affecting the price of delivered goods. A sector that could be considered to have been in crisis over the past 10 years is changing and offers significant opportunities. Road projects such as the RAJA Network, linking islands, would be instrumental in the integration of various regional economies with the national economy, as well as reducing economic imbalances. There is a need to develop a chain of road links, bridges and highway systems connecting islands. Some of the toll roads, however, might not be financially viable. The Government would have to provide concessions to sweeten the deal for private participants. As such, one of the biggest problems has been the lack of execution of toll roads and progress on announced plans has been very slow as a whole. Railway networks Indonesia has the 25th largest railway network in the world, with lines of 8,529 kilometres. Only 6 per cent of the railway lines are electrified as against 35 per cent in India and 31 per cent in China. There is a need to make huge investment in establishing a well spread-out railway network in the country, as it offers a cost effective means of transportation. A good railway network will help growth of tourism and movement of freight. Trans Sumatra and Trans Java rail will be a key target,

infrastructure market business intelligence

Transportation Sector Investment Outlook 2010-2014 State budget

Private sector investment

450 400


350 250

Steel and cement In order to further support growth in infrastructure and the construction industry, it will be critical to ensure that the raw materials such as cement and steel are available to carry out the massive infrastructure that is required.

200 150 100 50 0 ’10

’11 ’12 ’13 ’14 Source: Master Plan Ministry of Transportation 2010

and the commodity businesses such as palm oil will be linked into these. Marine transport Indonesia has the fifth largest water-based navigation network of more than 21,000 kilometres. There is a need to invest in merchant marine projects and ports that are involved in carriage of goods. The country has a fleet of 971 ships used for commercial purposes (the 11th largest in the world) and 12 important ports. With a coastline of more than 54,000 kilometres, Indonesia offers huge opportunities to invest in the marine transport sector, especially as it has many deepwater areas. Dumai, for example, is a congested port and needs to be alleviated and other ports need to be built. Transport investment outlook To reach the economic growth target of 6.3 per cent per year from 2010-2014, for the next five years, the total investment required in the transport sector amounts to Rp1626 trillion (or US$177 billion) and must grow on an average of 9.48 per cent per year. However, the allocation of state budget for the transport sector is still limited and could only cover 7 per cent of the total investment required (even with state budget average growth of 37 per cent per year). Some opportunities for PPP projects in urban transport developments are: ■ Bus Rapid Transit: exclusive lanes, park and ride facilities and shelters ■ The development and operation of the bus station/intermodal terminals (bus, train, ferry or cable car) ■ Intelligent Transport System (ITS) development and e-bus service ■ The development and maintenance of vehicle inspection stations ■ The development and maintenance of ferry ports ■ Gasification, including converter provision, gas station and supply

The steel industry of Indonesia employs more than 200,000 people and is capable of producing over 5 million tonnes of steel products annually. 4 million tonnes of crude steel was produced in 2009, and the country consumed a total of around 8.8 million tonnes of steel. Indonesia thus relies greatly on steel imports, and the import of iron ore. There is thus a major gap in the industry that needs to be filled both currently and in the future. The country registered 32 kilograms of steel consumption per capita in 2009. Bar and section are the primary steel products and account for the largest annual production output of the industry. The industry is predominantly dominated by a handful of state and private enterprises, with PT Krakatau steel accounting for around half of the industry. The world’s biggest steelmaker, ArcelorMittal, is however considering an investment worth US$5 billion in Indonesia and South Korean rival POSCO is looking at buying coal and iron ore mines. Indonesia’s cement industry over the past few years has gone from strength to strength, and margins are still very attractive in this market. In 2000, the market demand was just over 25 million tonnes, and in 2010 should represent a market of around 42 million tonnes, with a growth rate of about 10 per cent over 2009. Semen Gresik holds around 45 per cent market share, Indocement TP around 30 per cent, Holcim Indonesia around 12.5 per cent, and others 12.5 per cent of the market. Energy Sector Last but not least, the sector in which Indonesia may face the highest challenge to date is the energy sector, as it will require cheap and abundant energy to support its growth requirements, and without this growth could be seriously dented. Electrification ratio is still low (66 per cent in 2009) and some areas are facing crisis conditions (lack of Investment requirement for generation, transmission and distribution (2008-2027), US$m Infrastructure Generation Transmission* Distribution* Total

JAMALI 140,750 22,254 8,553 171,557

Beyond JAMALI Total 31,521 172,271 2,037 24,291 3,591 12,144 37,149 208,706

Notes: * Transmission and distribution up to 2018 only. Source: RUKN 2008-2027 73

infrastructure market business intelligence

Growth of electricity demand Jamali

Luar Jamali





Three geothermal power plants are also in the list of projects offered by the province, which each cost US$2 billion. Additionally, in order to provide a boost to infrastructure investments for investors, and in order to protect these investments, the government has established a state-owned guarantee fund to protect investors in infrastructure projects from any “unfavourable” policies that may be implemented.

600 400 200 0

’08 ’12 ’17 ’22 ’27 Notes: Jamali means Java, Madura & Bali With assumption: • GDP growth: 6.1% p.a. • Population growth: 1.3% p.a. electricity Hence, growth rate of Indonesian • Electricity supply). demand growth: 9.2% p.a. • Elasticity: demand for1.5% electricity is still high (9.2 per cent per Source: RUKN 2008-2027

annum up to 2027), thus a huge additional capacity of generation, transmission and distribution is needed. Based on the National Electricity General Plan (RUKN) 2008-2027, total investment requirement for generation, transmission and distribution in years 2008-2027 is US$208.7 billion.

A promising future Indonesia has, in particular, been wooing Chinese investors to come into the country and invest in infrastructure projects of all types. For example, Indonesian officials recently invited China’s investors to take part in toll road, seaport, geothermal, power and rail projects in the provinces of West Java, East Kalimantan and Riau. In order to help, Indonesia has smoothed the way for investors by accelerating the process for business permits to between four hours and seven days from up to six months previously. West Java province’s investment arm, PT Jasa Sarana, was looking for partners to develop a 239-kilometre toll road project valued at US$1 billion, and the Cilamaya port, worth an estimated US$1 billion.

The fund – called PT Penjaminan Infrastruktur Indonesia (PII) – will act like an insurance company, compensating investors for losses if, for example, promised tariff hikes on a toll road did not materialise. Investors will have to pay premiums but not as high as those charged by traditional insurance firms. The objective in establishing PII is, first and foremost, to reduce the cost of financing PPPs by improving the quality of the PPP projects and their creditworthiness; and firms who are backed by PII will also enjoy easier access to credit and lower interest rates, effectively ring fencing the government’s obligations. Formed in early 2010, the government has injected Rp1 trillion (US$107 million) into this scheme. It will however take some time for this system to gain trust, particularly with banks, helping to reduce the high interest rates that developers are currently charged, due to long gestation time and risks associated with infrastructure projects. Madusudanan Ramani, Research Analyst, Business & Financial Services and Kirti Timmanagoudar, Director, Business & Financial Services authored this article, with contributions from Muhammad Asrofi, Consultant, Indonesia, Transportation & Logistics and Chris de Lavigne, Global Vice President, Consulting, Frost & Sullivan.

Contact details Eugene van de Weerd, Country Director, Indonesia Tel: +62 (0) 21 571 3246 Email:

Frost & Sullivan, The Growth Partnership Company, enables clients to accelerate growth and achieve best-in-class positions in growth, innovation and leadership. The company’s Growth Partnership Service provides the CEO and the CEO’s growth team with disciplined research and best-practice models to drive the generation, evaluation and implementation of powerful growth strategies. Frost & Sullivan leverages over 45 years of experience in partnering with global 1,000 companies, emerging businesses and the investment community from 40 offices on six continents. To join our Growth Partnership, please visit


Development Finance

The Agence Française de Développement (AFD) is focusing its activities in Indonesia on the protection of “global public goods” and especially the fight against climate change. The focal areas of its funding are renewable energies, energy efficiency in the industry and the preservation of forests, peat lands and biodiversity. Indonesia, as an archipelago, is vulnerable to climate change. It also became the 3 rd largest emitter of greenhouse gases, mainly due to deforestation, with emissions in the magnitude of 3 Gteq CO 2.

Indonesian climate change policy AFD has been actively supporting the Government of Indonesia policy through the “climate change program loan” over the last three years, by granting and disbursing a total amount of 800 M$. This program is based on a policy matrix resulting from an intensive dialogue among line ministries and with development partners (JICA and now the World Bank), under the coordination of the ministry of planning. AFD is also financing technical assistance and providing expertise to ease the implementation of the policy matrix.

AFD Group also provides non sovereign funding to soes or private companies AFD can also provide financing to SOEs or private companies directly or through local banks, such as Bank Mandiri. The aim is to encourage the production and use of clean energy and energy efficiency in the industrial sector, to ensure the sustainable development of Indonesia. AGENCE FRANÇAISE DE DÉVELOPPEMENT - Indonesia Resident Mission The Plaza, 27th floor - Jl. M.H. Thamrin Kav. 28-30, Jakarta 10350 T: +62-21 2992 1500 - F: +62-21 2992 1555 - Email:

development finance interview

James Nugent Country Director


asian development bank

James Nugent: I am an economist from Canada. I have been working in development in Asia, the Pacific and East Africa for the past 25 years. I originally went abroad in the mid-1980s with a consortium of Canadian engineering firms that worked in water and energy development in a number of countries in the region. I subsequently joined the Asian Development Bank in 1997, and have been working for ADB since then in various capacities. At present, I’ve been the country director in Indonesia since 2007. Prior to that, I was the country director in Laos from 2003-2007. ADB in Indonesia IF: Could you describe the ADB’s business here in Indonesia? JN: ADB has a strategy for 2020 that has three objectives: (1) inclusive growth, (2) building an environment for sustainable growth, and (3) regional cooperation and integration. Within that framework we have made a commitment to scale up private sector operations and development to 50 per cent of annual operations, so that is quite a significant shift in terms of our operations overall. This strategy enhances our ability to

Asia will need on the order of US$8 trillion by 2020 to pay for infrastructure development work in a number of areas in Indonesia – infrastructure, social sectors, financial sector and environment, natural resources and climate change. Infrastructure is a major component of achieving Strategy 2020 and delivering its objectives. Given a recent estimate that Asia will need in the order of US$8 trillion by 2020 to pay for infrastructure development – both private and public sector funding – Strategy 2020 positions us to be responsive to the infrastructure needs of the region.

In infrastructure we support government and private sector clients using a diverse set of instruments. We have public and private sector operations; we can participate in projects in the context of debt, equity or guarantees; we can provide technical assistance and we support country systems through program lending. In Indonesia, in terms of program support we participate in the infrastructure reform sector development programme; basically supporting the government’s reform programme to improve the investment climate. We also assist the government’s project development facility and establishment of the P3CU, or the Public Private Partnership Coordinating Unit. On the project side, we have been supporting the government both through support to bank and non-bank financial institutions and through infrastructure project finance in the public and private arenas. When I talk about infrastructure, the ADB is looking at a broad range of infrastructure projects. We are placing a lot of emphasis on the government’s clean energy agenda, whether it is through geothermal, renewables or energy-efficiency initiatives. We are also engaged in transportation, water supply, sanitation, solid waste management and rural infrastructure development projects. IF: Could you elaborate on the sectors and the work the ADB is doing? JN: In terms of energy, we are increasingly supporting clean energy initiatives. We support a new and renewables project in Indonesia, through PLN, the power utility, that invests in small geothermals, small hydro projects and others renewables, including wind power. We are in the process of discussing the possibility of further supporting the government’s geothermal program and we are one of the partners helping to implement Indonesia’s clean technology fund program. On energy efficiency, we support a project that has recently gone to our board. It is for Java-Bali distribution performance 77

development finance interview

improvement, and we are having discussions with the government and the private sector with respect to additional energy-efficiency initiatives through industry. We support government water supply and sanitation projects in different provinces. We also have had a long-term engagement in rural infrastructure going back more than 30 years. More recently this support has been through the government’s flagship community driven development program, PNPM Mandiri. In the transport sector, we have a regional roads development programme and we are working with the government on a new regional transportation development project. It is quite interesting because it uses a new financial instrument, known as a multi-year finance facility, which allows much more flexibility for

We are placing a lot of emphasis on the government’s clean energy agenda medium-term engagement for both government and ourselves. As you can see, we provide multi-sectoral support to Indonesia’s infrastructure development. Multi-year finance facilities IF: Would you mind expanding on the multi-year finance facility and explain how it works? JN: A multi-year finance facility, or MFF, gives you the latitude to take a look at the medium term. You start with a broader sector assessment rather than a project-specific assessment. Then you work with government to develop a medium-term roadmap for sector development over a period of 10 to 15 years. Within that period, you identify the investment requirements, how government, ADB and other development partners may participate, and identify a series of sub projects, so you don’t have to implement the project or program as a single tranche.

Career defining moment In development there are a lot of challenges, but within these challenges are tremendous opportunities. To work on any of these in order to advance the mandate of development, poverty reduction and growth is a unique opportunity. I have had the opportunity to work throughout the region for a long time but one particularly absorbing assignment was while working in Laos as ADB country director during the team’s processing of the Nam Thuen 2 hydroelectric power project. Today, it is one of the largest public private partnership projects in Asia. Motivation What gets me out of bed in the morning is the knowledge that I have an opportunity to make a change in the region. Biggest challenge faced The ADB’s vision is an Asia and Pacific region free of poverty. If you look at infrastructure development specifically, there are a billion people without water, approximately two billion without power, and over two billion without sanitation. Hence, poverty reduction remains a significant yet achievable challenge. For those of us who work in development, every day there remains poverty is a challenge, but every day also brings another opportunity to make a difference. Most important lesson in business It is important to listen. By doing so, you continuously learn, better informing your decisions and own capacity to share knowledge. It really is a two-way process.

The sequencing is more aligned to project readiness. The entire investment programme doesn’t have to be developed at the time you start, but you know where you ultimately want to get to, so you do the lending as you achieve project readiness. IF: One of the biggest bottlenecks here is land acquisition. What do you think needs to be done in order to try and solve this problem? JN: Land acquisition is not an Indonesia-specific issue; you experience this in a number of countries. We have experience from other countries and we are always more than willing to share that experience with our counterparts in government. The government has a sound investment framework that has components for land acquisition and eventually a land fund. It also has provision for an investment guarantee facility; and they already have a project development facility. There has been progress in terms of increasing access to infrastructure finance, both in terms of non-banks and commercial banks. On


the non-bank side, government has established both SMI and the Indonesian Infrastructure Finance Facility. I would say going forward, having identified land acquisition as a bottleneck but also having taken steps to dismantle it, we would hope that it isn’t as significant as it has been in the past. IF: You mentioned earlier that you are looking at geothermal power. Obviously Indonesia is blessed with huge geothermal resources. Can you tell us a little bit more about how you see the geothermal sector developing? JN: The country has a vast resource, the largest globally. To date, in-country we have geothermal financing experience in two

development finance interview

smaller units in North Sulawesi, where one project is in operation and a second project is going into construction as we speak. We also are supporting a development in Flores and commencing preparation for some larger scale sector engagement. We see geothermal as being part of an intermediate to longerterm sustainable plan for Indonesia’s energy sector. To support this development, Indonesia has qualified for the Clean Technology Fund.

The government has a sound investment framework that has components for land acquisition and eventually a land fund We look forward to supporting the government in implementing the fund and further advancing geothermal development in Indonesia. A better climate for foreign investors IF: You spoke of the government’s infrastructure investment framework. Could you expand on this? JN: One of the things this new investment framework does is it identifies and provides a framework, or a facility, for managing risk. This is very important for providing a greater degree of confidence for potential private investors. There has been a lot of development of policy over the past decade, and even more in the past five years. During the past six months many decisions have also been made on regulations, identifying what is required, addressing real and perceived risk to investment, and translating that into a more favourable investment climate. As I mentioned, there is good progress on the land acquisition and land fund, progress in the area of guarantee facilities and infrastructure finance, and a project development facility. IF: How do you see PPPs developing in this country? As you said, the framework is now in place to make this happen. What else does the government need to do? JN: At the Asia-Pacific Ministerial Conference on PPPs in April, the government of Indonesia outlined how they were adopting a double track policy for infrastructure investment which would continue to give priority to public sector investment, but also prioritising more private sector investment and PPPs. The government adopting this double track policy is very important. They become the enabler for overcoming the challenges to infrastructure development. Having that support is very important. In terms of identifying what the types of investments in public and private sector should be, that work has been done through the government’s mediumterm plan for 2010 to 2014, while PPP preparation is supported through the government’s project development facility. It has advanced significantly and there are a number of firm projects under consideration.

We are also seeing scaling in terms of the size of the projects and the diversity of interested investors. There are some very

There are some very large investments in terms of the rail sector and toll roads under consideration. There is also substantial interest in the power sector, water and sanitation large investments in terms of the rail sector and toll roads under consideration. There is also substantial interest in the power sector, water and sanitation. IF: Does the government expect too much from the private sector? Should it take more of a stake in some of the projects? It seems they want the private sector to take all the risk. JN: The investment framework goes a long way to understanding systemic risk and distributing it. Then you need to look at it project by project to determine what risk allocation or mitigation is required and what is the best financial structure going forward to manage this risk. I don’t think PPPs are homogeneous and maintaining the flexibility to address project risks and structures appropriately is the right way to go. IF: Is infrastructure development in Indonesia truly ready for the private sector? JN: We are very optimistic in terms of the future of investment in the private sector and PPPs in Indonesia. 79

development finance interview

Joachim von Amsberg


Country Director world bank indonesia

Infrastructure Focus: Can you tell us a little about your background?

investment target in the private sectors. What do you think are the major constraints to this private sector?

Joachim Von Amsberg: I am Country Director for the World Bank in Indonesia. I hooked up with the bank immediately after doing my PhD, when I worked for it in the US for 13 months. I then moved to the Philippines as Country Director for three years and have been in Indonesia for the past three years.

JVA: I want to put it under one big heading, which I would call fragmentation. Before they had this autocratic regime, where the top decided what would be done. Then the regime collapsed, and since then you have an emerging democratic, decentralised state. While that is happening there is also incredible magnification, where each ministry has different policy guidelines, where local governments pursue very different priorities to the national government, where environmental agencies and land agencies all have their say and the ability to block projects. So it is very difficult for Indonesia to do anything big.

Realistic investment goals IF: The government has a US$150 billion infrastructure investment target over the next four years. It wants two thirds of this to come from private participation domestically. What do you think of these targets, and how achievable are they? JVA: From the perspective of need, it is very sensible. However, if you look at it systematically, you would find substantial infrastructure investment gaps. Infrastructure investment over the past 10 years

We invest about US$2 to US$3 billion, which is big for us but small for Indonesia has really lagged behind demand. There are serious constraints on power and transport which are hampering Indonesia. The US$150 billion target is reasonable, but it is a stretch. Historically, seven or eight per cent of GDP was spent on infrastructure before the Asian financial crisis in 1997. Today it is down to three or four per cent of GDP. At that rate it is still US$22 to US$24 billion a year, substantially less than what the target would indicate. It needs a big step forward. Spending $40 billion a year is close to eight per cent GDP, which is high but not excessive. That’s a level that would allow Indonesia to sustain a few years of catch up. IF: In the provinces, Indonesia has set a 60 to 65 per cent


You can do anything within your own back yard; and that is why private investment is doing so well. Because if you have a plot of land, you just build; it is under your control. What is not so easy is building an access road, a sewer that actually connects to a public pipe, which is where it breaks down because you need so many players to work together. IF: As a young democracy don’t you think it takes time to work these problems out? JVA: I think it has become better. Certainly from the first to the second government there has been a sequence of improvement, and there is more recognition of how leadership functions in a democracy. In the beginning there was chaos and then you had increasing leadership in a democratic context, where it became more feasible for the President to pull the strings together. In this government you can see there is more emphasis on the coordinating institutions; the Vice President plays a strong role, Bappenas plays a strong role and the coordinating ministers have been given more power. IF: Has the process of decentralisation been beneficial, or has it just increased another level of fragmentation? JVA: It does look like it is creating more fragmentation, because

development finance interview

it is one more institution. However, for the long term I think it is a pre-condition for Indonesia to function well. I think one of the reasons is because people in different parts of the country recognise that they are actually living in diversity in Indonesia, and that they were given autonomy to pursue their own developments that are compatible with the nation. Indonesia today is in a much stronger place. The long term has already begun and the benefits have already begun to come in for investors.

In this government you can see there is more emphasis on the coordinating institutions Public private partnerships IF: What do you think about the future of public private partnerships in Indonesia? JVA: In the recent past there were a few attempts to generate momentum with investment summits. There was a long list of projects, and very high ambitions, but very few deals were actually closed. So that was frustrating. I think the government has rightly taken a step back from these projects and put more investment into more reasonable projects and preparing the framework. There was the infrastructure conference a few weeks ago. That was a more realistic step; maybe it was less dramatic, but it was substantial. The ministers were talking about policy actions in terms of bringing a financing guarantee facility and fixing some of the regulatory issues. I don’t think it will be a flood of implementation. I think investors gradually need to gain confidence at this point. We are working closely with the government to help create a few success stories, and have a few relatively straightforward projects with full pricing and finance. IF: Could you tell us about the profile of the investors? Have you seen their interest gaining in phases? JVA: We see increased interest, no question about it. People are beginning to wake up to the fact that Indonesia is the fourth most populous country in the world and it is growing fast. Now the question is can the government capture that interest. The key to converting

The long term has already begun and the benefits have already begun to come in for investors that is in real investment in a particular infrastructure. That depends on the policy agent we are talking about, getting the pricing policies right and dealing with some of the regulatory obstacles. IF: What does the World Bank do with its investments here? JVA: Three things. One is to give advice and recommendations,

Career defining moment When I was 15, I spent quite a bit of time travelling in India. It really sunk in how critical economic development was for the world’s six billion people. The second moment was when I was with the World Bank in Chile. I was sitting there with the Environment Minister of Chile, debating recommendations for better environmental management of the country. And I was thinking, “Oh my God, I’m just out of university and I am making recommendations which are important for a country.” It sunk in how much space I had to work with in helping them shape their policy. Motivation To work in an institution that combines financial resources and a think tank of knowledge that we can offer to policy-makers to help them access their development goals. We are sitting in the centre of a spider web as a facilitator of financial knowledge to make a difference in the world. It is absolutely fascinating. Biggest challenge faced My biggest challenge was when I was in the Philippines. The country is similar to Indonesia in that it has all the resources for success yet it has a very hard time putting it together. At the time we were working on revenue administration. Taxation was going to suffer due to a lack of tax rules, and the government could not invest in what it wanted to. Everyone wanted it, but the politics were so fragmented. It can be awfully frustrating for technocrats like us. Most interesting project The recent financial support provided to Indonesia during the global financial crisis in 2008. Two weeks after Lehman Brothers collapsed, Sri Mulyani (former Indonesian Finance Minister) called us to a meeting to say she was worried about the impact of Lehman Brothers on Indonesia. We pulled together a US$5.5 billion standby financing package that would allow Indonesia to continue to spend on social progress infrastructure if the market shut down. Indonesia was able to access the market because it had our backup funding. studies and technical assistance, and help policy-makers. Secondly, we finance public investment. By finance I mean helping the government implement expenditure planning. We invest about US$2 to US$3 billion, which is big for us but small for Indonesia. The third is to help provide the framework. We have put resources in the Indonesian infrastructure finance facility. We are now putting finance into the guarantee fund. IF: Which sectors are the most interesting and where are the early wins? JVA: The needs are significant in all sectors. Power is pretty much the challenge across the country with pricing issues. Then you have the transport challenges, which are particularly acute in the more concentrated areas. Flood control in Jakarta is an absolute must, because of the losses that are incurred by annual flooding. Shipping is a huge issue, and I think it’s very much neglected. 81

development finance interview

Joël Daligault Country Director


agence française de développement (afd)

Joël Daligault: I have been with the AFD for the past 30 years, so quite a long story. This is the sixth time I’ve been a country director. Previously I was twice director of the head office in Paris, once for French overseas territories, and before coming here I was in charge of Africa.

that could be good for the environment is fine for us. I was a little bit pessimistic on arrival at first but now there is more and more involvement at the top level in Indonesia.

IF: Tell us more about the AFD’s business in Indonesia and how it started here.

JD: Things pretty much started moving straight away with a commitment to climate change from a very high level, by the Indonesian President himself.

JD: I opened the AFD’s Indonesian resident mission just three years ago, so we are still very new, and it has been a real challenge. We selected Indonesia because it is an emerging country. About four years ago, the AFD discussed with the French government to look at strategies for new and large emerging countries, and it was decided to focus on areas regarding climate change. The AFD is an interesting entity. We are a French statutory body, a state-owned bank. As a bank we enjoy an AAA rating if we go to the market, but we are not private, and on top of that we place great importance on climate change. So I came three years ago to

We have reached a US$1 billion commitment, which for the AFD is a lot of money find a way to convince potential partners here to go ahead with us in granting loans, either soft loans or commercial rate loans, but with a real mandate of tackling climate change issues. We are not in a position to finance the infrastructure as such, unless it proves to be related to this mission. Whenever we are granting a loan to government or state-owned companies or banks, or even a private company, it should be through this rationale. We therefore have to avoid coal-fired plants, fuel plants, and so on. Although any kind of transportation or project


IF: When did things start moving for the afd here?

Since the 13th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP 13 – UNFCCC) hosted in Bali in December 2007, we have been engaged with our climate change programme, initiated by the Indonesian government and supported by the Japanese government. We managed to have discussions with the Japanese at the beginning of 2008 and later it paved the way for us to have a government partner for the climate change programme loans. Now we are in a position to move to state-owned banks such as Bank Mandiri, corporates such as Pertamina for geothermal, or PGN for the domestic use of gas. Also later, and as soon as possible, to private companies as well. The major change for us was to at least convince the government itself and to have some kind of partnership. Just recently, we disbursed the third tranche of the climate change programme loan (CCPL), which altogether brings a total extended figure of US$800 million for CCPL only. Furthermore, if we include project aid and lines of credit, we have reached a US$1 billion commitment, which for the AFD is a lot of money. So the starting point was really the CCPL. Without that, it was difficult to convince the Government, and also convince other stakeholders such as banks. Indonesian Climate Change Programme IF: How do you work with the government to incorporate the climate change programme? JD: The rationale of the climate change programme is to establish a ‘three-year’ sustainable policy that tackles climate

development finance interview

change issues through actions stated in the government’s ‘Policy Matrix’. It is aimed to support the implementation of the Indonesian Climate Change Programme, which covers a lot of actions, such as laws, presidential or ministerial decrees and some pilot projects or key political decisions. Hopefully they could be upgraded year after year. We are ready to put a lot of money into the budget as a support to this national policy on climate change. However, please note, we are not allocating our funds to any kind of decision; rather, it is really a government decision because it involves at least

27,000 megawatts (MW) of potential geothermal energy exists here, but less than 1,000 MW has been exploited 12 ministries and government agencies, including the Ministry of Energy, Ministry of Agriculture, Ministry of Public Works and Ministry of Industry. They are the ones who are committed to comply with the policy matrix. I can give you an example from geothermal, which is a key issue here because Indonesia is supposed to be a major geothermal resource by the world’s standards. People are saying 27,000 megawatts (MW) of potential energy exists here, but less than 1,000 MW has already been exploited. So how can we move from 1,000 MW to a bit more? The first step was a key decision in terms of tariffs. There was a presidential decree on the price of geothermal energy, which was supposed to be purchased by state-owned electric company Perusahaan Listrik Negara (PLN). It is forced to purchase any type of geothermal energy with a ceiling price of up to 9.7 cents per kilowatt hour. Despite developers having to go through the bidding process from the districts all the way down to provinces level – and they offer a price – PLN is forced to use this price with that ceiling; and even the ceiling is now in discussion; maybe they will remove the ceiling. It was a key decision. Because of this, we hope there are prospects now in some geothermal projects in the field. Especially with Pertamina; because it has, in the past, benefited from very large and good concessions for geothermal, it is ready to start. Also thanks to that policy, it now enables us to fund geothermal projects directly with Pertamina, not through the government, because we are ready to take the risk on, to assess the risk, to price the risk as a bank; to say: “Okay, we are ready to grant loans for whatever the project could be, provided it is geothermal.” Later on, perhaps in two or three years, we might provide some funds to a private geothermal developer, either foreign or local, to do the same. The key for that policy is to find a way to convince all these ministries to work together, to be very committed. Probably the next step will be how to involve provinces and districts because of decentralisation.

IF: Are you also involved in some of the associate monitoring and technical assistance that accompanies the programme? Please explain how the programme is evolving to involve private companies directly? JD: Indeed, the other question is about how can we monitor or bring some expertise in addition to giving out loans. We have agreed with the government and the Japanese for some monitoring processes to be set in place. Within the monitoring team there are some Japanese people, and we have also hired a French expert in forestry to be in charge of monitoring the forestry components of this policy matrix. That said, a good example of how we have succeeded in evolving the programme to the private sector would be when we started cooperation with the Ministry of Industry. It was a long process, but it was quite successful. The Ministry of Industry was supposed to have a roadmap for energy efficiency, starting with the cement industry, because of its obvious nature of being a major energy consumer. It is actually quite easy to have some standards, and some requirements, but even the ministry was not in a position to negotiate with companies to force them to adopt the sustainable

It is actually quite easy to have some standards, and some requirements, but even the ministry was not in a position to negotiate with companies to force them to adopt the sustainable energy programmes energy programmes. Step by step, together with officials from the Ministry of Industry and a consultant financed by us – which has now turned into a team of consultants – a very comprehensive roadmap will be designed, with the negotiated standards and requirements in terms of energy efficiency. That is the way we are trying to use our expertise or bring in some expertise, and this is a key point. This methodology could 83

development finance interview

be duplicated for other sectors, such the steel industry, for instance, which would be the next step. IF: How is the AFD expanding its lending efforts and supporting the programme further? JD: We began discussions months ago with a leading lender, Bank Mandiri, to expand our programme. Through Bank Mandiri we hope we can cover more projects. Step by step, we are hoping for a first line of credit, perhaps a second line, and together we could even co-finance and co-appraise projects. We could come with a guarantee scheme: for example, we guarantee up to, say, 50 per cent of the risk on a project and you, as a bank, take for the remaining 50 per cent because you think it is better for you to do it with us than sharing with another bank. Another example is our financing of an upgrade for electricity distribution for Java and Bali. It is very simple and straightforward. It involves the replacement of substations and loading stations and supplying new equipment for the existing network. The aim is to improve efficiency for the electricity distribution network by reducing distribution losses, which of course means there will be fewer greenhouse gas emissions. Together with the ADB we are putting in a total of US$100 million. Proparco IF: Can you explain to us about your subsidiary Proparco, its mission and what it is? Is it the AFD’s arm to expand the business to the private sector? JD: Proparco has been our subsidiary for the past 30 years, and it is a real subsidiary compared to IFC and the World Bank or others: IFC is 100 per cent owned by the World Bank, Proparco is 54 per cent owned by the AFD. We have many other private investors such as the French, foreign, multinational banks and big companies. The idea from the very beginning was to force us to have a more private approach. In Indonesia as well as in other countries, it has a similar mandate to the AFD, but the way it works is more private-oriented, especially as its shareholders are different. We have been a little more open with Proparco for the past few months, saying it could provide financing for green and sustainable development, which means that it is not strictly climate change. Here we are trying to finance some micro-finance; either banks or some banks that are trying to move to micro-finance. Presently, we have appraised two banks for micro-finance and by the end of the year we shall have at least one line of credit from Proparco to a private bank for micro-finance. What we are trying to do is to use Proparco, in addition to the AFD and private banks, private investors or private investment funds, to have equity in some investments. We are ready for any good private social projects, but it has to be done selectively. IF: You raised the issue of decentralisation earlier. Can you


give us your views on how this has affected the development of infrastructure? JD: Infrastructure is a major problem in Indonesia for many reasons after the 1997-1998 crisis, and for many reasons there is a strong need for it, especially in energy. You have to identify what are the bottlenecks and decentralisation could certainly be one. It was probably a process that happened a little too fast because it started in 2001/2002; there is still a lack of capacity building and some of the local governments have a lot of difficulty in using their own budget. It is a good decision but the problem when you have an urgent need in infrastructure is how to manage it. However, I have seen some improvements. In forestry, for instance, through the ‘forest management units’, the government now has combined teams – consisting of province/district plus

In two or three years we might provide some funds to a private geothermal developer, either foreign or local government representatives as advisers – to manage specific areas of forestry, which, as you know, is a very sensitive issue. It was probably too difficult before when investors had to deal with different groups separately. Even if the power has been split between government, the province and the districts, they have to work together. I am quite confident that if they use this kind of experience with forestry in other sectors, such as in mining, and this system is to be strengthened by law and decrees, things will improve.

development finance interview

Takanori Satake Chief Representative


japan bank for international cooperation (JBIC)

Takanori Satake: The Japan Bank for International Cooperation (JBIC) is a Japanese financial institution. Our mission is to promote Japanese business abroad. We have many infrastructure projects in Indonesia, where we mainly support the power sector and provide export credit to the government. Supporting independent power producer (IPP) projects is also a priority. We just closed two of those in March, a plant expansion and the Cirebon IPP project. Analysing Indonesia’s infrastructure IF: JBIC and the Institute for Economic Social Research and Faculty of Economics at the University of Indonesia held a workshop to identify infrastructure problems. What came out of that? TS: We agreed to set up three working teams. The first is on the macro economy and financial cooperation between the government and JBIC. The second is for the power sector, mainly IPP projects and geothermal or other renewable energies. The third is for environmental business. IF: Were the talks about geothermal and other renewables different from the core IPP discussion? TS: Yes. We like to discuss IPP projects in relation to risk allocation: participation among the parties, or what kind of

The private sector can develop projects, but the government should make strong commitments or support the private sector to develop them support from the government is necessary to invite investors or financial institutions. Geothermal projects have specific issues that are related to only geothermal, and their upstream risks.

IF: How is that team progressing? Have there been any developments? TS: We had a starter meeting for team two, the power sector and IPP projects. We also had a parallel meeting with Perusahaan Listrik Negara and a Central Java IPP project which is in the process of bidding. The challenges to infrastructure development IF: What are some of the biggest obstacles to investment in Indonesia? TS: Infrastructure should be developed by the government and the public sector. The private sector can develop projects, but the government should make strong commitments or support the private sector to develop them. That is very important. Developing countries tend to transfer all the risk to the private sector. That makes it very difficult for private sector participation. In Indonesia, it also takes too long to get the green light. Often, we don’t know why the process was stopped, or delayed. If we know what the problem is, we can solve it. IF: What about the future of public private partnership projects here? TS: That is a very big challenge, but at the same time, participation by the private sector is necessary to develop infrastructure. Although it is important to roll out a successful first project as a case model. IF: Do you think there is the political will to solve some of these problems of fragmentation between the departments and bureaucracy? TS: The government is trying to work on these issues. It understands infrastructure and soft infrastructure are important. In general, government and public sector officials don’t want 85

development finance interview

to make a decision. However, the situation will improve, not dramatically, but slowly. IF: What is the most successful project that JBIC has undertaken in Indonesia? TS: We are advising the government based on our experience in the power sector, not only in Indonesia, but in other Asian countries where we have IPP projects. However, we advise on risks, but we are not a technical assistance agency. We are just a financial institution. IF: Could you tell us more about the 660 megawatt Cirebon thermal power plant project? TS: Cirebon has a long history. We had some major problems making it bankable, and had a long discussion on Cirebon and also other projects. For Cirebon, the first agreement was not bankable for us, and we told the government this. There were so many risks allocated to the project company. Some of those risks should have been taken by the national power company, PLN, or the government. Transmissions risks should be taken by PLN and not by the project company. The Indonesian side is represented by PLN, so in that sense PLN should take that risk also, backed by the government. Telecommunications: a big growth sector? IF: JBIC lent to Telkom Indonesia, which is one of the largest communication carriers in Indonesia, to finance the installation of a high-capacity submarine fibre optic cable around Kalimantan. Do you think telecommunications has a lot of potential? TS: We think there is significant potential in the Indonesian telecommunications sector, not only fibre optic cable, but also

The power sector is the most active, but telecommunication is also filled with opportunity. We just applied the first loan to Telkom other telecommunications infrastructure. If Japanese companies want to participate in projects or supply equipment, we would like to support them. IF: Do you see an appetite for Japanese companies to come into the telecoms sector in Indonesia? TS: The power sector is the most active, but telecommunication is also filled with opportunity. We just applied the first loan to Telkom, but we understand that there will be another project that is also similar to fibre optic cables. There may be another one centred on a loan. IF: What about natural resources and transport?


TS: We have financed many energy facilities in Indonesia and we also understand that Indonesia is considering building a new receiving channel; that would be another possibility. Green resources IF: Are there any other areas JBIC is focusing on? TS: We have a very long history with Indonesia. We have supported Japanese companies in various sectors, infrastructure, oil and gas and also in manufacturing, but we have just launched a new mission to contribute to climate change issues. In the future, we will try to support projects that positively contribute to climate change. In this area we don’t require the involvement of Japanese companies to reconcile economic growth and environmental preservation. IF: Is this green initiative something that you are pushing quite strongly? TS: Yes. Mr Hatoyama just retired as Prime Minister of Japan. He forwarded the so called Hatoyama Initiative in Copenhagen last December and committed Japan to contributing to supporting developing countries with climate change issues. We also assigned a new mission to contribute to this effort. IF: Would you be working with Indonesian companies or Indonesian provinces to finance green initiatives at that level? TS: Indonesia has serious potential in these areas. We are having discussions with the government on how we can cooperate, as long as we source very good projects.

National Institutions

national institutions perspective

Problems and solutions Adi Putra Tahir, former deputy chairman of Indonesian Chamber of Commerce and Industry (KADIN) provides a valuable insight into current developmental issues

Improving our infrastructure is absolutely vital in Indonesia – it is probably the single most important thing we need to do in this decade. Currently, our roads, ports and power generation facilities are old and creaking under the weight of our increasing population. Meanwhile, our water supplies and sewage systems are still largely underdeveloped compared with countries in the region. All this infrastructure needs to be upgraded, not only to maintain existing levels of service, but beyond that, especially if we want to improve our growth and compete for business internationally. The need is across the board, but primarily for electricity, roads and ports. If we look at the ratio of our ports and power capacity to our population, we are lagging behind many other developing countries.

If we could standardise ways to attract infrastructure investment, it is possible the country could grow at levels seen in China and India, at 10 per cent or above For people’s living standards to rise to developed-nation levels, we really need around 8 per cent annual economic growth over the next few decades. Last year, we achieved almost 5 per cent - a good result coming out of an international recession, but it’s not enough. We need at least 7 per cent growth to soak up the new additions to the workforce every year. If we could standardise ways to attract infrastructure investment, it is possible the country could grow at levels seen in China and India, at 10 per cent or above. The challenges facing development If we observe the rule of thumb that infrastructure spending needs to be at 5 per cent of GDP, our GDP now is 5,000 trillion rupiah (US$560 billion). This amounts to 250 trillion rupiah (US$25 billion) of new investment a year. That’s big money, and a big need in


terms of funds. Everybody in Indonesia agrees that infrastructure is the government’s primary responsibility, but the government doesn’t have enough money to do the job on its own. That’s why for much of the past decade the government has been inviting in KADIN and overseas investors into private public partnership (PPP) agreements – but they haven’t always worked. This is a big issue, so let’s start with the problems. Previously, Indonesia has had difficulty attracting infrastructure investment because our investment processes were different and depended on the sector. To get approvals and permits, people had to go to a lot of different government departments. Government decisionmaking took a lot of time and the process was not always clear. Of course, it can be challenging to do business here purely on geographical grounds. Indonesia consists of so many islands, different cultures and levels of government that are far removed from the central government in Jakarta. Decentralisation is also a factor. Since regional autonomy began in 2000, district and provincial governments have begun passing their own laws and the greater complexity can make things confusing for new investors. Many investors are worried about changes in central government regulations that could affect their projects – this political risk has made them ask the central government to guarantee their projects. At the operational level, there are also difficulties with land acquisition. Under Indonesian law the government is unable to easily secure private land for public use – there is no law that forces private owners to sell. Speculators can get involved and if they spark community resistance, it can be very difficult for government to acquire land. This can cause still more delays, and land acquisition problems have occurred across the spectrum of infrastructure projects. Meanwhile, in sectors like roads or electricity there can be problems with the PPPs signed with government. Many Indonesian

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businesses believe toll road projects are unbalanced, that local businesses have to take on too many risks, which should be shouldered by the state. For example, when the task of acquiring land was given to private investors, with government acting as an intermediary, there were many problems acquiring land

The new land acquisition law is a positive step, but there could still be challenges in its implementation and projects stalled. Previously, things had moved more quickly because government was completely in control of this process. In electricity, as another example, big projects can stall because investors cannot agree with the state power company about the power purchase price. Or they worry that regulations on purchase agreements will change after they begin operations. Solutions in motion KADIN presented its Infrastructure Roadmap to President Susilo Bambang Yudhoyono at the beginning of his second term. This was a detailed document, which outlined these key impediments and suggested solutions for these bottlenecks. The government has been following this document closely and two KADIN ideas: a stronger land acquisition law and guarantees on PPPs are being introduced this year. Another positive change is that the government has simplified investment approval procedures. Gita Wirjawan, the chairman of the Investment Coordinating Board, has already created a one-stop shop for new investors, and this has led to some

significant and measurable improvements in new foreign direct investment this year. As importantly, at the regional level, there is ongoing dialogue with district and provincial governments about the importance of infrastructure and its implementation. This might sound like basic stuff, but many administrations have limited experience in handling large projects and it is vital that everyone is thinking on the same wavelength before projects go ahead. The new land acquisition law and government guarantees The new land acquisition law is a positive step, but there could still be challenges in its implementation. Indonesia does not have a law on eminent domain, allowing government to seize land from private owners and compensate them. Speculation has also been a problem – speculators often buy up land ahead of developments and then inflate land prices. The new regulation does, in theory, allow for government to seize land from landowners, but only after a long consultation process, starting at local-body committees, moving up district and provincial governments to the Home Ministry. Appeals mean the process can even go as high as the President! That’s clearly impractical and the process should be simplified and independent valuers added to give landowners more confidence

Investors must realise the odds are not insurmountable; they are getting smaller by the day and the rewards are also big in the system. The government’s guarantees system is also a move in the right direction but, again, things could be improved further. Currently the government is only guaranteeing part of the projects. The guarantee is a form of insurance, in case later changes in government regulations negatively affect projects. This means that government compensates investors if there is a regulatory shift. However, there is a perception that government is moving toward a system of greater guarantees. This is another reason why investors are increasingly looking at Indonesia as a likely prospect. Foreign investors New investors must realise the odds are not insurmountable and they are getting smaller by the day. In a country the size of Indonesia, the rewards are also big. They should talk to other international investors that have a track record here. They understand how business works and they are staying for the long term. In Indonesia, we have a saying, “All things can be settled if you persevere.” This is still a country in transition. Not everything is perfect but things are getting better. For this reason, you have to be patient; be prepared to listen and negotiate. If you can do this, then you will succeed. 89

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Suryo Bambang Sulisto


President indonesian chamber of commerce and industry (kadin)

Suryo Bambang Sulisto: Over my 40 year business career, I have been both a user of infrastructure and an investor in infrastructure. I have also been involved in developing businesses where there has been little or no existing infrastructure. Since the Asian economic crisis just over a decade ago, I have witnessed the lost opportunities for our business community and our national development of not investing in essential infrastructure. I therefore bring many different insights with me to my new role as president of KADIN Indonesia as we address our infrastructure challenge. One of the most valuable insights is the benefit and importance of bringing in the private sector as investors in

Indonesia is now emerging as a stable long term growth performer by regional and global standards. The risk-return equation has improved markedly for investors infrastructure either through public private partnership (PPP) projects or through purely private initiatives. My view from business is that the government should focus on the regulatory issues and building the right environment for investment. This is especially important now in Indonesia where our infrastructure requirements are so vast they are well beyond the scope of government alone. IF: Going into 2011, what is your view of the state of the Indonesian economy? Why should international investors come to Indonesia when China and India offer plenty of opportunities and have a good track record? SBS: Indonesia is now emerging as a stable long term growth performer by regional and global standards. The risk-return


equation has improved markedly for investors. This was reflected in our capacity to grow through the global financial crisis and is now reflected in strong foreign direct investment (FDI) flows coming into Indonesia from high quality international investors and through upgrades in Indonesia’s credit ratings. However, Indonesia can do much better, and building our infrastructure base is the key to unlocking our potential to return double-digit GDP growth in the years ahead. That is why the government is targeting US$140 billion on infrastructure investment over the next five years, with a large proportion of that expected to come from the private sector. Investors are seeing that Indonesia has turned the corner and offers a unique package compared with many of its neighbours. Our regions are rich in natural resources and have the potential for significant increases in sustainable agricultural production. We have a much younger and more creative labour force than many

We have deregulated the electricity sector to make private investment much more attractive of our competitors to support the revitalisation of our industry. This labour force also provides a strong consumer base. Indonesia is committed to democracy and peaceful transition through the ballot box and we think this is a big plus for Indonesia. In fact, we are seeing investors from China and India themselves now turning to Indonesia for expansion in this improving environment. IF: What are the major constraints to private sector participation in Indonesian infrastructure? How are these problems being solved? SBS: Five years ago the list of constraints was significant. At that time our aspirations for infrastructure development were running

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Career defining moment The Association of Southeast Asian Nations (ASEAN) economic crisis just over a decade ago was wakeup call because our exposure in the financial sector resulted in the whole economy unravelling, bringing many otherwise successful businesses to the brink of bankruptcy. We were open to international financial markets without proper regulation, without a strong banking sector and with many unscrupulous practices. It was an expensive lesson. We have learnt that business organisations like KADIN must play a leading role in providing input to the government to safeguard the stability of business. Our market cannot just open without building strong institutions and regulatory frameworks. Motivation In a rapidly changing country like Indonesia, we need to ensure that the public and the small players are empowered and equipped to share in growth and development without economic calamity. Big business has its own interests and is able to look after itself. I consider my role in KADIN is a “call to duty” so that KADIN can be a strong partner with government to provide solid foundations for growth across the whole economy.

ahead of our ability to deliver bankable projects. We went back to the drawing board and over recent years we have carefully identified our handicaps and what is needed to address them. We have worked with experts to improve our capacity to assess and implement PPP projects. This includes how to share the financial

In the transport sector, we have new shipping and rails laws and we are formulating national master plans for ports and rail and a blueprint for intermodal transport risks. At the sectoral level we have also been undergoing a big reform agenda. We have deregulated the electricity sector to make private investment much more attractive. In the transport sector, we have new shipping and rails laws and we are formulating national master plans for ports and rail and a blueprint for intermodal transport. A new law on land acquisition is now being considered to address this long standing bottleneck to infrastructure development. At the bureaucratic level, we are seeing improved administrative procedures through areas like a One Stop Shop for investors but there is still much more to do. These are just a few examples of wide ranging reforms to make

Biggest challenge faced In my role as president of KADIN, the biggest challenge is still ahead - how to save Jakarta from gridlock. It is unacceptable to have our national capital, which contributes about 15 percent of Indonesia’s GDP, coming to a standstill. We are rich enough to afford modern transport infrastructure, technology and communications but nobody is making the vital decisions to address the problem. We think there should be a much bigger role for private investment and in KADIN we will be pushing for this. Most interesting project Certainly, my new role as KADIN president is likely to be the most interesting project I have undertaken. I see it as means to deliver on our great potential in Indonesia. There is no reason why Indonesia cannot achieve double digit growth and be one of the most competitive economies in the world. We need to get infrastructure investment underway, develop pro-business policies and get rid of the impediments. We will be working with great determination with the government to establish the business friendly environment we need. Most important lesson in business Business cannot operate effectively and invest confidently without the “tools of trade”. These tools are top quality infrastructure, modern technology and capacity building for our entrepreneurs and work force. We must continually invest in these things otherwise we are handicapped in business. This is a lesson we must not forget in Indonesia. Indonesia more attractive for infrastructure development. IF: You were recently appointed president of KADIN 91

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in October 2010. Please outline how your presidency will further KADIN’s role in supporting infrastructure development? What is KADIN doing now and how would you like to see things develop? SBS: Our main focus in KADIN will be on the implementation of reforms for infrastructure development. We will be encouraging the government to speed up implementation and making sure reforms translate into bankable outcomes for business. We will be a frank but constructive partner with the central and

We will be encouraging the government to speed up implementation and making sure reforms translate into bankable outcomes for business regional governments helping them to add more coherence to our significant reform agenda. In this process, we would like to work closely with international partners to ensure they can invest


more confidently in infrastructure. Our energies will be directed toward the opportunities that are available in the regions and provinces of Indonesia because that is where the growth potential

There is a very real sense in KADIN and in the government that we must now deliver on our promises and our hard work lies. Bankable infrastructure projects in our regions have to be part of a wider development process involving industrial and agricultural development, improved services and connectivity, capacity building for the work force and new entrepreneurs, and of course integration with regional and international markets. We will therefore be giving significant attention to these elements to support the long term viability of infrastructure investment. In Indonesia, we have been working on all these issues for a long time and there is a very real sense in KADIN and in the government that we must now deliver on our promises and our hard work.

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Emma Sri Martini President Director


sarana multi infrastruktur (smi)

Emma Sri Martini: We have been up and running since early 2009. Before I came here, I worked for another state-owned enterprise as CFO. We were an asset management company, managing credit assets, property and shares, which were bank or non-bank shares, and loans restructuring. I worked there from 2004 to 2009. Two days after I left, I was appointed by the government to establish SMi. However, prior to the asset management SOE, I worked for the Indonesian Banking Restructuring Agency (IBRA). That was one of the biggest financial entities ever established in Indonesia, as a government effort to tackle the banking crisis in end of the 1990s. All bank assets and companies’ restructuring were handled by IBRA. I worked there for about five years, and before that I started my career in the back office of the Jakarta Stock Exchange, the Indonesian Securities Clearing and Depository Company. I was heavily involved in developing their automated trading system. Leveraging investment IF: How would you best describe SMi’s business? ESM: The government realised that they have a very limited budget to finance infrastructure development, and wanted to leverage their capacity through the establishment of this company. By using SMi, the government can invest a certain amount of investment and attract larger amounts from the private sector. That is the basic idea. The smaller the capital outlay, the better it is for the government, which freely admits that the need is huge but that the budget can only cover 30 per cent of that need. The other 70 per cent has to come from the private sector. That is our mandate; ensuring SMi can attract private sector participation in public private partnership schemes. We have already accomplished our first phase mission by establishing our own subsidiary, the IIF, with an investment of

600 billion rupiah. We have also obtained committed equity from other sources, such as the International Finance Corporate, the German International Cooperation Agency and the Asian

The smaller the capital outlay, the better it is for the government, which freely admits that the need is huge but that the budget can only cover 30 per cent of that need Development Bank, which kicked in with 1.6 trillion rupiah. Another loan commitment from the World Bank and ADB for US$100 million each was also secured. We have already leveraged our investment of 600 billion rupiah to 3.6 trillion rupiah, or six times our initial commitment. IF: How does the financing agency work? ESM: The government established SMi as an investment company. It will leverage capacity for financing infrastructure by using the subsidiaries or by financing directly. Because SMi is a SOE, most of the private entities are reluctant to invest directly in SMi. If they want to invest in SMi, then the government has to obtain approval from the House. To make the process easier, a private sector participant will need to collaborate with SMi, and establish a subsidiary company. This allows them to get a commitment from the government through shareholding portion of SMi. IF: So if it’s private participation then the lending goes through IIF, but if it’s direct to the project then it is SMi. Is that how it works? 93

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Career defining moment I see myself as a result-oriented person. Consequently, in everything I do, I will try my best. My educational background is in informatics engineering, and I don’t have any formal education in financing. However, most of the time I worked in the financial industry, and taught myself how to execute an operation. Being appointed as President Director of SMi is a career-defining moment for me. Motivation I always want to do the best I can. I accepted this job because it was an honour to be chosen by the government. They chose me to manage this company, which is a trust that has to be upheld. It is exciting because it is quite new and challenging, in terms of pushing infrastructure forward.

ESM: Let me put it this way, if the private sector wants a company that will finance infrastructure, then it can collaborate with SMi,

We have already leveraged our investment of 600 billion rupiah to 3.6 trillion rupiah, or six times our initial commitment which will establish a subsidiary. That is one model. For IIF they can also finance the project directly. IF: So it is a financier and a special purpose vehicle (SPV)? ESM: Yes. It’s a financier and also an SPV. If we identify a project that is already viable for financing, then we don’t have to establish the JV (joint venture) first; we can just collaborate to finance the project directly with the private sector. This is one of the three models available. Financing solutions IF: What type of financing solutions do you think would be in most demand for Indonesia? ESM: It depends on the private sector. If it is not a 100 per cent private equity investment then the private sector usually wants SMi to provide lending for the project, over the short term or even the longer term. But if the investor is coming from a private equity firm, they generally prefer to establish a JV with SMi.


Biggest challenge faced Dealing with the regulations because they control what we do. When we run into a regulation that does not fit with us commercially, we either have to mitigate the obstacle, or we have to propose to and pursue the government to amend a bill or make an agreement. This is quite time consuming and challenging in terms of managing people who will actually become the stakeholders of such regulations. Connecting with local government is also another big challenge because we have to convince them that deals will be good for them as well as for their society. Most interesting project I think there are two projects that attracted our interest the most. Firstly, at beginning of our own operation – for which we only obtained an operating licence at the end of 2009 - there were a lot of projects that we could finance. In the space of two months we managed to close the deals with four projects, mainly state-owned enterprises (SOEs): a construction project, irrigation, a public toll road and a water supply project. Secondly is the establishment of IIF (Infrastructure Investment Fund), a joint venture with the ADB, IFC (International Finance Corporation) and DEG (Deutsche Investitions- und Entwicklungsgesellschaft). On this project we have to strike a balance for all the interested parties. We are grateful that all the parties can work together and join forces in establishing IIF. Most important business lesson To never give up. That is the key, because once we feel like giving up, then the game is over. For instance, when we are dealing with local government and all their issues are making it difficult for us to be able to move things forward, then I realise that if I think like that, I might as well get out of the industry. The key to dealing with infrastructure is realising that to close the deals we have to be patient and have to make ourselves ready for such a long process. That’s the challenge, to admit that the problems are still there, and to be able to fix them one problem at a time.

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It is quite flexible and depends on the investor’s risk appetite. But in terms of the types of financing, they can be divided into three areas. First, a senior loan which will be sourced by the banking industry, then mezzanine finance and finally equity financing. Equity is supposed to be provided by the project sponsors or owner or private equity. Senior loans are supposed to be provided by the banking industry. For the rest, we have to fill in the gap. The role of the capital markets IF: How do you see the role of the capital markets in Indonesia in financing over the short to medium-term? What challenges are you facing in getting the capital markets?

Eventually, the capital market should be utilised as a source of funds to finance projects, because our credit assets are quite good ESM: At the moment, the capital market doesn’t provide much help in supporting project financing. But going forward, it can be looked at as a source of funds for projects. This is because the underlying assets and the trust level of the people at the moment are not that high. Eventually, the capital market should be utilised as a source of funds to finance projects, because our credit assets are quite good, and we can leverage our capacity.

Reassuring investors IF: How can investors be assured of financial guarantees? ESM: That is why the government established the Indonesia Infrastructure Guarantee Fund (IGF) or Penjaminan Infrastructure Indonesia (PII). SMi will be providing the financing, and IGF can

By using SMi, the government can invest a certain amount of investment and attract larger amounts from the private sector provide the guarantee. The IGF covers the political risk. If there were changes in policy and concession agreements or tariff policy then it would have to realise the guarantee. IF: What do you think about the next step of this PPP scheme? ESM: I think the government has put a lot of effort into moving forward with this PPP scheme. A lot of laws have already been amended, and a lot of regulations for PPPs are already in place. A few months ago, there was a new regulation for the tender process, land acquisitions and the rights of the investor. So there are assurances that we would provide. However, I think it may take some time for all of the parties to get used to this regulation. 95

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Sinthya Roesly Chief Executive Officer


indonesia infrastructure guarantee fund (iigf)

Sinthya Roesly: My background is electrical engineering. I did my masters degree in power systems, and also completed a masters of business administration. Before becoming the CEO of this company I worked with PLN for 16 years, starting in 1993. My work saw me move from being in a technical, engineering job - as a commissioning engineer in power plant construction – to a more financial one. After power plant construction, I moved into commercial, and then operations in transmission and dispatching centres. In the past five years at PLN, I was involved in the corporate and financing side of the business, particularly dealing with the financing of the 10,000 Megawatt project. That included securing financing from the global bond market, development and export credit agencies and commercial and international banks, especially Chinese banks. Back in 2006, I was also involved in some corporate planning and strategy works. I was one of the drivers for PLN’s transformation

The aim is to give investors and bidders certainty in the project structure at an early stage program in 2009, pushing the company to get the margin required from the government for enlarging investment capacity. Then in late 2009, I joined the IIGF to deal with the formulation and execution of government guarantees provision for infrastructure projects. They wanted someone who had experience dealing with banks and development agencies and knew the expectation of contracting agencies, especially PLN, the government and investors. IF: Moving on to business matters. Obviously, IIGF is a relatively new organisation. Could you give us an overview of


the function it performs and tell us a little about the history of the company and the reasons for its formation? SR: The IIGF deals with the provision of government guarantees for foreign investors in infrastructure projects. Previously, these guarantees were provided by the Ministry of Finance in the form of government letters of comfort or support to investors, or through government-to-government cooperation, such as confirmation notes to a particular foreign government agency. These guarantees are deemed to provide full or blanket government coverage. The government’s objective in creating the IIGF, first, is to standardise the format of the guarantees, with more transparency and clarity on the process of guarantees provision for infrastructure investment, particularly the public private partnership projects. The aim is to give investors and bidders certainty in the project structure at an early stage of the project development and put project bidders on a level playing field. Guarantees may cover both political, credit or market risks that are triggered by government actions or inactions. Most important is that the guarantee is not blanket but covers only specific risks in the concession agreement. The second objective is to manage the contingent liability of the government. The government presently has an exposure in guarantees of about US$8 billion for projects in the 10,000 Megawatt programme and several billions of US dollars for other programmes. Post IIGF establishment, most of the contingent liability exposure for new projects will be managed by IIGF. Risk exposure of sudden shocks to the state budget is expected to be dampened by IIGF. As an implementation of the Single Window Policy, IIGF will appraise, process, structure and monitor the

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guarantees for infrastructure projects and make sure the process is clear and navigable. Obviously the creation of the IIGF came from a need. The old system of guarantees was not standardised and it was a bureaucratic, unclear and lengthy process. Financing IF: How is the IIGF financed? SR: We are currently financed through equity injection from the state budget – Rp1 trillion from state budget 2009, another Rp1 trillion scheduled for 2010 and Rp1.5 trillion for 2011. The government has a plan for equity injection every year until 2014.

With the IIGF, we now have an independent arbiter of risk, as well as a single-window policy for guarantees. Any request for guarantees has to go through the IIGF The other source is the guarantee facility from the World Bank, providing us with US$500 million in guarantee facilities that can be leveraged – because the World Bank is AAA-rated – by four times up to a total of US$2 billion deal flows. In the future, we are also expected to receive other sources of funds from export credit agencies or other financial institutions. In Indonesia, going ahead with a large infrastructure project is not always easy. Investors may have problems with land acquisition or regional government regulations. Most importantly, for a project to get loans, it must be seen as being economically and financially viable from the outset. By having a government guarantee on projects, it may increase the bankability and attract funds at a lower cost. IF: So, essentially you are the middle ground between the government and investors? SR: Yes, we are basically a bridge between government and investors. Previously, the private sector directly approached the government to request government guarantees. With IIGF, we now have an independent arbiter of risk, as well as a single-window policy for guarantees. Any request for guarantees, anything that relates to government guarantees, has to go through the IIGF. Guarantee risks IF: What are the common kinds of risks that investors encounter that you plan to guarantee? SR: One important risk is political. Primarily this relates to breach of contract or change in regulations – either from central or local government - which could negatively affect project economics.

Career defining moment I think it was dealing with the financing of the government’s “fast-track” power project, which aims to add 10,000 megawatts of electricity to the national grid in the next few years. This was a defining moment of my career because it marked a move from a technical, engineering-type position to a financial one. Motivation In addition to my love of work, what really motivates me, as a woman in this kind of business, is making a contribution to society. I love it when the work we do, for example with PLN, can improve people’s lives. Of course, working in the infrastructure sector you do help a lot of people and the public in general. Most interesting project Before joining the IIGF, I would say financing the fast-track programme during the years 2006 to 2009. This was the first time that the state electricity utility, PLN, was directly exposed to external financing; being global bond, export credit and commercial loan financing. Historically, the government has taken the primary funding role for PLN. All foreign loans were made on a government-to-government basis and were distributed to PLN through subsidiary loan agreements. With my current business in IIGF, we are dealing with government guarantees for Central Java power projects. The challenge for us is to create guarantee schemes that work for all stakeholders – investors, lenders, the Ministry of Finance and, of course, the contracting agencies, PLN. Most important lesson in business The most important lesson in business is working with and trusting your team. I always work to the best of my ability. I also believe it is important to deliver above and beyond our boss or counter-party’s expectations; for teams to set their sights high but achievable goals. Indonesia has a complex three-tier system of government – from central, provincial and regional level and regional governments have recently been devolved greater powers. In such a system a large number of interests are involved. The IIGF was set up to ensure that investors and developers would be insured against any change of regulations that negatively affects their business. This guarantee also acts as a deterrent against law changes, because the central government will be lumped with the bill if investors are put out. In the power sector the key problem for PLN is the power subsidies. Currently PLN is forced to sell power at lower than the cost of production to consumers. The government is supposed to make up the shortfall from this mismatch in a form of public service obligation (PSO) subsidy. Investors and lenders then see this PLN credit risk from this condition and need some sort of support or guarantee from government. 97

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guarantees and this legislation will be passed this year. It is a key piece of law and you should see substantial progress on guarantees when it is implemented. Future government projects IF: The government recently announced that it needs about US$150 billion in investment by 2014. It expects 60 per cent of this to come from the private sector. Are these targets achievable or realistic, and do you think Indonesia is doing enough to attract such investment? Guarantee structures IF: How do you see these guarantees being structured? SR: In terms of how we structure the guarantee of a project, first we look into the risk profile. What’s vital first is establishing good governance – to properly screen and appraise projects so that only feasible ones go through the guarantee process. In this endeavour, we have been assisted by the World Bank and have hired some consultants. Once we judge that a project is worth a guarantee, then we will structure the guarantee, whether using our balance sheet, World Bank or co-guarantee with the Ministry of Finance for mega projects. In terms of targets we have modest aims. From a total of 100 infrastructure investment projects the government is offering, we would like to see five to six large projects go through the guarantee process during the next four or five years. We are aiming to pick one or two workable projects from each sector to begin with. We have already identified six with a good chance of succeeding, including several waterworks projects and a railway. We are currently working on the supply side, which means we haven’t yet set targets for how many projects we expect go online. Regarding project pipelines – the demand side - investors are already starting to request our help in this process, which is encouraging. Within the IIGF, we go through four stages to provide guarantees: (1) consultation and guidance, (2) screening, (3) appraisal and (4) structuring of the guarantees. One important ongoing project is the power plant projects in Central Java. This process involves the Ministry of Finance, PLN, IFC and bidders and potential lenders. In Central Java, we are now at stage four of the process. We are currently testing the appetite of the market and structuring the guarantee agreement. There are seven bidders for the project – four from Japan, two from China and one from Korea. First we meet the bidders and lenders in a plenary session and then in one-on-one interviews. We then work out the terms and conditions for the guarantee and then give these to PLN. They have given us feedback and we are now preparing for a third round of meetings. On the legal side, the government is currently formulating a presidential decree explicitly laying the legal groundwork for


SR: Well, US$150 billion is quite a number. I think the government by using this figure was making the point that Indonesia’s development needs are huge. While achieving half that figure may sound like a lot of money, it won’t be enough to meet national or United Nations Millennium Development Goals. From my perspective, it took PLN about four years to raise US$11 billion for the fast-track project. That was quite a challenge but

Most importantly, for a project to get loans, it must be seen as being economically and financially viable from the outset. By having a government guarantee on projects, it may increase the bankability and attract funds at a lower cost we succeeded, and the funding is still there – it survived the global financial crisis. Internationally, of course, we have to compete for foreign funding with countries like Vietnam, Malaysia and Thailand. With an economy largely made up of micro, small and medium enterprises, there is not much capital around locally. In terms of promoting Indonesia, however, I believe we have turned an important corner. Much of this has to do with the work of the Indonesian Investment Coordinating Board (BKPM). The board has realistic targets of foreign direct investment – they’re aiming for US$17 billion of new foreign direct investment this year, with a medium-term target of US$25 billion per annum. Some very professional people are running the BKPM and it is already showing results. Indonesia booked US$8 billion of new investment in the first quarter and looks set to beat 2010’s investment target. Attitudes about this country are changing for the better. The key challenge for attracting sustained, higher levels of investment will be on the Indonesian side. We need to come up with bankable, feasible projects that deliver to communities as well as comply with environmental and social criteria. My organisation has been set up to facilitate this process and we are making good progress.

Energy & Natural Resources

energy & natural resources overview

Changes in energy aimed at foreign investors With a significant gap between the demand and supply of energy, Indonesia is facing an acute power crisis and addressing this issue requires massive investment in energy generation

To sustain its economic growth, the country needs an additional capacity of 20 to 30 GW by 2025

Indonesia is one of the fastest growing countries in Southeast Asia, with an estimated GDP of 6 per cent for 2010. The increasing rate of urbanisation and industrialisation has resulted in higher demand for reliable electricity. This translates to an estimated increase in energy demand of 7-10 per cent per annum until 2014. Presently, the country’s electrification ratio is approximately 65 per cent and the total installed capacity is around 37 gigawatts (GW). To sustain its economic growth, the country needs an additional capacity of 20 to 30 GW by 2025. With this looming gulf between demand and supply of power, the country is facing a serious power crisis. Addressing this problem will require massive investment in energy generation, including renewable energy (RE) and power transmission and distribution (T&D) sectors. Power development programs In 2004, the 10,000 MW Acceleration Plan (phase I) was instituted to moderate the energy crisis at a cost of around US$5.65 billion. The objective of this programme was to add 10,000 megawatts (MW) of new capacity by 2010, mainly by setting up coal-fired thermal power plants. However, a number of projects under phase I are still under construction and the overall completion dates are likely to be delayed till 2014. Due to this delay, a system of rotating blackouts is commonly followed in many cities. In April 2010, the Ministry of Energy and Mineral Resources (MEMR) identified an acute electricity crisis in 15 electrical systems. MEMR has set out short, medium and long term plans to resolve it. The short-term (less than one year) solution involves the purchase of power from private power producers, leasing portable generator sets, management of power demand and other network manoeuvres. The 101

energy & natural resources overview

medium (one to two years) and long-term (more than two years) measures involve power rental solutions, development of small-scale hydropower projects, independent power producer (IPP) project acceleration and timely completion of phase II of the 10,000 MW power project. Growing reliance on distributed power generation systems to meet shortterm power requirements is expected to make the Indonesian market highly attractive to both local and international suppliers of generator sets – stationary and portable, solar home systems and others. Despite the impending completion of the 10,000 MW Acceleration Program (phase I), the government introduced the program’s phase II (10,000 MW) in January 2010. The government has outlined to build 93 new power plants, which will provide electricity access for nearly 90 per cent of the country’s population by 2020. Of the 93 power plants, state-

The government has started removing subsidies for oil, which is likely to bring geothermal to a level playing field with conventional fuels owned utility PT Perusahaan Listrik Negara (PLN) is expected to build 21, while the remaining 72 plants are likely to be constructed on a joint collaboration basis between PT PLN and IPPs. To speed up investment in new projects, the government has allowed PLN to increase its profit margins from 5 per cent to 8 per cent and is granting interest-free loans. While the majority of the power plants under phase I were coal-fired ones, geothermal-based power plants are likely to dominate under phase II. The MEMR plans to install 9,000 MW of geothermal power plants by 2025. Despite Indonesia having the highest geothermal reserves in the world, it has so far utilised only 4 per cent of it. There is a greater need to exploit this resource as the government has started removing subsidies for oil, which is likely to bring geothermal to a level playing field with conventional fuels. Moreover, a big cost advantage is likely to emerge on account of its low carbon emissions. However, there are likely to be major delays in the implementation of the planned projects, as the sites are located in forests and are subject to several environmental clearances. Moreover, commercial feasibility of pursuing these plants remains uncertain, as they cost twice that of coal-fired plants and can take several years from research and development to final operation.


Power transmission and distribution programs The power transmission and distribution (T&D) sector in Indonesia is largely dominated by stateowned PT PLN, which controls about 85 per cent of the generated power. In 2002, the government enacted Law 20/2002 with the objective of reducing PLN’s monopoly within a five-year period. Under the provisions of this law, the private sector was allowed to participate in the wholesale of electricity to end users using the utility’s T&D infrastructure. However, the benefits of this law could not be completely realised as in December 2004 the constitutional court reinstated the 1985 Electricity Law that returned electricity distribution to PLN. The reason cited was that power T&D was a sensitive area and should be controlled by the government. Realising that PLN on its own would not be able to serve end users’ growing demand for power, in September 2009 the government introduced a new electricity law to replace the 1985 law. This puts an end to PLN’s legal monopoly on the supply and distribution of power to end users. As per the new law, a licence to provide electricity for public use (IUPTL) may be granted to private business entities, subject to a “right of first priority” for any new opportunities to PLN. The new electricity law is likely to provide opportunities for private companies in the downstream electricity equipment market. Impact of the new energy policy The National Energy Policy’s main objective is to create sustainable energy development. Recently the government issued a Presidential Decree No.4/2010, which states that PT PLN must carry out an accelerated electricity development programme by harnessing renewable energy, coal and gas. There has been a dramatic shift in the energy policy. Prior to 2006, Indonesia relied heavily on oil to fuel its power plants. However, there has been a shift from oil to other fuel types both for environmental and economic reasons. The price of oil increased dramatically, thereby increasing the cost of power produced. This, coupled with stagnant power tariffs, led PLN to incur substantial losses. The government took on the loss by providing subsidies for oil to PLN. Oil is the major contributor to the total energy production in Indonesia. To reduce dependency on oil and secure the energy supply for domestic consumption, the government released Presidential Regulation No.5/2006 on National Energy Policy,

Breakdown of Indonesian energy mix Oil Geothermal Natural gas Renewable Coal

Installed Capacity (MW): 37,650 Generation Capacity (TWhr): 155.6 Per Capita Energy Consumption (Kg oil equivalent): 507 Source: Frost & Sullivan

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energy & natural resources overview

which sets the target for the energy mix in 2025 as follows: ■ Oil – maximum 20 per cent ■ Coal – at least 33 per cent ■ Gas – at least 30 per cent ■ Geothermal – at least 5 per cent ■ Biofuel – at least 5 per cent ■ Liquefied coal – 2 per cent ■ Other renewable energy sources (biomass, nuclear, hydro power, solar and wind) – at least 5 per cent The new energy policy would result in very low investments in oil-based power plants, but owing to the large installed base, this segment would continue to provide service opportunities including supply of spare parts to local and multinational companies. Despite being the world’s largest exporter of liquefied natural gas (LNG), the share of natural gas in Indonesia’s power generation mix is only 28.6 per cent because of low incentives for investors who supply to the domestic market, subsidies for oil and the absence of revenue sharing arrangements for gas field exploration and expansion. However, with support from the government, natural gas power generation is likely

The wide gap between the supply and demand of power creates immense growth opportunities for both local and international companies to increase in the near future. Moreover, several gas pipelines are under construction and an LNG terminal is likely to be built for domestic industrial use. These factors are likely to drive the market for gas turbine suppliers and service providers. Alternative power sources To overcome the power crisis, the government is evaluating various types of power generation including nuclear power. However, they are taking a more reserved approach towards nuclear power as an alternative source because of the concerns associated with the installation of a nuclear facility in a country that has high levels of seismic activity. In addition, high capital costs in setting up a nuclear power plant do not make it an economically viable option. In the renewable energy segment, Indonesia has seen some activity in solar, biomass, small hydropower and geothermal. The National Energy Policy has a plan to increase renewable use from the current 4.5 per cent to more than 17 per cent by 2025. Volatility in oil and gas prices and a strong


need for energy supply security exerts considerable pressure to diversify the fuel portfolio – and to aggressively pursue alternative sources of power generation. However, most of the renewable energy systems (except geothermal power plants) have been installed as part of the rural electrification programmes and are developed by private power producers. Despite being a cost effective option to provide electricity in several rural and remote areas, growth momentum is sluggish because of ineffective policies and the lack of a road map to achieve the target. This has dissuaded project developers from pursuing renewable energy systems. Foreign direct investment in energy Investment Law 25/2007 that was passed in May 2007 aimed at boosting Indonesia’s investment climate and attracting greater foreign investment into the country. The new law puts domestic and foreign investors on a par, provides suitable compensation in the event the government takes action to nationalise, permits skilled foreign professionals to be employed, and allows private parties to transfer assets so long as they are not deemed as property of the state. The investment law promises to cut red tape and provide exemptions or reduction of income tax, import duties and value added tax. Under this law, disputes can be settled through international arbitration. Foreign direct investment (FDI) in the form of joint ventures between domestic and foreign investors is allowed in the areas of electricity generation (including nuclear power plants), transmission and distribution, electricity planning and supervision consulting services. A maximum of 95 per cent foreign ownership is allowed. Conclusion The wide gap between supply and demand of power creates immense growth opportunities for local and international companies – such as equipment suppliers, project developers and system integrators – to increase their market penetration in Indonesia. Growth of the energy market has been slow over the past few years because of challenges in getting project finance, execution inertia and the absence of clear guidelines. The looming power crisis needs to be averted, as the country’s economic growth is highly dependent on the energy sector. Long-term policy reforms – such as revisions in electricity law, rationalised electricity pricing policy, aggressive pursuance of renewable technologies and promotion of public private partnerships – coupled with short-term measures – such as decentralised power solutions driven by the government – could introduce more clarity to gain investors’ confidence in the power market.



PT KALTIMEX ENERGY ISO 9001-2002 Menara Karya Building 19th Floor, Unit G-H Jl. HR. Rasuna Said Blok X-5, Kav.1-2 Jakarta 12950, Indonesia Phone Number: +62 21 5794 4600 (hunting) Fax Number: +62 21 5794 4609/10 Email: Our vision: to preserve the future of energy and the environment Our mission: to enhance customers’ growth by providing reliable, efficient, competitive and environmentally friendly power solutions

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energy & natural resources overview

Opportunities across the board in natural resources Indonesia is blessed with natural resources – both above and below the ground – and with vast land availability will continue to grow associated markets. However, challenges predominantly pertaining to sustainability still need to be addressed In the agricultural sector, Indonesia recently overtook Malaysia as the world’s number one producer of palm oil used in food and industrial applications. It is also the world number three in cocoa production, most of which is produced in Sulawesi. Cassava, rice, rubber, sugar, coffee, peanuts, cashew nuts, fruit and vegetables also figure prominently in Indonesian production, not forgetting timber production for pulp, paper and furniture. Below the ground, Indonesia has significant reserves of several metals and minerals, including gold, nickel, coal, tin, and bauxite, not to mention oil and gas. On the other hand, the Indonesian market relies on imports of iron ore, steel, aluminium, oil and gas. Agricultural market With a population of around 240 million people and over 17,000 islands, Indonesia has roughly 100 million hectares of arable land planted in 2010, out of a total land mass of around 192 million hectares. Among the five major islands (Java, Sumatra, Sulawesi, Kalimantan and Irian Jaya), Java is the most densely populated, but also the most fertile. On Java, agricultural land area tends to decline, while outside Java it is increasing. The potential useable land resources are still mainly available in Kalimantan and Sumatra, which have the biggest areas of land in Indonesia. A large land mass, abundant rainfall, year-long sunshine, inexpensive skilled labour and the ability for foreign companies to own 95 per cent of an agricultural company in Indonesia have all combined to make Indonesia one of the most attractive countries to develop commercial-scale agricultural projects.


energy & natural resources overview

Natural waterfall Gunung Gede Indonesia

Palm oil Palm oil is the largest and fastest growing vegetable oil in the world, representing over 25 per cent of the market, compared to rapeseed and soya, which are the other two major vegetable oils. Several factors have helped to propel palm oil to the centre stage of vegetable oils. Firstly, although it takes five years for a palm plantation to reach maturity, it is a very hardy crop that requires very little maintenance. It also has significant advantages in that it produces an average of four tonnes of crude palm oil (CPO) per hectare planted, compared with soya at 0.4 tonnes per hectare and rapeseed at 0.6 tonnes per hectare. As an oil, it is also being favoured in certain applications such as frying due to its stability at high temperatures and neutral taste, and as a replacement for fatty matters, and has thus benefitted from trans fats issues. It is also the vegetable oil of choice in oleochemicals used primarily in soaps and detergents, though has not taken off as a biodiesel due to economic viability and its higher freezing points compared with other vegetable oils.

tonnes of palm oil in 2009 and is expected to produce close to 20 million tonnes of palm oil in 2010.

The location of Malaysia and Indonesia, which is in close proximity to the growth markets of China and India, has also been a boon for the industry. Both countries have significantly upped their imports to China and India, due to increased affluence and reduced import tariffs.

Indonesia must, however, address sustainability issues. Much illegal logging of tropical rainforest continues

The Indonesian palm oil sector, therefore, is still one of the most dynamic sectors in Indonesian agro-industry, with new investment steadily flowing in, increasingly so from foreign companies that have eyed this very profitable market. In general, it is considered that it costs around US$200 per hectare for palm oil, and the market price is hovering around the US$870 level per tonne. Indonesia produced more than 18 million

In 2010 the total area of oil palm cultivation in Indonesia was over 7 million hectares spread across five islands, up from 600,000 hectares in 1986. Approximately 70-80 per cent of this total area is considered mature, while the rest has not yet reached the productive stage. Sumatra is the main planting area for palm oil, accounting for 60-70 per cent of the total planted area. In fact, the majority of plantations in Sumatra are mature and in peak conditions. Kalimantan, on the other hand, is a relatively new destination for the development of oil palm plantations, so most plantations in this island are either still immature or reaching maturity.

Indonesia produced more than 18 million tonnes of palm oil in 2009 and is expected to produce close to 20 million tonnes of palm oil in 2010

At present, the expansion of oil palm planting has reached approximately 0.4-0.5 million hectares per annum; and a further acceleration is expected, thanks to the higher returns offered by palm oil when compared with other tree crops or staple grains.

Planted area of Indonesia palm oil by category of producers (2006-2010) Year

Area (Ha) Smallholders




2006 2007 2008 2009* 2010**

2,549,572 2,752,172 2,881,898 3,013,973 3,314,663

687,428 606,248 602,963 608,580 616,575

3,357,914 3,408,416 3,878,986 3,885,470 3,893,385

6,594,914 6,766,836 7,363,847 7,508,023 7,824,623

* Preliminary Figures ** Estimated Figures Source: Agricultural Department of Indonesia 107

energy & natural resources overview

in Indonesia at the expense of the environment, animals and people, not to mention that large amounts of carbon are emitted each year from the burning of land to clear it. While many Indonesian companies have joined the RSPO (Roundtable for Sustainable Palm Oil), there is still much that needs to be addressed in this controversial sector. Working hand in hand with all concerned parties and both implementing and enforcing the right policies will be critical. Indonesia still has over an estimated 90 million hectares of forest that constitutes around 10 per cent of the world’s existing tropical rainforests. If Figure 2 – Planted area and production of Indonesia sugar cane 2006-2010 Year Area (Ha) 2006 2007 2008 2009* 2010**

Production (tonnes)

396,441 2,307,027 427,799 2,623,786 436,505 2,668,428 443,832 2,849,769 446,150 2,861,103

* Preliminary Figures

Current sugar plantations are mainly in: ■ East Java (more than 40 per cent) ■ Lampung (more than 25 per cent) ■ Central Java (more than 10 per cent) Average yields are typically around 80 tonnes of sugar cane per hectare in Indonesia. In order to further develop the industry, and plant out at least another 500,000 hectares to achieve self reliance, the government has announced that it will expand areas into 14 provinces, including

With a potential supply demand crunch within the next five years due to old trees in Africa, the cocoa sector could be a real bonanza

** Estimated Figures Source: Agricultural Department of Indonesia

plans to reach 20 million hectares of palm plantations are to be followed through, it would seem important to preserve as much of Indonesia’s heritage as possible and ideally make as much use of the 7 million hectares of “degraded” land that is available. Thus while palm oil in Indonesia has a bright future, it must nonetheless address the environmental, social and legal issues that it is faced with. Private companies that represent around 55 per cent of the players in the market (10 per cent are state-owned companies, 35 per cent are smallholders) will need to take the lead. Sugar Another crop that we believe has a bright future, both due to a requirement to import and burgeoning global markets, is sugar. Spurred by ambitious government plans to spend significant amounts of money to upgrade this industry, both plantation and downstream businesses are set to benefit. Currently Indonesia has around 450,000 hectares of sugar plantations, up from less than 400,000 hectares in 2006, and produces almost 3 million tonnes of sugar per annum. Total sugar consumption was 4.8 million tonnes in 2009, making Indonesia the largest sugar buyer in Southeast Asia. Demand for raw sugar for industrial use totalled 2.15 million tonnes in 2009 while around 2.65 million tonnes is consumed for domestic applications, compared with a domestic production of only 2.8 million tonnes.


West Java, Southeast Sulawesi, Jambi, North Sumatra, West Nusa Tenggara (NTB), East Nusa Tenggara (NTT), South Sulawesi and Nanggroe Aceh Darussalam. Besides, 33 companies have expressed their plans to build plants in the 14 provinces. The government has estimated that it would require Rp23.53 trillion in new capital to develop the national sugar industry – Rp6.34 trillion would be needed by state-owned sugar producers and Rp17.18 trillion by private producers. Based on such plans, investment needed would reach Rp2.79 trillion in 2010, Rp4.75 trillion in 2011, Rp6.25 trillion in 2012, Rp5.12 trillion in 2013 and Rp4.59 trillion in 2014. The Government is thus likely to raise investment through support such as tax holidays, an easier licensing process, interest subsidy for

energy & natural resources overview

investments in sugar plants, and area facilities. The Ministry for State-owned Enterprises (SOEs) has also disclosed that state-owned PTPN plantations would be ready to build around 15 new sugar plants. The investment needed would be around Rp4.43 trillion, consisting of Rp3.62 trillion in plant repair works and Rp815 billion in area revitalisation. Such a plan by PTPN plantations would aim at meeting the national sugar production target of 3.54 million tonnes in 2014, rising 31 per cent from the 2.8 million tons in 2009/2010. With this revitalisation, sugar production from PTPN plants in 2014 could represent around two thirds of national production or around 2.3 million tonnes of the 3.54 million tonnes targeted by the government. By 2014, Indonesia could consume at least 5.7 million tonnes of sugar in domestic and industrial sectors combined. A significant proportion of the above investments will need to go into upgrading and revitalising the country’s inefficient fertilizer production. This could take up to Rp47 trillion in fertilizers alone. This would bring total investments required for the industry to a level of more than Rp70 trillion, or around US$8 billion. As mentioned above, for the smallholders and inefficient plants in general, it is important to achieve higher sucrose content in order to make sugar plantations as viable as possible. With an extraction of 9 per cent, the cost of production for a small farmer would be Rp5,000-5,300/kg compared with Rp6,250/kg at 7 per cent, thus increasing farmers’ profitability from Rp100 to Rp1,350/kg. Large private industry sugar players are also present and some of the large palm companies are starting to venture into the market, where they see potential for development. Downstream applications such as bioethanol could therefore benefit from these plans, especially as Indonesia is a net importer of oil and gas. Currently over 200,000 tonnes of bioethanol are produced in Indonesia. Another area that could benefit will be the power sector, as electricity could be produced from the biogases and biomass waste of the sugar mills. Part of this would be used to feed electricity back into the refinery and bioethanol plant, while the surplus could be sold to the grid. Indonesia’s requirement for electricity is no secret and the sugar industry could provide much needed relief. Currently, Brazil derives around 15 per cent of its total electricity requirements from sugar mill biomass. The key for Indonesia will be to ensure that the upstream and downstream therefore work hand in hand, and that the right incentives are in place, as well as developing the infrastructure to make it happen. If

Indonesia can manage to get this right, it could turn out to be a “sweet” investment opportunity. Cocoa Another sector with upside but significant challenges in Indonesia is the cocoa sector. Indonesia is currently the number three country worldwide Figure 3 – Production of Indonesia cocoa by category of producers (2006-2010) Year

Production (tonnes) Smallholders Government


2006 2007 2008 2009* 2010**

702,207 671,370 740,681 694,783 711,620

33,384 769,386 33,993 740,006 31,783 803,594 31,070 758,411 31,209 776,618

33,795 34,643 31,130 32,558 33,789


* Preliminary Figures ** Estimated Figures Source: Agricultural Department of Indonesia

after Ivory Coast and Ghana, producing around 750,000 tonnes per annum. Although Indonesia has risen fairly rapidly to hold a high ranking in the world arena, it nonetheless has many matters to sort out in order to raise productivity. Currently, Indonesia achieves just over 0.6 tonnes per hectare yield when a standard, well-run plantation can achieve 1.5 tonnes per hectare. Cocoa plantations are largely smallholder operations, and where smallholders are concerned, financial support may be required, as well as training and having access to optimal seeds. Without this, and when prices dip, farmers have a tendency to revert to other crops such as palm oil which are hardy and require less maintenance than cocoa. Additionally, a new export tax of 10 per cent has recently been implemented, Figure 4 – Planted area and production of Indonesia rubber by category of producers (2006-2010) Year

Area (Ha) Smallholders




2006 2007 2008 2009* 2010**

2,832,982 2,899,679 2,910,208 2,913,960 2,936,181

238,003 238,246 238,210 238,161 235,922

275,442 275,792 275,799 275,860 273,214

3,346,427 3,413,717 3,424,217 3,427,981 3,445,317


Production (tonnes) Smallholders Government

Private Total

2006 2007 2008 2009* 2010**

2,082,597 2,176,686 2,173,616 2,064,853 2,207,309

288,821 301,286 300,861 275,827 293,220

265,813 277,200 276,809 253,777 269,779

2,637,231 2,755,172 2,751,286 2,594,457 2,770,308

* Preliminary Figures ** Estimated Figures Source: Agricultural Department of Indonesia 109

energy & natural resources overview

and this should hopefully help to stimulate some further downstream processing in Indonesia. Out of the 1.5 million hectares of cocoa planted in Indonesia, around 80 per cent is planted in Sulawesi. However, Sulawesi has been prone to diseases such as VAD and the cocoa pod borer, which have wiped out rather large production at times.

By some time between 2015 and 2020, Indonesia could become the world’s number one rubber producer With chocolate prices just off a recent 33-year high, Asian countries consuming more, organic cocoa growing rapidly and a potential supply/demand crunch within the next five years due to old trees in Africa, the cocoa sector could be a real bonanza for Indonesia should it be able to provide further support to it.

crisis, exports rose at an average of nearly 10 per cent per annum from 2002-2007. China accounted for a significant portion of that growth, spurred by its fast growing auto sector which is the world’s number one with an estimated 16 million vehicles sold by the end of 2010. 70 per cent of the world’s natural rubber is consumed in this sector.

Rubber Also sometimes overshadowed by palm is the Indonesian rubber sector, which is the second largest in the world. While rubber had a difficult year in 2007 due to the weather and in 2008 due to the global economic crisis, it has recovered well in 2009 and 2010. China consumes more than 25 per cent of the world’s rubber production, with Japan in third place at around 9 per cent, and India in fourth place also at around 9 per cent; Indonesia is in close proximity to all these key markets. It produces around 3 million tonnes of rubber – just behind Thailand – and has an estimated market share of nearly 30 per cent of world production. By some time between 2015 and 2020, Indonesia could become the world’s number one rubber producer.

Total planted area is around 3.5 million hectares in Indonesia. Again though, Indonesia suffers from lower yields than other countries with around 1 tonne per hectare, which is not far off from 2 tonnes per hectare in Thailand.

Most of Indonesia’s production is therefore destined for exports and prior to the financial

Also, when prices are high there tends to be overexploitation of the crop and abandonment when prices are low. 85 per cent or so of the industry lies in the hands of smallholders; the rest in government and private hands. Greater attention must continue to be brought to:


Improving the spread of clonal material Halting the spread of low yielding local seedlings ■ Improving cultivation practices ■ Avoiding the proliferation of poor tapping processes that can cut down the lifespan trees ■ Improving district level financing schemes ■

Figure 5 – Production of cassava by top regions in Indonesia (2006-2010) Year Production (tonnes) Lampung East Java Central Java West Java Nusa Tenggara 2006 5,499,403 3,680,567 3,553,820* 2,044,674* 1,025,051 2007 6,394,906 3,423,630 3,410,469* 1,922,840* 882,648 2008 7,721,882 3,533,772 3,325,099* 2,035,446* 997,360 2009 7,569,178 3,222,637 3,676,809 2,086,187 998,115 2010** 7,927,764 3,079,008 3,933,587 2,103,820 1,031,548 * Preliminary Figures ** Estimated Figures Source: Agricultural Department of Indonesia


Jogjakarta Total(National) 1,016,270 976,610 892,907 1,047,684 1,031,138

19,986,640 19,988,058 21,756,991 22,039,145 22,851,003

energy & natural resources overview

Some of the large rubber consuming companies have also been very active in helping with regards to the above, though overall more money from the sale price needs to find its way down to the farmer. It is an industry that supports 15 million people. Sumatra has the largest rubber plantations in the country. The plantations in Sumatra are located mainly in South Sumatra, which alone encompasses 638,000 hectares in 2005, and in North Sumatra in Riau and Jambi. Other provinces that have large rubber plantations are West Kalimantan and Central Kalimantan, Central Java and West Java. Differing from Sumatra and Kalimantan, rubber plantations in Java are dominated by Badan Usaha Milik Negara (BUMN) – Indonesian state-owned enterprises – and private companies. Smallholdings are dominant in Sumatra and Kalimantan. Cassava While one typically associates Indonesia with palm oil, it is also a large producer of cassava. Indeed, although Thailand is always in the spotlight as being the biggest producer in the region and one of the biggest in the world with an annual production of around 24 million tonnes, Indonesia is snapping at its heels with an estimated production of just under 23 million tonnes in 2010, up from around 19 million tonnes in 2005. Cassava plantations have grown rapidly in Indonesia over the past three to five years as bioethanol production has spurred extract demand, and Indonesia now has an estimated 1.5 million hectares of cassava plantation in 2010. Yields on average are still relatively low in Indonesia compared with Thailand, averaging out historically at about 16.5 tonnes per hectare, compared with around 2324 tonnes per hectare in Thailand. It is not uncommon though to find very high yields above 80 tonnes per hectare in Indonesia depending on the cassava type, amount of fertilizer, soil and time left to grow. The largest producing regions for cassava in Indonesia are: ■ Lampung (around 25 per cent) ■ East Java (19 per cent) ■ Central Java (15 per cent) ■ West Java (9 per cent) ■ Nusa Tenggara (7 per cent) ■ Jogjakarta (5 per cent) With Indonesia continuing to ease subsidies in the fuels sector, alternative sources of biofuels should have a promising future so long as policies exist to ensure it is economically viable. Consequently, it should have a positive impact on cassava. Other crops/sectors As previously mentioned, Indonesia also holds tremendous potential in other crops. It is an

excellent base for fruit and vegetables and also presents opportunities in other sectors such as aquaculture. Mining sector Other than being blessed with tremendous wealth above the ground, Indonesia also has vast wealth beneath it. Gold, nickel, coal, tin and, to a lesser extent, iron ore are abundant. High mineral prices spurred by demand driven mainly by China and high prices of certain metals such as gold have led to significant growth in the value of mineral

Gold, nickel, coal, tin and, to a lesser extent, iron ore are abundant production in Indonesia. The industry’s commodity export value increased alone from US$9.4 billion in 2005 to about US$21 billion in 2006. This wealth has attracted several major foreign mining firms and investors in the market for some time, including companies such as: ■ Freeport

McMoran (US) – active in the Papua province producing copper and gold ■ BHP Billiton – active in Kalimantan and Maluku provinces ■ Newmont Pacific (US) – active in the West Nusa Tenggara province producing copper and gold ■ Vale INCO (Canada) – active in the South Sulawesi province producing nickel matte ■ Kideco Jaya Agung (South Korea) – active in Kalimantan In addition, there are several large local mining firms active in the market, such as state-owned PT Aneka Tambang which is active in many provinces in Indonesia producing copper, nickel and gold; state-owned PT Bukit Asam which has coal assets; PT Bumi Resources, PT Adaro Indonesia and PT Arutmin Indonesia which are active in Kalimantan (all coal); and PT Koba Tin and PT Timah which are active in Southern Sumatra. Chinese and Indian companies are actively looking for assets, in particular coal and iron ore, though the latter is a little more limited in Indonesia as the major reserves have already been wrapped up. The mining sector is important to Indonesia as it employs around 1 million people. With continued growth and demand for metals, it is expected that Indonesia will continue to see further investments into this sector, especially for coal driven by demand 111

energy & natural resources overview

in China and India. In April 2007, India’s Tata Power Company Ltd signed an agreement to purchase 30 per cent stakes in leading Indonesian coal firm PT Bumi Resources for US$1.3 billion. Coal Indonesia is the world’s number one coal exporter. The country has more than 61 billion tonnes of coal resources, with additional reserves estimated at around 6.7 billion tonnes. The largest coal deposits are found mainly on the islands of Kalimantan and Sumatra. Indonesia coal production has risen significantly in the past several years, from 132 million tonnes in 2004 to around 193 million tonnes in 2006, rising to 238 million tonnes in 2008, and is estimated to reach anywhere between 270-320 million tonnes in 2010. Indonesia’s coal exports have risen substantially, from 105 million tonnes in 2005 to 145 million tonnes in 2006. This rise is due to increased exports to several countries including Japan, China, India and South Korea to meet increased consumption needs fuelled by economic growth in Asia. 2008 and early 2009 were tough times due to the global economic crisis but from mid 2009 through to 2010 investors came back into the

Indonesia is the world’s number one coal exporter market to snap up assets, with coal being a major target, both thermal and coking coal. There has, however, been debate over capping coal exports at 150 million tonnes in order to preserve enough coal for domestic use. The electricity plan through to 2020 in Indonesia will use mainly coal as it diversifies away from oil as a source of power generation. There are several main local coal firms active in this market, including (but not limited to): ■

PT Bumi Resources (production capacity around 50 million tonnes/year) ■ PT Adaro Indonesia (more than 30 million tonnes/year) ■ PT Bukit Asam – state owned (more than 11 million tonnes/year) ■ PT Arutmin Indonesia (more than 10 million tonnes/year) ■ PT Kideco Jaya Agung (more than 10 million tonnes/year) ■ PT Berau Coal (more than 8 million million tonnes/year)


Gold, copper, nickel and tin Indonesia is one of the top producers in the world of gold, copper, nickel and tin. Globally, the country ranks second in tin production, third in copper production and fourth in nickel production. From a geological perspective, Indonesia has a lot of potential for further mineral development, with many reserves remaining untapped, though some of these may be hard to access due to environmental, social and logistical issues. Therefore, while greenfield exploration and development has to a certain extent been limited, existing multinationals have continued to make significant investments in their holdings. Indonesian mining is overall foreign-friendly as a foreign company can own up to 90 per cent of a mining company, though by year five needs to divest 10 per cent. Navigating both local and central government to obtain permits and concessions can sometimes be difficult. Companies such as Vale INCO have been operating in Indonesia since the early 1970s. Its operations are in Sulawesi and have a current annual production capacity of above 200,000 tonnes of nickel. Freeport McMoran has operated since the late 1960s in the Papua province and Newmont Pacific has operated since the 1990s in the West Nusa Tenggara province, both producing copper and gold. State-owned PT Aneka Tambang is active throughout Indonesia and is aggressively expanding its operations. However, the Indonesian mining sector comes with its own set of challenges, though it has become a better environment since early 2009. Historically, companies operating in the mining industry in Indonesia have faced legal uncertainties due to the

energy & natural resources overview

1999 application of Laws No. 22 and 25 regarding regional autonomy, and Law No. 41 regarding mining within protected forests. The challenges mentioned above are obstacles to attracting mining companies to invest in Indonesia. Historically, this hindered mineral exploration where very little money was spent on this activity. Despite all these challenges, in recent years mineral production has increased yearly across all mineral groups, and a new mining law that came into effect on January 12, 2009 after almost four years of Parliamentary debate has made investments into the Indonesian mining sector more attractive. Key highlights of this new law 4/2009 are: ■ Abolishing

the previous Contract of Work system for new foreign investment. The regulation of foreign investment in the mining sector has moved from the previous contract-based system (with contracts signed between investors and the central government) to a licence-based system equally applicable for both foreigners and domestic investors. Licences (Izin Usaha Pertambangan or IUP) are issued by the central, provincial or regional government depending on whether the mining project crosses regional or provincial boundaries. investment open but with divestment. A foreign investor can hold 100 per cent of an IUP concession. However, within five years of the start of production, the foreigner must divest 10 per cent of its shareholding in the IUP holder.

previously. Coal IUPs can be up to 50,000 hectares and 15,000 hectares for the exploration and production phases respectively. For mineral IUPs, the maximum areas accorded are up to 100,000 hectares and 25,000 hectares for exploration and production respectively. Conversely, the term of production phase IUPs has been reduced to 20 years, with the possibility of two 10-year extensions. The previous production licence was for a 30-year term, with two 10-year extensions.

■ Foreign

■ Designation

of mining areas within Indonesia. Under the new system, mining will only be permitted in areas that are designated as mining areas (Wilayah Pertambangan) by the central government, after consultation with the Indonesian Parliament and regional governments. Under the previous system, mining could, with very limited exceptions, be carried out anywhere in Indonesia.

Onshore processing obligation. To help develop the downstream refining and processing industries in Indonesia, the new law requires all mineral and coal miners to carry out processing and refining of the coal or mineral ores onshore. A five-year grandfathering provision exists for existing Contract of Work (foreign investment) mineral projects. However, Indonesia does not have the refining or processing capacity to process all mineral ores currently being produced, so there is significant concern as to whether Indonesian miners will be able to find adequate processing facilities.

■ ■ All

new coal and mineral mining concessions must be obtained by way of tender. To achieve better degrees of transparency, any award of an IUP must be made by way of a tender process, replacing the previous system of direct application. While the need for a tender prior to the grant of a concession may slow down the process for developing new mining projects, it should lead to a more level playing field for genuine investors, as it is designed to remove pure brokers and opportunists from the process.

Larger areas and reduced term. The maximum areas for IUPs have greatly increased, compared to

Regulation of mining contractors. The new law specifically regulates the mining support services activities, and requires mining companies to use national mining contractors over foreign-owned contractors, though the latter can be used where no local contractors are available. Similarly there is also a complete ban on a mining company using an affiliated mining services contractor, unless it otherwise obtains ministerial approval. The new mining law therefore clearly sets the regulatory path for investments in the Indonesian mining sector, and as a consequence Indonesia will continue to see further investments in the market moving forward. 113

energy & natural resources interview

Dahlan Iskan President Director


perusahaan listrik negara (PLN)

Dahlan Iskan: Before PLN, I was heavily involved in the media. I had more than 100 newspaper companies and 20 local television companies all over Indonesia. However, five years ago I became chronically ill. I had liver failure due to a cancer, so I simply handed over the company to my 30-year-old son. Fortunately, after a liver transplant, I got better and am now alive and well. I actually bought a helicopter during the illness to get me around when I thought I would be immobile due to my illness. Anyway, during my sickness, the company continued to grow. The younger generation was obviously capable of running the company in my absence. So I started thinking about what I wanted to do in the future. I did not want to go back to my own business. I travelled a lot. At the end of 2009, the President of Indonesia asked me to become the president director of PLN. I asked my doctor for advice on whether I could take on this responsibility – PLN is one of the biggest companies in Indonesia after all, and running it has many challenges and problems, but my doctor said, ‘Go ahead’. I started to work very hard again, from 6.30 in the morning until night, seven days a week, and as you see there has been no problem! Overhauling PLN IF: Can you tell us about the challenges you faced when you took up your role as president director of PLN and how you went about putting your own stamp on the company?

DI: Well, as I said, I did not expect the President to ask me to head up PLN last year. It was very surprising. It was well known that I had criticised PLN quite often when I worked in the media. In fact, I hated PLN back then. So when the President offered me the job, I thought, why me? I have no experience with electricity, I am not an engineer. Yet the President said to me that although the problems with PLN were large, somehow he believed I would be able to help solve them. I had told him that if I became the director of PLN, I would have to have the right to choose my own team. I promised that I


wouldn’t bring anyone from outside PLN, I would choose people inside PLN, but it had to be my own team. I was very firm about this, and insisted that I didn’t want anybody to interfere with my right to choose the people around me, and the government accepted this. It wasn’t a problem for me because I knew that PLN has some very clever people working for it. However, the thing is, although everyone knew what the problems were, and everyone knew what the solutions should be, the difficult part was actually getting to the right decisions – making decisions is very difficult you know! I really think it is because the team was not solid enough, and not working well enough

I believe that this is the first time in PLN’s history where all the members of the Board of Directors are in one unified team together. So as a priority, I knew I needed to have the right to form and choose my own team – to construct a solid group of people around me. As a result, I believe that this is the first time in PLN’s history where all the members of the Board of Directors are in one unified team. Nobody has a ‘boss’ as such; they all work for PLN. IF: You obviously had a firm idea of where you wanted to go when you took on PLN. Are you seeing any evidence that you’ve got it right? That things are proceeding as you would want them to? DI: I think we had two pieces of good news recently that show things are progressing. The first is that electricity usage in Java and Bali has reached a record high, which of course indicates that Indonesia is growing fast. Second, yesterday the government

energy & natural resources interview

approved a price increment for electricity. They agreed to give an eight per cent subsidy margin increase to PLN in order to make it function better. Future challenges in an archipelago IF: What do you see as some of the more significant challenges facing PLN at the moment? DI: The obvious problem we face is how to supply electricity to all parts of Indonesia. That can be difficult to achieve because of the country’s geography – it is an archipelago. At present, only Java’s and Bali’s power systems are connected to each other. Every other island has its own isolated power system. One big challenge will be figuring out how to link all the islands’ power requirements through a reliable and fast network to fulfil the people’s need for electricity. Presently, there is only one island that we have not solved this problem for yet, Lombok island. However, by the end of June we expect to have solved even Lombok; therefore all the islands should not have to suffer any more shortage of electricity. It was

At present, only Java’s and Bali’s power systems are connected to each other. Every other island has its own isolated power system very difficult finally to get it to this state, but we tried to make sure the decisions got implemented quickly. In the past we had set a target to solve this problem in six months, so at the end of this month, we hope to have these problems sorted. IF: Could you give us an overview of Indonesia’s electricity requirements and how different sources of power are used? DI: We know that Indonesia is very rich in geothermal energy sources, and hydro power energy, and we want to increase our use of both of them within a maximum five-year time-frame. We hope that in four years’ time Indonesia will become the biggest geothermal energy consumer in the world. That would mean that by 2013 we would be using 5,200 megawatts of geothermal energy power per year. As far as hydro power is concerned, we intend to make North Sumatra, the largest province in Indonesia, have the ‘largest’ mini hydro power project. To do this, we will have to push hundreds of mini projects through the private sector. Mini hydro energy basically means power plants between 1 to 10 megawatts, but there will be many such projects. We plan to make the North Sumatra province a well-known centre for mini hydro projects. Another ambition we have is to push to make Flores Island, in the north of the country, the first island to use 100 per cent geothermal energy power. And in the eastern part of Indonesia, we plan to construct an historic project of a 350 megawatts hydro

Motivation Helping to grow Indonesia through what we do in PLN is my motivation. My goal is not only to make PLN a better company, but also through PLN to help the country as a whole. Without sufficient electricity, economic growth in Indonesia will simply not happen. Biggest challenge faced None really. My principles of life are pretty simple and I just follow them. I am a simple person and have no big ambitions. Most important lesson in business I don’t really want to give any advice to young people, because I believe that every era has its own generation and each generation is different from the last. Things are different now, even the climate changes over time, but I do believe that only young people can make certain things move faster. That was actually the reason I resigned from my previous company, because I did not want to compete with young people. power plant in Papua. We have done a lot of preparation this year, and next year we will start the project in Papua in earnest. There is an abundance of hydro energy sources there. Oil and coal issues IF: Can you give us a few words on the current state of oil price subsidies in Indonesia? DI: I think in the future, maintaining government oil subsidies will become increasingly difficult. We are at the beginning of the process of implementing pure democracy in our country. I believe that in the next 10 years we will reach a mature stage of democracy. Our situation may be bumpy now, but given time, I expect to see a general change in the way the majority of people think about such things. A sort of common sense thinking will, I believe, eventually lead to a reasonable oil subsidy price and all the relating factors will eventually balance out and function well. One problem is that many people nowadays have a tendency, when they don’t feel too happy with this issue and proposed reductions in oil subsidies, to imply that they will not support you as a Member of the Parliament or President. At the moment, everyone is afraid to use logical thinking, and be economicsminded with regards to democracy. But still, I think it is only a matter of time before all this changes, and within 10 years I am confident that our economy and democracy will be developed and stable. And such habits won’t be as much of a problem. IF: How is PLN working with private coal mining companies towards meeting coal demand? DI: We have a plan to grow with the upstream ourselves, and to have our own mine, but for now we are still looking. Still, we have our subsidiaries. The PLN coal company or PLN Batubara. We have a long-term contract with miners to supply coal for more 115

energy & natural resources interview

than five years, and we also have several short-term contracts. However, in the future we should certainly go upstream, but it will take some years to do. Moving upstream is about securing a steady coal supply for our power plants.

We plan to make the North Sumatra province a well-known centre for mini hydro projects IF: How do you think PLN currently interacts with the international market for financing these sorts of projects? DI: In the past two years, we have of course had significant local bonds, but we have also been looking internationally. You know that every year since 2008 we have issued around US$1.5 billion and our credit rating has increased. In fact, our financing options have been steadily increasing. Local Indonesian banks have huge cash funds, for example, so there are more choices for us now. IF: Can you tell us something about how you see your independent power producer (IPP) partnerships developing? DI: We maintain IPP projects in certain percentages, but I think the Indonesian people would not want 100 per cent of their electricity generation sourced to an IPP – I think our people will not accept that. Nevertheless, we do believe that some portion should be done in this way, because without private sector involvement, competition is not so good. So we will maintain IPP projects at around 30 per cent of total capacity. This year we will bid for two


1,000 megawatt plants in Java Island on an IPP basis. It is a new project and a new era for Indonesian electricity. Until now our biggest plant has been 615 megawatts, and now we move on to the 1,000 megawatt era. IF: It seems PLN has quite a few ambitious plans. Any others in the pipeline? DI: Actually, I don’t want to be dramatic by calling these programs ambitious; for me they are vital programs that we simply have to accomplish. We do have long-term plans, plans looking ahead 10 years up to the year 2019. All of them will, we hope, be approved by the government. However, what we are able to do for the

In the future, maintaining government oil subsidies will become increasingly difficult moment is just follow out our current short-term plans, and cope with the city electricity supply in order to reduce or to avoid blackouts all over the country. IF: A final comment. You seem to enjoy being president director of PLN. DI: The liver I got from the transplant was from a 21-year-old donor. That is why I feel now I have a second chance in life, and that as president director of PLN, I’m doing this not for money and not for my career. It is my second life and I have to keep on doing better, I have to do the best for my country, and for my people.

energy & natural resources interview

Karen Agustiawan


President and Chief Executive Officer pertamina

Karen Agustiawan: My background is in engineering physics; I graduated in 1983 from the Institute of Technology in Bandung Indonesia. After that, in 1984, I was employed by Mobil Oil Indonesia. In 1989 I moved to work in the United States. After a year I came back to Indonesia and spent a few more years with Mobil Oil. A headhunter asked me whether I would like to join Landmark, a consultancy company, but just then it was bought by Halliburton. I spent five or six years there before I decided I would like to start my own business. So I ran a family business in oil and gas consultancy before Ari Soemarno (former Pertamina president director) asked me to join Pertamina as expert staff for the upstream sector. At the time it was quite a move by him to take on someone from outside the company and a female at that! I joined the company in December 2006. I was appointed as the upstream director in March 2008. I was the upstream director for 11 months before becoming the company’s CEO in February 2009. Balancing Pertamina’s assets IF: How would you best describe the business, and as the company’s CEO how do you plan to evolve it? KA: As the CEO I must have a clear picture of where Pertamina should be in the next 15 years. We started the big transformation

We are currently looking at coal bed methane (CBM), at shale gas, and also at geothermal energy as potential energy sources in 2006, with the first five-year target to become a ‘landlord’ in our own country. We would like to expand the business, both

upstream and downstream, but I would like to concentrate more on the upstream sector. That is because although the total revenue from downstream is 70 per cent, and from upstream 30 per cent, the net profit is reversed, with 70 per cent coming from upstream and only 30 per cent from downstream.

In the second phase of the additional 10,000 megawatts (MW) of electricity for Indonesia, geothermal energy will contribute about 1,300 MW. Right now we only have 272 MW of geothermal energy from three fields The reason why you see me acquiring a lot of stakes in many oil and gas blocks is because I would like to have a 50/50 balance of revenue. If anything should happen in the downstream cycle of business, such as what happened due to the government’s oil subsidy policy, we can still remain firm as an oil company, relying on revenue from the upstream side. Energy resources: maintaining diversity IF: Can you tell us something about the energy diversification that Pertamina is working on? Geothermal or liquefied natural gas for instance? KA: We are currently looking at coal bed methane (CBM), at shale gas, and also at geothermal energy as potential energy sources. As to liquefied natural gas (LNG), Pertamina has been providing this service for the past 30 years. I believe we have been outstanding in terms of quantity and quality, such that people trust Pertamina to deliver on its commitments. However, we are not quite ready to develop the LNG sector to a 117

energy & natural resources interview

more advanced level yet, as we do not have the infrastructure ready. The first things we need are floating receiving terminals. Indonesia does not have any yet, but I hope to have one operational in East Java in the fourth quarter of 2011. As for geothermal energy, in the second phase of the additional 10,000 megawatts (MW) of electricity for Indonesia, geothermal energy will contribute about 1,300 MW. Right now we only have 272 MW from three fields located in Kamojang, West Java; Lahendong in North Sulawesi and the Sibayak field in North Sumatra. The government has realised that if you want power plants without consuming oil, you need to use coal, but that is not really clean energy either, so the best alternative here is to use geothermal energy. If other countries can do it, why not Indonesia? If you cut out all oil consumption, I think PLN (the state electricity provider) can slash subsidies for electricity by Rp15 trillion. That’s why I am very supportive of geothermal energy. The future of oil and gas IF: What do you see are the biggest hurdles to overcome in the development of the oil and gas sector? KA: Land is still an issue in Indonesia. There needs to be a better and clearer picture regarding the whole issue, because it has delayed our drilling activities both in the oil and gas industries. The government needs to focus on this. Also the recapping of exploration activities; I do not know when the government will come out with a final policy, but they are working on it. Uncertainty around the recapping of the exploration for the company might demotivate investors. However, clear guidance was given by vice president Boediono during the last IPA (Indonesian Petroleum Association) conference, when he said that they will be more appreciative of investors.

When you are the largest company in your homeland, it is not that difficult to penetrate into Australian, European or other markets

Career defining moment When Ari Soemarno (former president director of PT Pertamina) asked me to join the company as an expert in the upstream sector. After spending 14 years with Mobil Oil, looking at things from the perspective of an operator, I moved to work with Halliburton and learned to see things from contractor’s point of view. It gave me an understanding of both sides and it led me to be trusted to serve in a directorship position and then later as the CEO. Motivation For me, it was a golden opportunity to become CEO at Pertamina. However, for some reason I feel the company can still be handled better; I see there is still plenty of room to improve. I want to see a more sustainable company supported by the most important parts of the business: first, the human resources, second, technology and third, its assets. From the human resources side, I see that there are many strong potential leaders in Pertamina right now, but they need to be coached, they need to learn to see the outside world. Biggest challenge faced When I first became the upstream director, it was a maledominated environment. The first three months was the toughest time. I was saying, ‘This is like running a marathon with shoes of steel.’ What I had to do was take off the shoes and run barefoot. At the end I hope they saw that I was there to make things better and to make things work. Most interesting project When I was with Halliburton, I was appointed as the integratedservices country manager for all accounts with oil and gas companies, and they knew that this division was doomed to fail, because basically Halliburton had actually lost the market. I told them, ‘No, I will make this happen; I will make it work.’ It was very difficult - we lost the first three tenders or so - I was very frustrated, but finally I made it, and we then won four tenders. Most important lesson in business If you want to do something, to make something happen, it has to be done with passion. Being a leader, if you are not passionate about the work, you will not be successful.

IF: What achievements do you consider have significantly shaped the company?

over the Offshore West Java (OWJ) operations, but now they see what we can do.

KA: When I took the job as the upstream director, Pertamina EP (which works with BP Migas through a production sharing contract] was only producing 105,000 barrels of oil per day and now it is producing 136,000. Also PHE (Pertamina Hulu Energi), a subsidiary of Pertamina that manages an upstream portfolio of oil and gas and other energy sector was producing about 30,000 barrels; now it is about 50,000 barrels. When we acquired BP West Java, which is now under PHE, oil production was 21,000 barrels; now it is close to 29,000 barrels.

What I mentioned above are achievements of the upstream sector, while in the downstream sector, one of our significant achievements among others is our aggressive expansion in the lubricant business.

People were underestimating Pertamina’s ability when we took


When you are the largest company in your homeland, when you have penetrated the entire market in Indonesia, it is not that difficult to penetrate into Australian, European or other markets. We do have targets. First we would like to enter Singapore. After Singapore, we also have Pakistan and the Middle East in mind, and now we are trying to penetrate into Europe.

energy & natural resources interview

Elisabeth Proust


President Director and General Manager total e&p indonesie

Elisabeth Proust: I am French and have been working for 30 years, mainly internationally. I have a technical background and started as a drilling engineer. I have since alternated between technical management positions in production and operations, and more strategic positions as a joint venture or new business project manager. Before arriving in Indonesia I was the vice president of engineering development worldwide. I became president director of Total E&P Indonesie on December 1, 2008. In summary, I have had a career with a lot of diversity, both in terms of geographical locations as well as the nature of the positions I have held. The system within the Total Group to develop our human resources is to give employees a challenge regularly, every three to four years, and this is also what we do with our people in Indonesia. The challenges ahead IF: Let us talk about the business of Total and, in that respect, please tell us more about Total E&P Indonesie and the key challenges you face. EP: Total E&P Indonesie has been around for 42 years and is well known with well established operations in Kalimantan. We are now the country’s number one gas producer, and our activity

We are currently supporting a project for an LNG-receiving terminal as part of the country’s energy ‘debottlenecking’ programme accounts for 30 per cent of the total gas production in Indonesia. We have 3,900 employees and every year we spend US$2 billion on our main asset, the Mahakam block in East Kalimantan, which we hold fifty-fifty with our Japanese partner Inpex Corp.

The Mahakam block presents a continuous and highly complex set of challenges: the installations are spread over a very large area in the delta of the Mahakam river and this gives rise to

It requires an enormous and constant effort from our engineers to keep production at optimum levels. So herein lies the challenge and one of the key points of our business: being at the top of technology and being at the top of performance in production intricate and complicated logistics. The fields are now mature and we have already produced a large amount from the reserves, so the technology needed to extract oil and gas is becoming more and more complex. It requires an enormous and constant effort from our engineers to keep production at optimum levels. So herein lies the challenge and one of the key points of our business: being at the top of technology and being at the top of performance in production. Another important aspect to Total E&P Indonesie’s business is to acquire new acreage in locations other than East Kalimantan. Here we are talking of seeking out new exploration opportunities. Total is very keen to diversify through exploration, and pursues this strategy worldwide, although it must be acknowledged that exploration has become more and more risky in Indonesia. Finding the right opportunities in association with other companies is the other challenge and we are ready to work in any part of Indonesia if the opportunity is there. 119

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IF: As far as the necessary infrastructure is concerned, what is the current situation and what is Total’s involvement? EP: Geographically, Indonesia is a unique archipelago with so many islands scattered over such a huge territory. Energy distribution is therefore not easy and, as in many other countries, the oil and gas resources are often not close to the areas where demand is high. This is typically the case for us. We produce in Kalimantan and for years we have provided gas for domestic usage, and we are one of the biggest providers and sellers of gas to Kalimantan’s industry: fertiliser plants, power plants and so on. However, there is also

For producers there is not so much difference in producing gas or oil: you go through the same steps, the same process, you have to explore and develop, you have to finance your project, you have to produce, and the costs are about the same a strong need for gas in other islands and we should be ready to respond to and meet this demand; but we face the fact that the only way at the present time to transport this gas, due to the distance, is as LNG (Liquefied Natural Gas). The other islands need to be ready to receive this LNG and at the present time we are in discussions to provide gas for LNG-receiving terminals. There is already a pipeline infrastructure between Sumatra and Java, but with limited capacity and a lack of gas transportation infrastructure. So the idea to increase the share of gas to the domestic market is linked to the development of this infrastructure, ie the LNG-receiving terminals. We are currently supporting a project for an LNG-receiving terminal as part of the country’s energy ‘debottlenecking’ programme. We are also naturally involved in the steps needed not only in creating physical infrastructure but also the sound economic system to bridge the gap between the producer of oil and gas and the final user; or distributors such as the state electricity distributor PT Perusahaan Listrik Negara (PLN) or PT Perusahaan Gas Negara (PGN), which has a role as a transporter of gas.


Motivation Every day there are new challenges: both short-term and long-term. Finding solutions to these challenges and implementing them is still fascinating. This does not mean that I like surprises. Sharing and achieving the objectives of the company with the team is my motivation. Biggest challenge faced In Indonesia, the biggest challenge when you arrive is to acquire the knowledge about the culture of the country, follow its evolution and adapt and integrate it into the company. Being accepted is one step, but we must achieve more than just acceptability; becoming part of the country is the second step. Most interesting project If we want to zoom in on a point in my career, I could mention an interesting project in Russia when I was in charge of launching a new business in West Siberia. I had to convince this particular company that we could bring them technology, know-how and organisation, and help them develop their competence. However, this company had a very guarded approach to us and saw us as a foreign party arriving to try and take a stake in their market. The dynamics between myself and the Russian manager, who I had a lot of respect for, were fascinating. Most important lesson in business Success in business is primarily linked to the competence that surrounds you. Not only creating business but maintaining it and making it sustainable. You need to learn not to be a standalone businessman or businesswoman. Alone success will be short-term, while long-term success requires us to identify continuously high potential collaborators, to promote them regularly within our organisation and develop and maintain their competences. The developing market for gas IF: Tell us more about the developing market for gas in Indonesia. EP: Regarding its potential, we have to place gas within the broad energy picture, since we should not forget that Indonesia is very rich in resources of oil, gas and coal. There is also geothermal energy and hydro-electric available here too.

energy & natural resources interview

Gas is still considered a by-product of oil: easier and cheaper to produce than oil. However, this is simply not the case. For the time being, people think that gas is a cheap form of energy, so there is still promotion to be done with respect to pricing. The main difficulty is to get the end-users to look at gas the same way they look at oil, because for producers there is not so much difference in producing gas or oil: you go through the same steps,

People think that gas is a cheap form of energy, so there is still promotion to be done with respect to pricing the same process, you have to explore and develop, you have to finance your project, you have to produce, and the costs are about the same. Also, it is very difficult to transport gas for a long distance. You need to liquefy it (and it is very expensive to liquefy gas), then transport it and re-gasify it. On top of that, in the current environment when you produce oil you have a guarantee to sell it at the international price; and there is no major discussion if this oil goes to the refinery in Indonesia or if it goes abroad. This is not the case for gas. However, looking forward, the prospects are very good for gas and Indonesia is likely to use less and less oil. In the broader picture, Indonesia needs to build a complete mapping system for gas with respect to other energy sources. For example, give preference to use of coal in faraway islands because of its ease of transportation, and building more industry near gas production because of the complexity and cost associated with transportation. This mapping is progressing and I am confident it will become the base plan for new infrastructure with the associated commercial structure. IF: Do you have any plans in coal bed methane? What other potential businesses do you see in Indonesia? EP: There is a strong wish and willingness on our side to be more involved in coal bed methane (CBM), especially in Kalimantan because we already have operations and we can add value through our knowledge of those operations. However, there are many other things we are interested in. For instance, Total has proven worldwide expertise in high pressure/ high temperature (HP/HT) wells, and indeed we are currently drilling an HP/HT well in Indonesia. We have been working in many countries specialising in sour gas/acid gas, C02 (carbon dioxide) and H2S. So again, this is cutting-edge technology we could bring to Indonesia. We are also well known for deep offshore activities in the Gulf of Guinea, which is another one of our specialities. There is a lot of potential in many markets in Indonesia, but these tend to be risky projects and the resources or the ‘prospectivity’ attached to them are sometimes marginal, and require good contractual and commercial conditions. IF: What has affected appetite to work and invest here and

what progress is being made in these areas? EP: Decentralisation has initially been a drawback as it has complicated the permission process, creating delays, postponement and a lack of efficiency for projects. However, regional authorities understand that they need to be more

Regional authorities understand that they need to be more efficient and are now empowered through their budget to focus, develop and create growth in their regions, so I am quite optimistic about the prospects for progress efficient and are now empowered through their budget to focus, develop and create growth in their regions, so I am quite optimistic about the prospects for progress. We have to recognise that debates over contractual schemes for oil and gas investors that are focused only on increasing state revenues create an unfavourable climate of uncertainty. I believe the production sharing contract (PSC) structure is the right one for both the country and the producers, as it covers all the contractual, commercial and fiscal parameters quite closely and encourages investment. As soon as you move to another contract, the parameters are only partially covered or remain outside of the contract. This creates uncertainty, instability and inevitably makes investors very wary. Full and open participation of the investors in the debate is essential to achieve and restore a good climate for investment. 121

energy & natural resources interview

R. Priyono Chairman


bp migas

Infrastructure Focus: Can you tell us something about BP Migas and the work it does in Indonesia? R. Priyono: The existence of BP Migas as you know began with the national decision to reform the economy and meet the challenge of democratic reform in Indonesia. The oil and gas sectors were very important in this process. After we had run the business more than 40 years, we realised that the sector had reformed itself in order to bring itself into line with good corporate governance. It was different with Pertamina, years before the establishment of BP Migas. BP Migas functions as an executive agency whose responsibility is to control all activities in the upstream petroleum industries.

form of investment will be as a partnership between the private sector and government. This partnership is something that relies on the trustworthiness and fairness of all parties. With these values as a background, we invite private business entities to

Investment in the upstream petroleum industry under the PSC regime is unique. The main form of investment will be as a partnership between the private sector and government

IF: Why does accountability matter in the petroleum sector? RP: The petroleum sector, in accordance to the national constitution, is intended to create revenue and benefit the state in order to serve the greater welfare of the people. The industry is not an end in itself; it is for the welfare of the public. So public accountability is the most important aspect of the business because of its public welfare obligations. BP Migas will meet the mission of the sector in two ways. First, through the traditional pathway in which the institution is responsible for maintaining and increasing production. The second is through what we call “economising the petroleum”. The sector has to become the engine of growth for the nation in terms of economics, technology and politics. Politically, we have to avoid any risk that people may judge the sector as a public curse. We want to be seen as a creator of welfare. making investment in oil and gas attractive IF: What has been done by the Government to improve the overall investment climate in Indonesia’s oil and gas sector? RP: Investment in the upstream petroleum industry under the production sharing contract (PSC) regime is unique. The main


partner with the government to develop the upstream business, starting from the initial exploration right up to the final production process. As the government agency, we are willing to maintain and enhance performance with a trustworthy partner, while from the private sector we expect them to be fair. All contracts that have been made as part of the partnership need to be respected. If we released a negative list of cost recovery, this shall be conceived as an obligation. However, the deeper argument of such a release is to protect the sector: not turning into a public enemy, being a public partner for development instead. BP Migas has a five-year organisational plan, which we have summarised in the acronym “PRUDENT”: Professional in performing, Responsive in teaming, Unity in diversity as an organisation, Decisive in acting, Ethical in doing, Nationally focused in thinking, and Trustworthy in partnering. That buzzword mirrors the institution’s willingness to provide the very best code of conduct in co-operation with the private companies, in order to achieve the highest performance of the upstream petroleum industry in Indonesia.

energy & natural resources interview

production targets: realistic or not IF: What is your view on the government’s production targets?

shows that the application of more advanced technology in exploration has increased our success ratio.

RP: We do understand that the maturity of the onshore fields is unavoidable. Therefore, we are starting to expand horizontally by going into deeper areas; in other words the offshore potential. Indonesia has offshore areas which are three-times the size of the Gulf of Mexico. Yet our deepwater development

Our view on the government’s production target is that it is fine and rational enough. Indonesia’s huge potential still offers great opportunities for the oil and gas industry. However, Indonesia is not Kuwait, or Saudi Arabia. We are an archipelago which is as big as the United States. “Peak Oil” could be a myth for Indonesia, as the size of the producing area is still very tiny compared with the geographical extent of the nation.

If we make a strong and effective effort (financially, technologically and managerially) for the new exploration, the government target is not unrealistic

Brazil could be in the same situation as us. In Brazil it was predicted that peak oil would limit the production to less than 1 million barrels of oil per day (BOD). However, since the government, through its agency ANP and Petrobras, put a huge effort in to explore and discover new resources, the production has ended up at 1.8 million BOD in the year 2002. Indonesia may be able to follow this example to similar effect.

is still relatively small. It means that there is huge potential for exploration in our basin. However, by going deeper it does not mean that the institution undermines the potential remaining in onshore areas. There is still oil and gas worth exploring there.

If we make a strong and effective effort (financially, technologically and managerially) for the new exploration, the government target is not unrealistic. A new cooperation with the third parties, investors and other industry players is needed. The government has to create an environment that will assist and incubate the potential investment in the upstream industry. That means producing comprehensive legislation on the upstream oil and gas development issue as a whole. Rather than capping cost recovery, it will be better to improve the mechanism of cost recovery control.

We are open to any proposal to apply a more efficient and upto-date technology to intensify the existing well enhanced oil recovery (EOR). We will seek to apply that technology. This is what we call our vertical proliferation strategy. The experience 123

energy & natural resources interview

way. The campaign of energy efficiency shall be a national one. The basis of the campaign is not merely based on the argument that petroleum shall be treated as an inter-generation equity for the nation. The state will allocate a certain percentage of the revenue made by the energy sector (ranging from coal as a primary energy up to electricity, which is petroleum included) to develop such a

The paradigm shift in the upstream industry needs more than just the participation of the private sector campaign. This may become a very large project. We may not only talk about electrical appliances or vehicle engines, but very probably urban and housing developments as well. Indonesia’s future energy mix IF: What are your views on the development of the energy sector in terms of Indonesia’s energy mix? What evolving sectors will have the most impact in the short term?

IF: How are you reducing the consumption of petroleum in the community? RP: We have to bear in mind these two facts: oil is a limited resource, and not replaceable. While gas is multi-usage, yet replaceable. Oil is used mainly for transport. And in fact, it is replaceable. Although gas can be used as a primary energy and

Regionalisation of the grid system will mean there will be less of a need for complicated project financing and operation management for such infrastructure. An integrated grid system involves much greater complexity and risk also as a raw material for industry such as in petrochemicals, its usage could be replaced by another products. From these two understandings, we then could ask which product shall be reduced and how to reduce it. Do we prefer reduction or efficient use? Although it is not our domain, we shall persuade the community to use petroleum products in the most efficient


RP: Again, it is not really an area our institution gets involved in. Nevertheless, I believe the support from the institution will lead at least to what we call a paradigm shift in our petroleum industry; that is, from oil to gas in the power industry. At the same time, we are also expecting that the transport sector will also follow the power industry. This must be the future business of the downstream sector. IF: How do you see private sector participation in infrastructure development developing in Indonesia? What else needs to be done to develop Indonesia’s infrastructure market? RP: As I mentioned above, the paradigm shift in the upstream industry needs more than just the participation of the private sector. Gas always needs a system of transport, a specific storage system, and other facilities to reach its customers. Most of the questions concerning the industry arise because we do not have a sufficient system for transportation and distribution. We lack a comprehensive gas infrastructure. Pipeline, storage, receiving/ re-gasification terminals for LNG and similar infrastructure should be the targets for private participation in natural gas industry development projects. As happened in the common transport sector, power sector and other such sectors, proposals from the private sector for the development of natural gas transportation and distribution networks have to be seriously considered. There are several forms of project execution or financing, such as Build, Operate and Transfer (BOT), Build, Lease and Transfer (BLT), among others. Regionalisation of the grid system will mean there will be less of a need for complicated project financing and operation management for such infrastructure. An integrated grid system involves much greater complexity and risk.




Source: BP Migas

PROVEN (P1) = 4,303.15 MMSTB POTENTIAL (P2+P3) = 3,695.39 MMSTB TOTAL (3P) = 7,998.54 MMSTB

















Indonesian Oil & Gas Reserves (01-01-2009)















PROVEN (P1) = 107.35 TSCF POTENTIAL (P2+P3) = 52.29 TSCF TOTAL (3P) = 159.64 TSCF


energy & natural resources interview 125

energy & natural resources interview

Hans Peter Haesslein


President Director and Chief Executive Officer siemens indonesia

Hans Peter Haesslein: My background is in electrical engineering, and as such I started out in engineering for Siemens 30-plus years ago in Germany. From the engineering side I moved on to project management, which provided me with international exposure. From there I moved into management. After various steps and countries, and different market segments, mainly related to the industrial business, I was given the responsibility to head PT. Siemens Indonesia as CEO in 2007. IF: Please tell us about Siemens Indonesia and your commitment to the market? HPH: It all started with a telegraph line back in 1855 from Surabaya to the Netherlands. This is when Siemens started in Indonesia and we have been present ever since, helping to develop the telecommunication, industrial and energy demands of the country. Today we are active in three sectors: the energy sector, the industry sector and the healthcare sector, and without doubt and as our history proves, Siemens is committed long term to Indonesia. There are approximately 240 million people living in Indonesia, and as there is presently a middle class of just 30 to 50 million, there is huge potential and demand for development. Therefore, any company that is serious about Asian markets needs to be present in Indonesia because I believe if you only have China and India in your viewfinder it is just too narrow a focus. However, one thing to keep in mind is that there is a certain degree of unpredictability because Indonesia has a young history of democracy, and fighting corruption is still a major issue. These are challenges we have to live with, but as for the future of the country, it is a great country to be in. The energy sector IF: Out of the three main sectors you are involved with, which sector do you see has the most potential going forward? HPH: If we talk business volume then it is certainly the energy


sector because if you do not have electrical energy to cover the demand, the industrial sector will not be able to expand. In our energy sector, we cover the market with our divisions for fossil, renewable, oil and gas, and power transmission and distribution including maintenance and service. Development of renewable energy in Indonesia is still in the development stage mainly because of its economic feasibility. Subsidies will be needed to develop these energy sources to substitute fossil fuels in the mid and long term. We are a long-term partner to the state electricity company PT Perusahaan Listrik Negara (PLN). We are participating in big projects such as our partnership in Paiton II Power Plant in East Java, where our equipment is installed and in which Siemens holds a 50 per cent share. We are also very strong in the business of power plant conversion from oil to gas and we will be participating in the upcoming projects to convert single-stage power plants to combined-cycle power plants. Energy demand is huge and so are the prospects for business. The country has an electrification rate of approximately 60 per cent. This means that of the population of 240 million, a huge portion do not have a reliable permanent supply of electricity at present. The government will have to provide electrical energy otherwise this portion of the population will not be able start their own businesses, they will not be able to watch TV and have access to information via TV or personal computers (PCs). In other words, they will stay behind. It may take a while to provide electricity to all, especially since Indonesia is so fragmented because of its geography. However, the country has all the resources it needs to develop the required electricity in addition to and as replacement for fossil fuels, with available sources such as solar, wind, biomass, and of course geothermal energy. IF: So what does this country need to do to fulfil the gap in energy demand? What are the barriers that are withholding development?

energy & natural resources interview

HPH: A big request from the industries as well as investors is to put in place regulations or a framework of rules that are more transparent, more predictable and less complex. BKPM (Indonesian Investment Coordinating Board) is working very, very hard to bring in investors; it has been successful in modifying the so-called negative list but still there is more transparency needed to set up business. If the Government can address these topics and also some existing contradictions, or overlapping regulations, then I am convinced the energy sector will develop rapidly. There is enough money for investment in the world and there are enough companies or investors out there willing and ready to come to Indonesia if the pre-conditions and the investment environment are right. An issue that in my opinion needs a closer look is the tariff structure for electrical energy. At the moment, it is subsidised in a way that makes it difficult for PLN to negotiate a PPA with a potential investor that will grant the investor a reasonable ROI. The rates for electricity are regulated by law and do not always cover costs, regardless of primary fuels. In summary, the tariffs will have to be reviewed in order to attract necessary investment. Water management and transportation IF: In terms of infrastructure more generally, what markets are the ones to watch? HPH: If you are talking about infrastructure in general and our business, I see a huge demand in clean water and waste water management. Water treatment is one of our core business areas. Globally, we have a turnover of approximately €1 billion, but in Indonesia we have no significant market at all. Fresh water is becoming more and more difficult to obtain, so I predict the market will develop rapidly in this area. In addition, the country is becoming more and more aware of the environmental impact if waste water from public consumption and industrial use is not treated appropriately. This will lead to the implementation of a regulatory framework and additional investment in this market segment. Another big growth area, of course, is transportation. I see huge opportunities for railroads, airports and ports. Public transport will have to be improved not only in Jakarta but also in all other major cities. Some mining companies are located far away from the sea and they are looking for replacement of transportation by trucks. Operating trucks carries high fuel costs, is slow, and limits volume of load. Replacement with railroad would not only reduce transportation costs for the mine operators but would have an additional effect of providing transportation at very reasonable cost for the public, because the majority of the investment and operating cost of the railroad would be carried by the industries. Then the entire region will benefit and develop along the railroad’s corridors.

Career-Defining Moment I do not think there is one single moment. However, starting in engineering, moving to project management and making the transition to managing the overall business within the company were the key events. Motivation In part, it is to do business, to make a deal, to close a deal, to make money at the end of the year for the company. To start with a project idea, develop this idea with a client, sign a contract, and at the end of the day have a successfully completed project is fascinating and motivates me. Just as important is working with people, and I find working in a team and sharing my experience acquired over the years very motivating. Biggest challenge faced There has been no single ‘biggest challenge’. Very challenging were the past three years of the global financial crisis, during which time it was extremely difficult to predict investment and market behaviour in general. Most of our Siemens employees are long-time employees, and despite the changes we had to adopt during these last years, we were able to retain our workforce. Most interesting project There were two. One was my very first project, which covered delivery of the electrical power supply for an aluminium smelter in Australia in the early 1980s. The second was more a business opportunity than a project. After the reunification of East and West Germany when I was running the food and beverage business, I was charged with providing electrical and automation equipment for the sugar industry. A number of new sugar factories had to be built in a very short time with very little front-end design. There was no room for delays because in autumn when the beet is ready for harvest it had to be processed, therefore the factories had to be up and running. It was a huge success and very rewarding. Most important lesson in business I believe you have to stay honest, always and in every aspect. You have to retain the trust of your business partners as well as of your employees. If they do not feel or if you are not able to show them that their values are also your own values, you will not be successful. It is always, always the team that assures success is there.

IF: Any tricks to doing business in this market?

re-tendered again over a period of years. Secondly, one must understand the way of thinking in Indonesia. That comprises the people, the setup of private and public organisations, the central government and also regional requirements.

HPH: As I said earlier you need to have the trust of your clients, which is the number one priority. Also, you have to have the financial muscle to participate in major tenders. It is not uncommon that major projects are being tendered and re-tendered and

To summarise, if you have a quality product, if you have the right solutions for your clients, if you have a motivated team, and if you adapt to the local requirements, business in Indonesia is not so different to doing business anywhere else in the world. 127

energy & natural resources interview

Darmoyo Doyoatmojo


Chief Executive Officer medco energi

Darmoyo Doyoatmojo: I started at Medco group in 1975. At that time we were still a contracting company, mostly doing electrical and mechanical work for electrical companies and the oil and gas industry. I continued working for Medco until I went to the United States in 1989 to do my MBA. Not long after that, my career started to take off. In 1994 I was made Medco director, and was deeply involved in taking the company public. A year after the IPO

We plan to make a big investment in ethanol in Papua in the next few years

we took over Stanvac from ExxonMobil. This was a milestone for us because we not only bought a company, but also an organisation with people, who were well trained by Exxon. In 2003 I was made head of production and then exploration and production. I was promoted to CEO in 2008. IF: How would you describe Medco Energi’s business today? DD: We work in three core areas. There is exploration and production, both domestic and international. Second is power. We are generating power as well as running operations and maintenance services for power plants. Third is our downstream business. This is a major activity for oil distribution as well as some renewables, such as ethanol. We plan to make a big investment in ethanol in Papua in the next few years. Another important business is coal bed methane (CBM) because it is new. However, in Indonesia we are still working on the regulations and how to implement them. IF: Medco Energi is intending to invest about US$7 billion between now and 2014. Two of those investments are an energy plant and a geothermal plant. Can you give us an overview of both the energy plant and the geothermal plant? DD: The energy plant is a major milestone for us. Few companies have experience in building energy facilities in our part of the


world. It is a big project, with total investment of more than US$3 billion. We will hold 50 per cent of the upstream where the most value is added. It will generate great value for us, the local community and the government of Sabu. We intend to situate the geothermal plant in Sarulla, North Sumatra. North Sumatra is interesting because it has ample geothermal resources. Our project will be on three sites and generate 333 megawatts in total, but that could go up to 1,000 megawatts. Most of the electricity in North Sumatra is fuelled by diesel oil, which is very expensive. In contrast, geothermal is clean and green. IF: Could you tell us more about CBM and Medco’s involvement in this area? DD: As I mentioned, CBM is something new here. We started discussions with the government several years ago when the

Geothermal energy in Indonesia is still evolving, and once it is evolved, I think there is huge potential. It is clean and it should be one of the priorities regulations were under one department. The government decided it should be the same as with oil and gas, so it is supervised by Unigas, and they treat it like a production sharing contract. We are still on the exploration side of this – doing the quarrying – but the potential is very big. The availability per well is small, so you need a lot of wells. The challenge, therefore, is that it requires a lot of land.

energy & natural resources interview

IF: Are you optimistic that land acquisition problems will be solved in the short to medium term? DD: We expect there to be some problems over land acquisition, but not only from regulations. Sometimes one plot of land is claimed by several parties or a tribe. I think using a plantation and CBM working together is the way forward, otherwise it could be difficult.

I think using a plantation and CBM working together is the way forward, otherwise it could be difficult IF: Are there some other insights into upstream operations that you would like to share? DD: Due to new regulations, upstream production has been on the rise over the past few years. The government is also streamlining the process, which will make companies more interested in investing. It has changed tack over the past few years because the President is in his second term. It is more stable and we are looking at economic performance, and not just political issues. IF: Can you tell us more about your ethanol operations? DD: We started with small plants, roughly about 1,100 barrels per day, in Lampung in South Sumatra. We feel there is a future there in expanding the potential of the land and the workforce. This is also true of renewables, not just creating clean energy and fuel, but also the creation of jobs. To produce 1,000 barrels, we need about 1,500 people. IF: How do you see Indonesia’s energy mix evolving? DD: The national grid is still running at about 70 per cent of demand. A growing economy means there is growing demand for fuel. I think government will mostly go for the cheapest option, which is coal, and we have a lot of coal. We see coal consumption significantly increasing over the next 15 years or so. However, if you look on the other side, on the environmental side, that is still one of the toughest issues. We are focusing on clean energy like geothermal, gas-fired power plants and biomass.

North Sumatra is interesting because it has ample geothermal resources. Our project will be on three sites and generate 333 megawatts in total The government tried to develop geothermal but ran into problems because it was hard to sell. There are some other areas that also need to get worked out, such as: is approval shifting from the central government to the local government, and if so how does it work? How can you develop geothermal under the new scheme?

Career-defining moment When I took the company public. We were not an oil company. We were a surfacing company back then, and only a small firm of perhaps $15 million in assets. Motivation Our vision is to create value for our stakeholders and for the country. For example, our contribution to the government for 2008 exceeded US$1 billion. This is in line with our values, creating something new and seeing how the results help. I also enjoy completing a project. I remember in 1979, I got my first big design project in London. I was working as project manager. I really enjoyed solving all the problems we had to face. Biggest challenge faced The IPO was the biggest because it involved so many people. We were leading a thousand people, and aligning those people and leading them towards the same goal is challenging. If you can do that, you are guaranteed success. Most interesting project Probably the one where I worked with a Japanese company because I learnt how to work with the Japanese. The Japanese work in a totally different manner to Westerners or Indonesians. There is a fairly strong commitment. They build their business over a long period of time. If you can be patient, you become closer and closer and you win that trust. This is what I like to do most. Most important lesson in business Preparation and understanding are musts. You can’t just say: “This is good, let’s do that.” You can never be too prepared. When you are, it works. Should it be under a tariff? Geothermal energy in Indonesia is still evolving, and once it is evolved, I think there is huge potential. It is clean and it should be one of the priorities for government. IF: What is your view on how foreign companies can work with local partners like yourself and do you see the appetite increasing? DD: A lot of work with foreign companies is in projects or asset help. For example, in Block A in Aceh, because the carbon dioxide content is high we needed some technology. Not only technology, we also needed a company with experience in developing 200 million cubic feet per day. It is those sort of situations where foreign companies can easiest access the market. IF: Does the government need to do more? DD: Yes, I believe so. It needs to be more specific on law enforcement and on tax structures, to make them clearer. However, I believe we are moving in the right direction. 129

energy & natural resources interview

Gatot Prawiro


Regional Executive Asia Pacific ge jenbacher gas engines, ge power & water and ge energy

Infrastructure Focus: Can you give us an overview of GE Indonesia? How would you best describe the business, and what is your company’s involvement in infrastructure? Gatot Prawiro: To begin with, GE Energy has three main businesses: GE Oil and Gas, GE Power and Water, and GE Energy Services. In Indonesia we have representatives of all three. We have been doing business here for more than five decades. You can still see old gas turbines and steam turbines manufactured by GE in Indonesia; they are still running and serving mostly with PLN [Perusahaan Listrik Negara: Indonesian state electricity company] and the Oil and Gas companies. GE Energy has more than 200 members of staff in Indonesia, although of course we have other staff who help outside the country – the people who help us with government relations and marketing, for example. GE is a technology company – we produce equipment and services that will help solve some of the world’s toughest problems. In Indonesia GE’s technology has helped provide solutions to extract oil and gas, assisting companies like Pertamina, ExxonMobil, BP and Chevron to do their business well; and more recently being involved in a coal bed methane to power project. GE’s technology has also provided the conversion of fuel, be it fossil fuel and renewable fuel, to much-needed electricity; both in PLN and in the private sector, such as industrial estates and commercial buildings. Supplying the energy sector IF: Could you tell us something about the equipment you provide to the market? GP: We offer a wide range of gas turbines, ranging from 20 megawatts (MW) to more than 200MW per unit, that run on natural gas, synthesis gas, oil, marine fuel oil and all other types of fossil fuels. We also make steam turbines for coal-fired power plants, geothermal plants and even nuclear-powered plants. We also manufacture Jenbacher Gas Engines ranging from 300kW to 9,500kW (9.5MW). Wind turbines have also been GE’s fast growing


business worldwide; we hope to see some wind farms established in Indonesia in the near future. Our Jenbacher Gas Engines have been the fastest growth business in Indonesia, from zero MW in 2004 to 400MW in 2010. The fleet are running on various fuels from natural gas, to flare gas to bio-gas and landfill gas; and are soon to be running on low rank coal gas (synthesis gas). Renewables and the future IF: Moving on to green energy, how important do you think this technology is to Indonesia? How do you see the market developing? GP: Indonesia has been blessed with plenty of potential renewable energy sources. It has an estimated potential capacity of 27 gigawatts of renewable geothermal resources for electricity. However, only a little bit of this has been exploited,

GE hopes to see some wind farms established in Indonesia in the near future and we really should develop this more. Solar energy has great potential as well, although prices for the technology will have to drop; Thin Film technology will bring the price per watt down Through GE’s Ecomagination initiative. Greener technology is an important part of the GE strategy and through this mindset GE has been honoured to be able to help provide cleaner-burning and also bio-gas-burning engines. The renewable energy market is a growing market in Indonesia, but it can grow faster; it needs more supportive regulations and policies in the form of tax incentives and RE production credits. GE Energy Financial Services – the energy financing unit of GE Energy’s parent company, the General Electric Company - has invested US$50 million in Star Energy’s expansion for a geothermal

energy & natural resources interview

power plant project in 2009, through a loan facility, in Wayang Windu field in West Java, and we are looking to do more. Certainly, geothermal energy is something which we can participate more in. We know that it would be foolish for Indonesia not to consider

I don’t expect any big explosion of development in Indonesia. We need to manage our expectations. renewable energy, especially geothermal energy. However, we cannot deny that Indonesia is also endowed with enormous reserves of fossil fuels like coal and gas. The fact that Indonesia is now a net-importer of oil is not really because reserves are not there; it is more because of other business factors. I expect you will still see many Indonesian power plants fuelled by coal, natural gas and oil. IF: Any expansion plans? GP: We are going to open an office in Balikpapan very soon to cover East Kalimantan and also in Palembang to cover South Sumatera. These are where the energy sources are, so we want to be close to the local decision maker and stakeholders there. Our gas turbine repair shop in Bandung is being continuously upgraded and in the future, as our gas engines fleet matures,

GE Energy

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GE Energy

Jenbacher gas engines Singapore

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88540 Singapore

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energy & natural resources interview

Career defining moment When I joined GE back in 1995, in an interview with the company in Hong Kong, I asked the interviewer why I should join the company. The guy replied, ‘If you join GE, you will be teaming up with the big boys.’ He was right; I haven’t regretted it at all. I was just like a little kid that had found a perfect playground. I have a strong passion for the energy industry. I have had a lot of fun since I joined GE. It was one of the best decisions that I made in my life. Motivation I want to try and make a difference for my country. I remember that back in 1974, many people, even in parts of Jakarta, were still living without any electricity at all. In 1975 at the age of 13 I was sent to the United Kingdom to study. I went to school over there and did my ‘O’ levels and ‘A’ levels, then I studied for a university degree and became an engineer. I returned to Indonesia in 1988. I noticed that there had been some improvement, but still millions of people were living without electricity. This motivated me to work in an industry that could concretely improve the lives of millions of people.

there are also plans to establish a more comprehensive overhaul shop. The infrastructure challenge IF: The government has said it prioritises infrastructure development to boost economic growth. How do you see this development going forward? GP: From what I see, I don’t expect any big explosion of development in Indonesia. We need to manage our expectations. While we have no doubt about economic growth, what we see is this: Indonesia still has an electrification ratio of around 60 per

Indonesia has an estimated potential capacity of 27 gigawatts of renewable geothermal resources cent, meaning there are about 90 million people living without power in this nation. Economic growth is forecast at around 5.7 per cent (for 2010), fuelling demand for electricity at a rate of 9.2 per cent. This is a big demand for electricity that needs to be caught up with. In terms of fuel usage, there is a minor problem here. We would like to use gas, but gas needs piping. If it is liquefied then it is expensive; if it is compressed, it is also expensive. The same thing goes with funding the development of oil wells (ageing ones


Biggest challenge faced To change a ‘mind set’ has been my biggest challenge. When a customer thinks that ‘the cheaper price is the better’, it is very difficult to get them to consider that actually the better is the lower ‘life cycle cost’; and that is not only considering the price but also the operational cost over the life of the equipment. Most interesting project Turning everyday waste to electricity, now that is very interesting indeed. Our technology does exactly that. Most important lesson in business To network with integrity and to delight your customers (and that means to do more than just make them happy...) are very important lessons to me in business. or exploring new fields). The oil becomes expensive. There is also the fact that the good quality coal here is usually exported. PLN have admitted that they need help to catch up with electricity demand. It has to be the private sector that steps in to help. The government has actually done a great job in providing some incentives: import duty for power plant construction equipment has been cut or even scrapped altogether. They have also done a pretty good job of setting up a reasonable tariff for the developers of mini-hydro plants in rural areas with a capacity below 10 megawatts. But the government needs to push for a more conducive investment environment. For example, permits should be simplified, like whenever you want to build a plant and you need a local permit, this should somehow be made simpler.

energy & natural resources interview

Sukrisno President Director


bukit asam

Sukrisno: Before I began working for Bukit Asam, I worked at a cement plant. A plant belonging to Cement Padang, which was located in West Sumatra. I worked there for 21 years. My last position there was plant manager. After that, in 2001, I started working in PTBA (PT Bukit Asam) as a production director. That lasted for about five years. Then in 2006, I was appointed president director. Although my experience really only comes from working in a cement plant, it still means I had quite a lot of experience with coal. As you know, cement plants use a lot of coal! It seemed natural to move into the coal business. In fact, I had had 21 years of using coal from PTBA. We did a lot of business together. I became familiar with the company, and PTBA got to know me pretty well too. Investing in coal IF: Can you tell us a bit about Bukit Asam and how you see the business working? Sukrisno: PTBA is first of all a coal producer, but its business also encompasses energy. By energy I mean power plants. Recently, for instance, we have also been looking into gas-powered plants.

Before this decentralisation process, only central government controlled the company, but now we have many more stakeholders PTBA is currently studying coal-to-gas, or coal gasification. Our current partner here is the German engineering company Lurgi. I hope that by the end of the year we will have completed our studies, and about two or three years after that, we will have constructed a gas power plant. We are hoping that the plant will be completed in around 2014.

IF: Bukit Asam has been investing in mining infrastructure. Can you outline to us your reasons? Sukrisno: With regards to infrastructure, there are currently four projects. The first project is an existing railway line that will help increase coal production capacity to 22.7 million tonnes a year from 10 million tonnes a year. The second project is a planned new direct railway line from Tanjung Enim to Lampung; the planned coal capacity target here is 25 million tonnes per year. The third project is a planned railway line from Tanjung Enim to Bengkulu which should help bring up to 40 million tonnes of coal production per year. PTBA has no share in this project though; we are only committed to transport the coal. The final project is a planned line from Tanjung Enim to Tanjung Api-api in South Sumatra. Production capacity here is expected to be 30 million tonnes a year. This deal is also for transporting coal only. IF: Can you tell us something about the project in South Sumatra that involves a port? Sukrisno: Ah yes, the one with a port. That is a railway line project that is financed 80 per cent by the Rajawali Group, 10 per cent by China Railway Engineering Corporation, and 10 per cent by Bukit Asam. This project will start in 2011, and finish in 2014. Challenges for infrastructure development IF: It seems more and more important for companies to have to build the infrastructure themselves if they want to be able to get their coal - or other natural resource product - out there to be sold. What would you say is the most important hurdle in infrastructure building? Sukrisno: The most important hurdle I would say is the problem of land acquisition. For our current projects, I am truly hoping for the help of the local governments of Lampung and South Sumatra with land acquisition, because we have about 307km 133

energy & natural resources interview

of rail projects in those areas. We expect the land acquisition process to take about a year and a half, possibly two years. As you can see, this itself is a big problem as it is a very long time. Basically, due to current regulations that are still not clear, the land acquisition issue is a bit tricky. The decentralisation process in government that has been happening in Indonesia for a few years now has also caused us some problems. Before this decentralisation process, only central government controlled the company, but now we have many more stakeholders. Not only the central government, but Motivation The challenge that comes with developing a company and making it as successful as possible. When I worked for Cement Padang in Western Sumatra I was an assistant manager, and then a plant manager, which was one level under the director. In Bukit Asam I was a production manager, and a question we were always asking there was how to increase company performance. Now, as President Director, it’s the same question and the same motivation: how to increase our production levels. So that is my motivation: doing as much with the company as possible. Biggest challenge faced As I’ve just mentioned my biggest challenge as president director is still all about increasing production. Just to give you an idea, our target is to have an annual production output of 50 million tonnes of coal by the year 2014. This is what we all call a ‘golden’ figure: 50 million tonnes per year. At the moment, we are producing only 12 million tonnes per year. But with a lot of transportation projects in the pipeline we should be able to increase this. In fact I would say that 50 million tonnes is really a targeted minimum per year. We can probably go higher.


local government becomes stakeholders too, which means new regulations coming from local government. IF: We are interested to know a bit about your work with energy and power. By this we mean investing in facilities that will operate as an independent power producer (IPP). Can you tell us a bit more about PTBA’s investments in power production, and in becoming an IPP? Sukrisno: There is a power plant we plan to build in the South Sumatra area. It is going to be a 2 x 300 megawatts (MW) plant. Aside from this, we also plan to build another 2 x 300 MW power plant in the province of Riau, because PTBA has a presence there as well. We have a 1.3 billion tonne coal reserve in Riau, but about 500 million tonnes can be mined. We also plan to install a 4 x 600 MW power plant in Tanjung Nim. This will be used to help supply Java and Bali’s power needs. The state electricity company is the one and only client.

The domestic market does not really fluctuate that much here actually. What we are seeing here is that the current trend is basically a rising domestic market demand IF: I see that some of these power plants are not just for industry requirements; they appear to be for public consumption, public power needs. Do you see that area of business being a very important growth area for PTBA then? Sukrisno: Yes I think so, the potential is there as PTBA has large coal reservoirs. We have 7.5 billion tonnes of coal, although only 2.2 billion tonnes is mineable.

energy & natural resources interview

IF: Prices of commodities rise and fall all the time. How have you seen this affecting your business? What consequences has this brought to your company? Sukrisno: The domestic market does not really fluctuate that much here actually. What we are seeing here is that the current

We have 7.5 billion tonnes of coal, but only 2.2 billion tonnes is mineable trend is basically a rising domestic market demand. 70 per cent of our market is domestic. The rest of the demand comes from countries like Japan, Malaysia, India, Pakistan and China. Constraints on foreign partners IF: Is PTBA positioned to work with foreign companies as a local partner, or is that not possible because it is a stateowned enterprise? Sukrisno: Based on new coal industry regulations, we cannot

really do business with other investors on a coal site. We are not able to transfer our mine concessions to other partners either. But if a partner already has a concession in Indonesia, they can work with us. IF: You have mentioned you are interested in developing energy aside from producing coal. Would you be interested in geothermal energy? Sukrisno: Actually, not really, but this is mainly because we do not have a licence for geothermal energy. Our licences are only for coal energy. IF: Where do you see your company in a few years time? Sukrisno: Well, we are still pretty small as a company I think. We used to be number one, but now we are seventh among the coal producers I believe. Still we have big reserves and therefore big potential. I think we have the largest coal reserves here in Indonesia. Maybe after 2020 we’ll be the number one coal producer again. The bottleneck is only infrastructure, and we are getting that sorted out. 135

energy & natural resources interview

Willi Goldschmidt


Chief Executive Officer navigat energy

Willi Goldschmidt: I was born in Fuerstenfeld, Austria and graduated as a mechanical engineer in Vienna. In 1981 I joined General Motors and was involved in project development. I moved to Rieter in Switzerland in 1989 as a project manager to build textile factories in different parts of the world. In 1998 I founded a trading service engineering company called Textechindo in Bandung, Indonesia, with about 60 local employees and eight expatriates. We continued in the textile machinery industry and built several textile factories on a turnkey basis in Indonesia and in the region. However, then I decided to diversify from textiles to renewable energy, as well as waste management, and established Navigat Organic Energy Indonesia (NOEI). NOEI is a developer and operator for the landfill sites in Suwung, Bali and Bantar Garbang in Jakarta. In 2003, I started the company Navigat Energy in Jakarta. It has now become one of the leading suppliers, operators and developers in the energy industry in Indonesia. The company addresses the growing local demand for clean power.

Indonesia, with its 237 million population and real GDP of US$932 billion, quietly dominates ASEAN countries, accounting for two-fifths of ASEAN’s population and one-third of its GDP IF: Could you describe Navigat’s business? What are the products and the services you deliver to Southeast Asia and Indonesia? WG: Navigat Energy is a developer and operator of clean power generation in Southeast Asia, as well as equipment supplier for small and medium sized power plants. We are the sole authorised Indonesian distributor for GE Jenbacher, an international


manufacturer of gas engines and cogeneration units that can convert natural gas, biogas or coal bed methane into power. GE Jenbacher has 10,000 installed generator sets worldwide. We provide an integrated one-stop shop approach for our clients, including power plants that come under the BOT (build-operatetransfer) scheme, or we can do purely sales to independent power producers (IPPs). Aside from that, we are able to develop power plants ourselves and supply the power to basically two markets: the state electricity company PT Perusahaan Listrik Negara (PLN) or directly to industry, what we call captive power. In terms of the size of our business, the energy we are talking about is a total of about 350 megawatts. We are growing quite rapidly; we are expecting to install an extra 100 megawatts in 2010, and an extra 150 megawatts in 2011. energy perspectives IF: How do you see the markets growing in Indonesia and the market trends that you have identified? WG: Indonesia, with its 237 million population and real GDP of US$932 billion, quietly dominates ASEAN (Association of Southeast Asian Nations) countries, accounting for two-fifths of ASEAN’s population and one-third of its GDP. The country is the world’s largest democracy after the US and India. It is the largest national economy in Southeast Asia, with political stability and financial reforms in place. The country, which is one of the members of the G20 economies, has a real GDP that grew by 6.3 per cent in 2007 and another 5.9 per cent in 2008, despite global market conditions. I think personally and strongly that Indonesia will keep on growing economically. That means middle gross income will increase. Although, economic growth will only be sustainable by development of infrastructure projects, for example power generation. As the GDP grows, people will consume more electricity. It also would mean supply from the local industries would grow.

However, among the bigger islands, only Java and Bali have electrical infrastructure. The remaining parts of Indonesia have limited electrical infrastructure. Indonesia is a very special country, as it has more than 17,000 islands. Ironically, while the Indonesian economy is growing, the country has one of the lowest installed capacity per capita, as well as the lowest energy consumption per capita. Indonesia only has 0.1 kilowatts (KW) per capita; while for instance Japan has 2.1 and Thailand has 0.4. The electrification ratio is only 59 per cent. The total installed capacity is approximately 30,000 megawatts (MW), of which 80 per cent is installed in Java-Bali. Currently, there are 17 independent power producer (IPP) projects in operation, with a total capacity of 4,318 MW. A large amount

Indonesia’s geography, with its numerous islands, constitutes a unique opportunity to build a distributed energy platform of Indonesian power generation – 25 per cent – is diesel or fossil fuel fired. Furthermore, Indonesia has approximately 1,500 MW of open cycle power generation. Due to the country’s rapidly growing demand for electricity, the Indonesian government announced two crash programs to meet this demand. Crash program one establishes new coal-based electricity generation with a total capacity of 10,000 MW. A second crash program has been announced for the period of 20102014, which will consist of over 60 per cent new capacity from renewable resources; specifically 48 per cent (5,000 MW) from geothermal resources and 12 per cent from hydro resources. Indonesia’s geography, with its numerous islands, constitutes a unique opportunity to build a distributed energy platform. The country is endowed with an abundance of energy sources, such as gas, biogas, biowaste, hydro and geothermal resources. In terms of the best opportunities going forward, we will focus our business on sectors such as gas-to-power, hydro and biogas-to-power. The energy resources mix IF: Tell us more about gas and other alternative resources in Indonesia? What do you see as being their potential? WG: This country has plenty of natural gas, and next to that, with an even larger potential, is coal bed methane (CBM); and then it also has smaller gas resources like landfill gas. Landfill gas can actually be a big source of energy in certain locations, where you can sustain a big landfill plant like the ones in Bekasi (outer city of Jakarta) and Jakarta. There is an enormous amount of gas that is produced in these locations. However, CBM really seems to be getting going now. There is an enormous source of gas everywhere, which also means next to

energy & natural resources interview

Career Defining Moment I have two. First, during the 1998 crisis in Asia I decided to quit my professional career and start my own business, despite it being a very challenging economic time in South East Asia. However, I learned that every crisis opens up new opportunities. The second was when I decided to move from the textiles industry into the renewable energy sector. Both decisions and the timings have contributed to the success of my career as an entrepreneur. Motivation To provide clean, renewable energy for Indonesia and use natural resources like natural gas, flare gas, biogas, landfill gas or mini-hydro to do so. We contribute to the sustainable growth of Indonesia while reducing CO2 emissions. All of that gives you the feeling that you are doing the right thing.

grids in the future. We are currently supplying the gas engine for a pilot project, and GE Jenbacher has quite a track record in this area and in markets like China. Another potentially large source of gas is from the oil industry (flare gas). Although large in volume, there is a rather limited number of flare gas projects. Despite all the challenges to develop alternative resources it is worth it; I have done some research on this which says that the potential for biomass, hydro power and geothermal energy is larger than the installed capacity of Indonesia today. In principal, Indonesia has the potential to be one of the first clean power countries in the world. However, having said that, some of the projects are more expensive; and sometimes there are located in areas where you don’t need the power.

The country is endowed with an abundance of energy sources, such as gas, biogas, biowaste, hydro and geothermal resources At the moment, coal-fired power stations are cheaper. Indonesia also has a mountain of coal available. So why do you put your money in hydro power if coal is available for almost nothing? They are trying to look for a balance. IF: How about the development of public private partnerships (PPPs) in the energy sector? What are the obstacles and how can PPP move forward in this country? WG: The power prices that IPP developers may get have almost doubled within the past couple of years and there has been some


Most interesting project Since we have so many different interesting projects I will just mention a couple. The waste-to-energy project in Bali is definitely a very fascinating one. We are also very proud to be part of the first coal bed methane (CBM) project in Indonesia. In general all our energy projects in Indonesia have interesting elements, which makes this business so exiting. Most important lesson in business Most important in our business is the quality of your team, which is constantly developing. Also, maintaining long lasting business relationships and credibility with your customers and partners. Moreover, to be successful in Indonesia it is very important to deliver what you have promised and keep expanding your business network. improvement in terms of proper legislation. So negotiations are easier and times are shorter – less than six months. So I’m pretty positive. Maybe it’s just because there is an enormous need for power and the Ministry of Energy, as well as the Finance Ministry, is pushing PLN to do something about it. This problem will not be sorted in five years time, as there will be even more need for power and demand is growing. The question is: can we, as producers of power, balance the future demand? Some people say that this can only be achieved by privatisation of the whole sector. IF: Given all the conditions you described, how do you see Navigat going forward? WG: There will be more focus on IPP and BOT. Bigger projects with bigger capacities, like the ones we are developing throughout Indonesia and in Papua. I also believe in the coming years, we will be active in Thailand and Vietnam. We would like to do more investment type projects where we place equity into projects we will own. Therefore, Navigat will develop as an independent power producer. That is what we are building now. We have the first projects up and running right now, but in 2011 we are expecting it to grow more rapidly.

energy & natural resources interview

Nico Kanter Country Head


bp indonesia

Nico Kanter: I was born in 1958. My late father was a general in the military. He taught me the values I uphold now; the commitment to, and love for, this country Indonesia.

actually the country’s third energy centre and because of that Indonesia will be able to grow as integrated LNG producers and exporters.

I graduated from the University of Indonesia with a law degree. I started off working in a law firm, back in 1983. I worked for less than a year in the law firm, and then moved to oil and gas. In 1984 I worked for Arco, an American oil company, as a lawyer in the legal department.

We started our commercial operations in July last year. Our actual market is China, and we are the third largest LNG exporter to the US. We believe there is potential growth in the greater area of Tangguh. That is why we focus exploration activities there. We are considering options and studies to further develop Tangguh. We are also conducting exploration activities in the greater area of Papua.

I worked there for almost three years, and then moved around working in various departments in the company. At the start of my career, I worked in a lot of supporting roles for different departments until I took over Government Relations and Communication.

Asia will need on the order of US$8 trillion by 2020 to pay for infrastructure development BP took over Arco back in 2000. At that time, BP tried to consolidate all the companies that they acquired. I held that role for the last ten years, but I was still responsible for Human Resources and Government Relations also. In 2008 I was appointed Country Head of BP Indonesia. Varied investments IF: Can you tell us something about BP Indonesia and its business today? NK: BP Indonesia has more than 40 years’ experience in the country. Being one of the largest active investors in the region, our activities in Indonesia are heavily dominated by exploration and production; there is our Tangguh LNG project as well as VICO, a joint-venture cooperation between BP and ENI, supplying gas for Bontang. The Tangguh Project is a national project. It is

In addition to that, we are looking at a greater expansion of coal bed methane (CBM), another bigger opportunity outside Papua. BP has 30 years’ experience of producing CBM and we can bring the technology and expertise into Indonesia, if the CBM demand is high enough. In fact, according to the upstream regulator, BPMigas, there is a lot of potential for CBM in Bontang. What we can offer here is technology and experience; and we are able to do this job successfully both environmentally and technically. The infrastructure is there; it’s just a matter of getting full government support. However, the government supports us very well already actually. Apart from that, BP also has an interest in the downstream market, in other words in lubricants and cap top. Apart from that, we also have an interest in chemicals; we have a joint venture with Mitsui Amoco, producing the purified terephthalic acid from our plant in West Java. IF: Will you be making a similar type of initial exploration investment with surrounding infrastructure in any other areas outside the region, or will you be focusing only on what you have here at the moment? NK: Our main focus remains in Kalimantan, capitalising VICO’s operations which have been producing conventional gas resources there for more than 30 years. We have studied the conditions 139

energy & natural resources interview

Career defining moment When I was assigned to our joint-venture company, VICO, I was responsible for human resources and advertising management. At that time, there was an opening for an executive assistant in BP. It was a role where I had to actually accompany the group vice president, who was based in Hong Kong, and I was responsible for BP’s Asia Pacific assets. The role was demanding and I worked long hours. I also had to bring my family over with me to Hong Kong. It was challenging but I managed to get through it all. Motivation It probably comes down to upholding my core values: how do I work with integrity, doing something good for the country, helping the community and the environment, and doing something good for the people?

of the land and the reserves there. One of the reasons why we focus on Kalimantan is CBM; we will be bidding against Australia. Having the infrastructure helps us tremendously in making us the first LNG producer there. Renewables: a green or red light IF: What types of renewable energy does BP Indonesia plan to develop? NK: Globally, our focus is, and always has been, in bio-fuel, solar power and carbon capture. Those are the products BP worldwide has. When the President of Indonesia was in Boston in 2009 at a

We don’t plan to go into geothermal energy, however. We are not ruling it out, but we are focusing on the priority needs of Indonesia business forum held by the Indonesian Chamber of Commerce, what they wanted from three big companies like BP, Exxon and Shell, was to give a presentation on renewable energy. We explained to them that before we looked into the matter – and I am not saying that we rule out doing renewable energy in Indonesia - we need know whether it is profitable and has a large enough potential. We are looking at going back to unconventional gas. That, we know, is there, and has huge potential. We are not, though, going heavily into renewable energy. We will venture into CBM, which is something new in Indonesia, and we will be happy with the experience and the expertise we have there. We can convince the government.


Biggest challenge faced The biggest challenge for me is: how I can actually make the country, the government, the community believe that we are doing the right thing, while at the same time balancing large operations where I face many corporate battles. There are a lot of challenges here: uncertainty, insecurity, management of expectations, and sometimes social unrest in the locations where we operate. Most interesting project That would be the LNG Tangguh project in Papua. It is not only a commercial challenge, but there are also many social and environmental challenges too. When I first handled the project, I had to go to a thenuntouched area, and deal with the local people personally; making a commitment to them and dealing with their concerns and fears. I feel we ended up helping the community, the environment, and doing something good for the people. Most important business lesson No matter how good you are at something, you still need to find a balance. To manage faith and expectations with people. Striking the right balance means that you are not hiding one way or the other with the stakeholders, making sure that in the interests of all, things are well coordinated. Then, the ability to convey the truth, even if sometimes people do not like to hear it, but it has to be done. For me, honesty is the most important lesson in business. No matter how hard or difficult the message is, when it is conveyed with sincerity, people will actually understand it. We don’t plan to go into geothermal energy, however. We are not ruling it out, but we are focusing on the priority needs of Indonesia. The country needs gas and BP Indonesia plays a key role in that industry and across the region.

energy & natural resources interview

Other activities IF: How important are downstream activities in petro-chemicals and lubricants to BP Indonesia? NK: Our interest in lubricants is with Castrol. The demand of the product, and BP, is very much focused on where we can contribute. We have Castrol focused on short-term as well on long-term business in Indonesia. I am responsible for the whole business in Indonesia; and I report to Singapore in this instance.

One of the reasons why we focus on Kalimantan is CBM. Having the infrastructure helps us tremendously in making us the first LNG producer there IF: What about the IPP (independent power producers) market? How do you see it developing? NK: If you look at the map of Indonesia, Tangguh is in Papua, then you have our Bontang plant for LNG in Kalimantan. If you look at the country’s demand, it is huge in Java and Sumatra where there are many production facilities. The question is: how do you bring the LNG to where the demand for domestic use in Java and Sumatra is? LNG is situated far away from where the demand is. The idea is for us, through our operations in Tangguh and Bontang, is to be able to export our products, and therefore generate revenue for the government; then the government invests this money in infrastructure that will help distribute LNG from where it is extracted, to where local demand is. Improving regulation IF: When it comes to the energy market, the general government policy is to provide some sort of framework regarding partnerships. What do you see are the challenges and what else can the government do to help improve things here? NK: Current government policies and the regulatory framework that we have are quite challenging already. But with regards to

The question is: How do you bring the LNG to where the demand for domestic use in Java and Sumatra is? policies, when you look at the overall economy of Indonesia, the government needs to work on its monetary policy so as to provide a low and stable inflation rate. If they achieve that, it should help stimulate the economy and therefore the country can generate more investment in the sectors it has. The regulatory framework is a particular challenge. Decentralisation, for instance, may have brought a positive impact to the country,

but then at the same time it often creates a lot of headaches for foreign investors. It becomes a new source of corruption. Above this, there are also a lot of regulation issues created by the central government, again going back to the problems of uncertainty and bureaucracy. That is another challenge the country faces. IF: So, how do you put together a good policy and good regulations for investors that provide certainty or minimise ambiguity? NK: I think there should just be better coordination within the government. Investors also feel that there is a lack of a desire to

When you look at the overall economy of Indonesia, the government needs to work on its monetary policy so as to provide a low and stable inflation rate engage with everyone. Even among the ministerial departments, you see a lot of decrees or laws and regulations being issued without any consultation, even among themselves, let alone external consultation with the relevant industries. We have an environmental law that is very, very stringent and it actually makes things tough on the industry. We, in BP, need to reach a production target, but how do you meet that target if the rules are too stringent? It is the same situation for those in the oil and gas industry, the mining industry, and for investors as well. The government needs to change some of its laws soon. A lot of investments here plan to be long-term. Therefore it needs a stable and business sensitive legal framework. 141

energy & natural resources interview

madhu koneru Executive Vice Chairman


MEC (Minerals, Energy & Commodities)

IF: How did your business get started in Indonesia and how have things fared so far? MK: In early 2000 we decided to invest outside the Middle East and India. We were interested in mining sites. In Indonesia, we started with some processing plants for highly processed clay used as sanity wares and in the paper industry as filters. This was in 2004. We then decided to enter the coal business. We identified one greenfield location, Muara Wahau, in East Kalimantan, with huge coal deposits. It looked easy to mine, we could mine large volumes, and it was within the radius of 150 km and ideal for a 10 to 15-million-tonnes operation. We decided we needed a railway track. Because of the potential value of the coal there, rail was the cheaper form of transport in the long run. Along with this project, we are involved with a planned aluminium smelter in Indonesia with the National Aluminium Corporation (Nalco) from India. We told Nalco, which owns 74 per cent of that project, that we would like 26 per cent of it and we would like to be the main supplier of coal to power the smelter. This also gave us a lot of comfort to go ahead and plan for the capital expenditure of the railway.We are also going to work with some local power producers, providing them with coal,. But for the moment what we are doing is planning to produce a certain volume of coal to make the project feasible and sustainable for the next 15 to 20 years. There are certain markets, certain agreements which we have signed for in order to ensure that. Still, to actually to grow our business, we will have to double our output quantities – more for the domestic market not for the export market. After the construction work is over, we will work harder to sell our coal domestically. IF: Will you be making further investments in East Kalimantan to produce coal, or outside Kalimantan? MK: Nalco’s smelter project in Kalimantan was a coincidence really. They were looking to power their smelter and we were also looking at the same project, to provide the coal for that


power. But other than that we plan to sell coal outside Kalimantan because what we would like to do going forward, is to supply power producers in other parts of Indonesia. IF: How big is your team? Can you tell us a bit about them? MK: In 1998 when we came from India it was just the seven of us. Then there were five new people that joined, so a total of 12. Five of them are still here. Outside of India we have around 650 people. In Indonesia, within the country and the mining site, it is very labour-intensive, so we have a lot more people involved. There are six people in the coal team, which I work very closely with. Each team member develops his or her own section and takes responsibility for the growth of the company. My job is basically to keep listening to their ideas. Then when

As long as we have a coal-rich land and a long-term standing contract, financing wil be possible. The only problem is losing the people’s confidence we hear the one idea we are interested in, we start working on it, experimenting to see how the idea may pan out, trying to identify the challenges and to move forward with it. IF: It’s a huge project you are undertaking when you think about 130km of railway, and the sort of boundaries and properties that the line must pass through. Tell us a little bit about the challenges that you faced, or the challenges that people face generally. How did you overcome these particular obstacles? MK: Some people look at us and say how fantastic it is what we have achieved already, but for me and my team, we are still four

energy & natural resources interview

months behind schedule. The land acquisition concept is pretty easy, although you’ve got to act fast for it to work. You deal with people who talk to you. For example, somebody says that they want to sell their land for US$1000, you tell them you will get back to them. You make a report, go to the head office, get somebody in finance to release the money, and pay them. It is important to make these decisions quickly. Secondly, you need to establish a good relationship with people, you have to keep on meeting them, explaining the project. You have to interact with land-owners, understand their issues, understand what they want, make them understand how a job can change their lives. Try to get them to understand that they will be able to get some sort of financial support, that may last 25 years instead of just giving them a lump sum of money in the beginning. You need to have a personal touch with people. IF: With big projects like these, there are social issues

For the moment what we are doing is planning to produce a certain volume of coal to make the project feasible and sustainable for the next 15 to 20 years that need to be addressed. How do you plan to maintain sustainability and be responsible about social issues? MK: We focus on the needs of the people and we have a lot of programmes planned. I personally head the MEC foundation to make sure that we pay attention to every programme we implement. We

Career Defining Moment: For me, it was when our family group made its first processing plant. It was totally and independently done by ourselves. The team involved is still working in the group today. It was a good moment and it was successful. Extraction is one side of the business, but processing was a completely new business, we felt we created additional value for the company. It was a big move for us at the time. Motivation It is the energy within the team that keeps me going. We have all travelled the same journey. Most important lesson in business For me, in every successful business, it’s not about technology, or money, or power. It’s about staying close to the fundamentals of the long term goals and the sustainability of the business. go to the people and interview them, ask them what they need. Different villages have different needs. One may need water, the other electricity, the third may need a school. We may not be able to provide all of these right away, so we have to prioritize and take them one-by-one. Perhaps we provide small clinics, bring paramedics or teachers to the different villages for instance. IF: Do you plan on extending this approach beyond Kalimantan? MK: Our focus is on East Kalimantan between Wahau and Kutai. When our different projects in East Kalimantan are all up and running then we can start thinking about going somewhere else. IF: What are the next challenges that you might be facing in the project? MK: We have three main challenges: land acquisition, technical and financial issues. Without the completion of land acquisitions you can’t do anything else. Technical-wise, unless you go to the location and drill, you cannot see what kind of land profile it has. We have completed 90 per cent of the land acquisition, and we have completed 30 per cent of the work from the engineering point of view. As soon as the land acquisition is done then the technical work starts in earnest and then the financial

I am very keen on local banks to participate, at least 20 to 25 per cent closure starts. But we were running parallel processes for of all of these. We didn’t wait for the full nine to 12 months of land acquisition before we started to profile the land. We started drilling three months after we bought the land. As I’ve said, we are four months behind schedule and time is a problem. It is not because we think we are going to lose a lot of money, if we


energy & natural resources interview

delay. What I am concerned about is the trust of the people in East Kalimantan. They sold their land to us, but even though we own the land, if we delay the project, the trust of the people is gone, and our project will not be successful. Technically I think there is no problem in building the railway. Financially, we don’t have an issue. As long as we have a coal-rich land and a long-term standing contract, financing will be possible. IF: When will you start on the aluminium smelter plant? MK: The construction of the power plant for the aluminium smelter will start six months after the we start construction of the railway. Construction of the smelter will not start until we finish the railway. IF: How about the financing side of the project? Will it be funded by MEC Capital? MK: The whole project will cost around US$1 billion. MEC intends to achieve financial closure on the project with 25 per cent equity and 75 per cent debt. The debt component of the project is likely to be sourced from Export Credit Agencies and commercial banks on a long term basis of 10-15 years of repayment. The above referred financing plan/structure would be finalised once we decide on the various contracting packages. The equity component of the financial closure is primarily expected to be funded through partnerships with reputed business houses and financial institutions in 2011.

IF: Do you anticipate participation from local banks? MK: I am very keen for local banks to participate, at least 20 to 25 per cent. We plan to bring them in because we want to bring the local economy along with us. It is very important that we take local banks along.

Somebody says that they want to sell their land for US$1000. You make a report, go to the head office, get somebody in finance to release the money, and pay them. It is important to make these decisions quickly IF: One last question: do you have ambitions outside Indonesia? in China for example? MK: China is difficult because there are so many big Chinese firms similar to us, involved in similar businesses. We will always look at China as more of a service-providing country, not only for earlier stages of construction, but also from a technology point of view. We will continue to see China as an important country, but not directly involved with us. 145

energy & natural resources perspective

mining and shared infrastructure Colin Davies, chairman of EuroCham’s infrastructure working group and president director of PT Laing ORourke Indonesia outlines the potential of shared services

Indonesia has long recognised the need for investment in its aging infrastructure and the wish list extends to hundreds of worthy projects and billions of dollars to finance those objectives. The question is: where to start? The challenge of legal certainty for foreign investors and the priority issue of land acquisition still hinders the development of much-needed toll roads, and without road connectivity the upgrades to airports and seaports become somewhat academic if there is no functional network back to the hinterland. Perhaps the government is just looking too far ahead with such ambitious plans. Perhaps the immediate need is to focus on less demanding infrastructure requirements and build on simpler foundations. Perhaps commercial enterprises can succeed where the public works department has struggled. While the mining sector may seem an unlikely candidate for this quest, and far from the industrial and political needs of Java, the case for shared transport corridors to support a booming coal industry today in Kalimantan, and tomorrow in Sumatra, has never been more compelling. One case in point is East Kalimantan, already a major coal producer and as such a regional leader in developing its own natural resources. Traditionally, coal has always been transported along local roads to rivers and then barged to ports or transshipment points offshore for ultimate loading on to sea-going vessels. This works well for the coastal deposits and projects within a reasonable catchment area of the road-river connectivity system. However, as the search widens inland for future coal supplies, distances become greater and the market requirements of China and India increase, an infrastructure system that is big enough will be required to deliver it to market. Resource-sector-driven infrastructure development History shows us that rail is the early lifeline of an undeveloped land. Canada and the United States have the Canadian Pacific and Santa Fe railway systems to thank for linking much of their land masses, with most of it being built by the turn of the 20th century.


Still, such infrastructure does not have to be country-wide or even cover such vast distances to be effective. Look no further than Australia with Queensland and the opening up of the Bowen Basin or Western Australia with its access to the Pilbara. In both cases, provincial railways, initially for coal and iron ore respectively, played a defining role in the development of the local economy but more significantly that impetus was not lost after the rail systems were installed and the commercial growth around those arteries continued to build and aggregate to what they are today. So there are precedents for Indonesia to follow, and perhaps the resources sector is indeed a valid driver for the initial connectivity for provincial organic growth and is therefore the catalyst that will ultimately influence the country’s infrastructure development as a whole. This can be seen today, and it is the commercial need of the coal industry that is the driver. One such initiative is that of Minerals, Energy & Commodities (MEC), with its determined efforts to build the first freight rail solution for East Kalimantan from its mine concession at

History shows us that rail is the early lifeline of an undeveloped land Muara Wahau in Kutai Timur, some 140km from the coast north of Sangatta. The problem is there are many other groups, for example Churchill Mining, Ithaca Resources and Bhakti Energi Persada (BEP), that are all trying to do the same thing. What therefore is the logic of building multiple linear infrastructure corridors when only one is required? These projects are also incredibly expensive (at least US$1 billion each). Yet to date, coal concession owners have been driving this process alone even though the individual project economics are not robust enough to support a single user corridor of 150 kilometres in length to the coast, let alone the need for a major new port loading facility as well.

energy & natural resources perspective

This predicament is not unique to East Kalimantan; Central Kalimantan has its own plan for an initial freight railway solution from Puruk Cahu to Bangkuang to circumnavigate the unseasonal upper reaches of the Barito River and ultimately an extension to the coast with branches all over the province. This project started life as a private sector initiative but has since been converted into a public-private partnership (PPP) project. However, without hands-on commercial practitioners the signs are already there that the impetus may have been lost. Central Kalimantan can ill afford any further delays to this project, which has been in the pipeline for many years, but the initial tender process has caused confusion and lacked direction. Southern Sumatra is another case in point, with billions of tonnes of brown coal deposits that until recently were only worked by the State Coal Company (PT Bukit Asam or PTBA). Historically they have been hampered by geographic constraints, with the topographic challenge of the Barisan Mountain range to the west and 200-250 kilometres of flat-lying wetlands to the east. Present production barely reaches 10 million tonnes per year, mostly down a narrow-gauge railway built originally by the Dutch over a century ago and nursed ever since by the State Railway Company (PT Kereta Api). The rail-transported coal is destined for the port of Tarahan through Lampung (or by sea via Palembang) to supply the Suralaya Power Station near Cilegon on Java, but this railway was never designed for major coal freight and has significant capacity issues. Only now with much-heralded Chinese investment are possible upgrade plans coming to fruition. Or are they? What is clear is that all of these projects, regardless of their provincial location, are being driven by one thing: coal. Indonesia currently produces approximately 250 million tonnes of coal a year and Kalimantan unquestionably delivers the lion’s share of almost 200 million tonnes for export and some 40 million tonnes for domestic market consumption. It achieves this with an existing road-river system that is saturated and almost bursting to capacity. To reach the next order of magnitude for delivery to China and India will need significant investment in delivery infrastructure and that must be rail. This is because with rail will come longevity and the ability to transport 100 million tonnes a year; not just coal, but for any business that can evolve from localised heavy freight services, including palm oil, timber, grain or fuel. The list is endless. Railways are not the only answer but they are the empirical base from which to build a long-term transport network that can spawn feeder distribution systems deep into the provincial

interiors. Connections to the main railway system could be lateral spurs but are more likely to be high-capacity Over Land Conveyors (OLCs) and dedicated Heavy Haulage Highways (HHHs) where terrain is less favourable for rail solutions. OLCs can easily move 25 million tonnes a year over distances of 50 kilometres and HHHs a similar amount over twice that distance. They are therefore able to deliver coal products from neighbouring sources to common stock yards and loading stations. The technology to build this infrastructure is not complex but efficient designs and quality installations will ensure they can serve the industry for many, many years to come. Even with rail, moving vast future amounts of coal to the coast is only part of the challenge. The installed port capacity just about manages the existing production volumes but in no way could it handle a 100% increase in new deliveries. New ports or loading jetties are an absolute necessity at the receiving end of rail infrastructure and rationally they need to be multi-user facilities. There are plans for such ports and the Miang Besar Coal Terminal (MBCT) is a good example of an independent third party effort in East Kalimantan, but presently there is no obvious distribution network to service MBCT because it is too far away from the proposed transport corridors. The shared service model The way forward then has to be shared service infrastructure where a group of like-minded investors come together and establish the economic parameters that are needed to provide realistic returns for such networks. These investors need not be the coal concession-holders but that does not preclude them from being equity participants. What this initiative is missing is coordination, the desire for the local coal owners to work together, a coal industry infrastructure master plan, a tweak of the legislation to allow shared services, integrated government Regency support and most importantly someone to manage it. All the pieces of the jigsaw are present – they have just not been assembled in the correct order. Both the Indonesian Chamber of Commerce & Industry (KADIN) and the Indonesian Coal Mining Association (APBI) have mandates that could assist this process, but in my opinion, the coordination initiative should probably rest with the Foreign Investment Advisory Board (BKPM) and their recently appointed visionary leader Gita Wirjawan. One single act of concerted effort over the next 12-24 months to bring about just one shared freight railway solution (probably in East Kalimantan) is enough to show the world that it can be done. 147

energy & natural resources interview

Henkie Leo President Director


pt zug industri

Henkie Leo: My background is in mechanical engineering. I graduated from Queensland University of Technology in Australia in 1997. In my studies I specialised in thermal engineering. I returned to Indonesia in 1999 just after the end of the Asian monetary crisis. I had a job in a company that works in thermal resources, which involved boilers, power plants, and also machinery. IF: Could you tell us about the start of Zug? HL: In 2002 I noticed that due to increasing fuel prices, there were big changes happening in the market. At that time fuel was subsidised by the government. I saw there was a big opportunity in the solid fuel boiler business. At the start of our business we imported boilers from China and Germany and supplied these coal-fired boilers for industry in Indonesia. Most of the industry was changing their heating system from oil-fired to solid fuel, coal and gas. It was a big movement in the market. That was the start of Zug, around the end of 2002. IF: How has your business evolved since then? HL: Most of our business was done in the Java islands at the beginning, especially with the textile industry, which was struggling with energy costs at the time. In 2005 there was another increase in fuel price; the government decided to take most of

I believe our business grew because our company had, and still has, a very strong engineering capability the subsidy off fuel and our business grew tremendously due to our effective after-sales services and efficient energy solutions. At that time there was also a big shortage of electricity. So we started supplying power plant boilers to paper factories, sugar refineries, oil refineries, for example. I believe our business grew


rapidly mainly because our company had, and still has, a very strong engineering capability. We also provide a lot of efficient and up-to-date solutions to our clients. We are getting into the thermal heating market; basically helping industries work more efficiently power-wise. We provide consultation services to help factories run more efficiently, as well helping set up or build thermal systems for new factories. IF: In terms of power plants, are you mainly supplying power to the industrial sector? Is the IPP (independent power producer) market also appealing to you? HL: We started with supplying power plants to private industries. At the same time, we also supply the steam or the heating system for these factories. We supply to a lot of industries: the rubber industry, sugar industry, paper industry and so on. We are now getting into the market as an EPC (Engineering, Procurement and Construction) for a Perusahaan Listrik Negara (the national electricity provider) national power grid project and we are starting to invest in IPP projects. We are currently investing in an IPP combine cycle project in Riau, a mini hydro in Nothern Tapanuli and a biomass power plant that are still under construction. Nowadays we try to concentrate more on renewable energy: hydro power as well as power plants for biomass. IF: What do you think are the most important growth areas for your company? Would it be the IPP market, or the biomass market, the alternative energy market, or the heat recovery market? Do you have a view as to which one will grow the strongest? HL: All of these have a good future. In a lot of isolated areas, especially in the Sumatra islands, in Papua, and in other small islands, there are a lot of untapped flowing water areas that could potentially be used for hydro power. Although nothing is currently being established there. However before this, our company is concentrating on coal-fired boilers. We are trying to see whether this might be a better alternative to oil, because oil


ZUG POWER GROUP a leading company in : 1. EPC ( Engineering, Procurement and Construction ) & Supplier of : a. Power Plant - Renewable Energy - Solid Fuel, Oil and Gas - Hydro Power - Heat Recovery - Solar Power b. Industrial Boiler c. Industrial Turbine d. Palm Oil Mill e. Control and Instrument f. Water Treatment g. Electrical & Power Transmission h. After Sales Services i. Operation and Maintenance 2. IPP ( Independent Power Producer ) - Renewable Energy - Hydro Power - Solar Power 3. Manufactures and Assembly of : - Boiler - Turbine - Fuel and Ash Handling System - Palm Oil Equipment

energy & natural resources interview

is too expensive. We may change this later on though, as using coal is really only for the current situation. We have started some alternative developments based on biomass. We have a plan being tested for about two to three years that is currently

In a lot of isolated areas there are a lot of untapped flowing water areas that could potentially be used for hydro power running. Our designers have designed these plants to make them more power efficient. We will submit this application to build very soon. Alternative energy like biomass, however, needs strong support from the government for it to work because the process of utilising biomass is more costly than coal. As to geothermal energy, the government also needs to put in more of an effort with this market. More research needs to be done, but research is very costly. Still, we are trying to develop more environmentally friendly technology. Dealing with tariffs IF: What do you think about the issue of PLN’s tariffs? HL: For the current tariffs and prices that PLN offer - and even the previous offers - it is hard to see much interest there. That is why you could say that some of PLN’s current programs are not really working. Financially speaking, it doesn’t really make sense to invest at the current prices. However, there is a lot of negotiation currently being done on this issue and we see that the national power grid is undergoing a lot of changes. PLN is also starting to be more open to negotiations. IF: Are how are you able to work with the current ones and how do you see them evolving? HL: For the new EPC projects, the indication budgetary prices in the tenders are extremely interesting. Therefore we are making more effort to win the EPC tenders. One of the big issues is that companies need to be sure that there is a sufficient tariff at the end of the day to give a cost of recovery. We ourselves have had some discussions with PLN. I have always said that if we want any project to go through, there has to be

The government and the lending institutions have to come up with some sort of new regulation that may allow project financing for 15 years three parties sitting together and planning how these things will go: the financial institution, the investor and PLN. For PLN, there is no point in making a tariff that is not acceptable to the bankers.


This is one of the problems. There appears to be some sort of misunderstanding between the investor, the financial institution and PLN. The misunderstanding arises because the financial institutions are asking for the investment to be written off quickly, especially in Indonesia. For medium-sized power plants, around 3 to 25 megawatts capacity for example, the financial institutions are asking for investments of less than seven years. PLN, on the other hand, thinks that this sort of power plant will run for 25 years. As there will be a 25-year contract, why should the investment be below seven years? There is a gap here. The Government and the lending institutions have to come up with some

I am quite sure that foreign investment will come. Indonesia is a country that needs a lot of infrastructure sort of new regulation that may allow project financing for 15 years. I also think that PLN has to restructure its tariff, perhaps introduce a system where during the first seven years they place a higher tariff but then after the investment has returned, the tariff is lowered. Furthermore, in the previous 10,000 MW IPP tenders, PLN was too lenient; there were many inexperience companies participating in the tenders at extremely low tariffs that couldn’t construct the plants after winning the tenders. Nor were they capable of providing the bridging funds requested by the financial institutions. However, with the new IPP projects PLN has introduced strict regulations. Another positive move is that many IPP tariffs for the first 10,000 MW program are under new negotiation. Indonesia as an attractive investment IF: Do you think that more foreign investment is to come given that PLN and the Government have made efforts to make this sector more attractive? HL: I am quite sure that foreign investment will come sooner or later. Indonesia is a country that needs a lot of infrastructure, especially electricity. Given the huge natural resources, such as coal, geothermal, hydro and biomass, and the huge additional electricity demands, I believe investors are closely eyeing this golden opportunity. I think foreign investment, especially from China, will come very soon, as costs there are increasing from day to day. China is getting more developed and they have a lot of funds which they may invest in Indonesia if the returns are better compared with other countries. However, I think the government here has to understand what investors want. Where are the benefits for investors in Indonesia compared with other countries such as China, India, Vietnam, etc? The government has to try to promote that fact that Indonesia is protecting investors and is now a more secure place to invest, with additional long-term benefits compared with other places.

energy & natural resources interview

K.K. Rahlan President Director



K.K. Rahlan: I came to Indonesia in 1980. I was working for another company at the time. From about 1987 to 1995 I was working for the Government. I started my own business in 1996; it has been 14 years now. When I first came to Indonesia in 1980 I knew that it was a country with potential. IF: What potential did you see in Indonesia when you first arrive here? KKR: I saw that Indonesia was a resource-rich country, not only in terms of natural resources, but also in terms of manpower. There were a lot of things that could be done here. I found that Indonesian people were friendly and outgoing, and they were usually good at understanding what you had to offer and what you could do. At that time, Europe and the US had a very tight hold on the energy market, because this market was still developing at that stage and things were sort of still being assembled. I am not saying that they are not being assembled even today, but it was more back then; there is more industrialisation taking place now. There are some impediments I found in doing certain businesses here. Any growing country has its own problems. I have had my

I saw that Indonesia was a resourcerich country, not only in terms of natural resources, but also in terms of manpower. There were a lot of things that could be done here fair share with tackling this. The law and order situation was excellent in the Suharto era, and everybody liked that. But still I think that after democracy took place in Indonesia, things

started to move for the better. Take the anti-corruption laws. The laws have been made formal, and I think it bodes well for the country. In general, people want to know that a country can solve its problems and the way Indonesia is tackling its problems

In the next decade, from 2010 to 2020, once I have more of these sustainable energy projects coming in, I would like to see this company go public for the public’s benefit is unique. It is that admiration of people’s minds which has kept me here for 20 years. Half my life I have spent in Indonesia and half my life in India, and I continue to be absolutely fascinated. Business perspectives IF: Can you tell us more about your company and your business in Indonesia and in other countries? KKR: We represent other companies from other countries. One of them in particular does three things under one roof: power generation, coal generation and hydro generation. Now there is a fourth dimension which is around nuclear efficiency, and energy conservation, so in our business we do that as well. But basically this is the model which we have. We have built our business around representing various companies. We have been generating electricity for PLN. There is a power plant project that is running at about 60 megawatts, but I want to take it to 100 megawatts in the course of the next year or so. All this is focused on adding value to all our clients. Regarding going into markets outside Indonesia, it was not an easy decision, but we knew we had to if we wanted to insulate 151

energy & natural resources interview

ourselves from the economic upheavals of one country. We created entities in Bangladesh, Singapore, Vietnam, Australia and now in Thailand. IF: Conservation of energy is a big concern and something you are looking at. Can you tell us your plans regarding this for the future? KKR: Sustainability is the key here. I believe that not only should we create environmental sustainability by planting trees, but I believe in sustainability of many kinds. On corporate social

As Indonesia grows, it will grow in innovation, especially in infrastructure. responsibility, for example, my wife is working with a company involved in mobile hospitals and small mobile operating theatres for eye operations and so on. Planting trees or corporate social responsibilities: it is that kind of activity where we can keep inspiring each other. For the next decade we are interested in biomass and biogas projects, where sustainability should come from. I know that in France, once the food supply chain is running well and everything is easy, over there you are supposed to have a biomass fuel supply arranged, and it takes time. You will not find many of these kinds of projects in Indonesia, but the prospect is keenly under observation. In the next decade, from 2010 to 2020, once I have more of these sustainable energy projects coming in, I would like to see this company go public for the public’s benefit. Because of this, and at this moment, my budget works around an estimated year of 2014 or 2015. At that time I would expect somebody else to take the reins from me in running the company; somebody who can take this to the next level. the future of infrastructure development IF: The Indonesian government said that US$150 billion may be needed towards infrastructure investments in Indonesia, with a large private sector input. What are your views on this? KKR: US$150 billion is achievable. Indonesia has the world’s fourth largest population, there is a good workforce, there are natural resources, a congenial market is potentially there, and it is growing. But you still find that there is still only around 30,000 megawatts of electricity to support this. Also there is a need to build roads, and a need to provide water. I think there are a lot of positives about Indonesia; there is a growing and potential market here. On the other side of the coin, as Indonesia grows it will grow in innovation, especially in infrastructure. When companies want to come in and invest, they want to see very clear-cut guidelines, not guidelines that can be bent. The other issue is the judicial system. I think there will be a day when there may be a cleaning up of the judiciary so that investors have increased confidence in legislation. Investors want a situation where should anything happen, either they go through regulation,


Career defining moment When I wanted to be independent and start on my own. An Indonesian man, whom I respect even today, became my guide. He taught me that you cannot always see everything from a logical perspective. He told me that it was not my mind that is attuned to the Almighty, but it is my heart. I used to run an energy division under him in a company name Kaltimex Jaya. In 1990, we had this one project, a 23-25 megawatt independent power producer (IPP) project that made us the first company who had a licence to prepare IPP projects for private companies. Later, my superior said the time had come to skim off the energy division. I was leading into a formal company and that was when Kaltimex was formed. I hold the majority shares, but it was his vision that made it happen. Motivation In business my motivation was to create an economy-wide company, of which I was the master. I very soon realised that after I had created a company with more than 300 staff, that I was now the servant of those 300 masters. I realised I should not make any decision which could bring any of them down. I also know that there is a difference between pleasure and happiness. Pleasure is momentary, happiness is permanent. Most important business lesson The most important lessons are that you have to be diligent, you have to be ethical, and you have to be tenacious in what you do, and you also have to be extremely clever. My advice to any budding entrepreneur would be that there is one thing he or she would have to do to remain lucky, and that is to apply the law of attraction; to do good things, remain honest, and be true to his or her purpose. or a situation where institutions uphold the contracts that are written; these contracts should be honoured by the judiciary, and should not be liable to different interpretations by the different levels of the court. That should be clear and is very important to sort out first.

US$150 billion is achievable. Indonesia has the world’s fourth largest population, there is a good workforce, there are natural resources IF: Do you have any other thoughts for potential investors? KKR: I think that open-mindedness is very important, and that one should not lose faith in the people, the country and the sector. Of course, improvements will come. Indonesia is a young democracy, and if I from a very small base can do something on a good way, I think that everybody should be able to do it. I think that if more investors see that as an opportunity, the better it will be for Indonesia.

energy & natural resources interview

K.B. Trivedi President Director


essar indonesia

K.B. Trivedi: I am a chartered accountant by profession. I have been working with the Essar Group since 1987. I joined Essar in India as a training officer. From there, I worked in various divisions. I started working with the offshore business, and then we moved to an onshore construction area. I was posted for one year in Mumbai, after which I went to Hazira, the group’s business in raw steel. I stayed there for two and a half years, then I returned to Mumbai where I worked for one and a half years. I looked after the commercial area, the contract finalisation and procurement. From 1994 until the end of 1997, I was in Dubai, handling the group’s finances as well as commercial negotiations and setting up banking facilities. In September 1997, I moved to Jakarta. I recalled that just one day after I landed, the riots started. The rupiah was Rp3,000 per US dollar and then it slipped to Rp18,000. I came to Indonesia at a very difficult time. I came as a general manager for finance to the unit of our steel-processing plant here. From 1997, I arranged financing for the group during the Asian financial crisis. Basically, I think we have ‘grown up’ as a company due to the crisis. In 1999, I was promoted to finance director, and since 2001 I have been the president director. When I first joined the Indonesian unit, the production capacity was at 150,000 tonnes per annum. Now it has reached approximately 350,000 to 400,000 tonnes per annum. Since 2000 I have also been in charge of looking after all the group’s business development, whether it is power or coal-mining, or oil and gas. So, I am very much a part of the group’s business here. IF: How would you best describe Essar’s business today? Please tell us about its expansion in Indonesia. KBT: As you know, there are six business units in the Essar Group. Our group’s business includes steel, power, shipping and logistics, infrastructure construction, oil and gas, BPO (business process outsourcing), and finally, in minerals, the group’s seventh line of business.

We are putting up a lot of power plants in India. At the moment, we are talking about 68,000 megawatt power plants, which are going to come on-stream within the next two years. To secure captive coal, we require the concessions here in Indonesia. Indonesia is near to India, and has huge resources of coal. But at the moment, the coal acquisition is for the group’s needs, not for outside exports. In Indonesia, we were focusing on steel but we are slowly expanding to minerals, oil and gas. In minerals, we have recently acquired two coal mines here. We have also acquired a nickel concession in Sulawesi. In oil and gas, we have acquired an oil-field in Sumatra. The group is looking for more opportunities in the coal-mining business as well as

We have gone through a difficult process because there is so much misinformation about coal concessions and there are so many brokers in-between. It took us some time to get the right concession whether there may be a possibility to set up a steel plant. We are therefore also thinking about the oil and gas area, areas that may have a gas spills, or coal bed methane (CBM), or any refining process as well. But at the moment, the focus is more on the mining side. The challenges in obtaining concessions IF: How difficult has it been to gain concessions to develop this area of business? KBT: For almost two years now we have been looking for coal properties in Indonesia. We have gone through a difficult process 153

energy & natural resources interview

because there is so much misinformation about coal concessions and there are so many brokers in-between. It took us some time to get the right concession. You have to make sure in your technical study that everything is under control. Among the problems you might encounter is that due to ‘regional autonomy’ as they call it, you may see so many overlapping issues, and poverty issues, that you have to address in order to get the coal concessions. You might also find overlapping regulations and land areas between coal concessions, palm oil concessions, oil and gas concessions, as well as minerals. Then there is the challenge of local populations and social issues – dealing with locals who feel you are coming into their area to take things away from them. The biggest challenge though is infrastructure. You may have good coal available but it’s usually

If the government puts systems and proper infrastructure in place, I think a lot more investors will start coming to Indonesia far away in the forest area with barely any infrastructure access. Major concession areas are not near the rivers or most transport systems. Our main intention is to get good coal. For the concessions we have acquired, we think that if the concessions are good, we do not mind them being a bit far from transport facilities. We have to build 80 kilometres of road for the concessions we have acquired in order to reach the river. Then on the river, we build a port. We then need to provide a system for transporting the coal from the barges. Then from the river, it will go to the sea. Depending how far, it may take about 14-20 hours to get to there. From there, you get to a floating cargo, and then load the coal onto the main vessel. This is how the system works. Logistics is a challenge in the coal business here. If you cannot do that, you do not get the coal. It is very straight. IF: So you have to make a commitment: if you want to get a concession, you have to build the area? KBT: Yes. This is why infrastructure in Indonesia is an important question. If you asked everybody in Indonesia to build roads, then everyone would build roads. They would destroy the forests and environmental issues may arise. However, if the government puts systems and proper infrastructure in place, I think a lot more investors will start coming to Indonesia. You see, people want the coal, but nobody can afford the infrastructure. If you buy the coal for say US$20 million for the concession, you are putting in US$45 million for the infrastructure; the investors cannot afford it. However, we have decided to take the concessions. We plan to acquire the lands, to put good roads in place and take care of the various local and environment issues. IF: How do you manage the challenge of gaining the trust and co-operation of local people?


Career defining moment When I was promoted to president director of the company. When you become the number one person in a company, the entire scenario changes. People look up to you, and you have to start looking forward and ahead for the group. Motivation I want to keep the business growing. How do I take my company to the top? It is something that drives me through my whole career. Biggest challenge faced It was in 2008-2009, during the global financial crisis when the commodity business was struggling. The price of cold-rolled steel slumped badly; in just one month it fell to US$700 per ton from US$1,400. We made losses, but at the same time we kept our motivation going. Somehow, we kept producing and we did not wait for the prices to recover. We went to the banks to restructure loans. The group supported us by injecting some funds into the company. This year, we came out with flying colours. We posted the best performance for the past 12 years. Most interesting project When we wanted to put in a galvanizing line during the crisis. Previously, we were only a producer of cold-rolled steel. We were going to capture the galvanizing market. We went through a lot of upheaval, because what we did was completely eliminate the middle cycle and go directly to the end-users. It took some time but here we are today, the largest producer of galvanized steel in the country. Most important lesson in business Ensuring you manage the risks properly.

We plan to acquire the lands, to put good roads in place and take care of the various local and environment issues KBT: We have a concession in East Kalimantan, in Kutai Barat to be precise, which we have had for a month. We know that there will be social issues, but we know how to deal with them. We have been in Indonesia for almost 15 years now. We know the local cultures. In any country that you go to, if you respect its cultures and you understand them, I think you can do business. We will definitely take care of the people when we are doing the project. We will provide employment. We will provide the facilities, the schools, the hospitals, etc. You cannot just take things away from people. Meeting infrastructure targets IF: The government has announced that it needs about US$150 billion within the next few years to develop infrastructure. Can the government make this target?

energy & natural resources interview

KBT: First of all, there is no doubt that infrastructure is required in this country. For the past three years, I have attended all the infrastructure summits here. We are setting up a new division for this too. So many projects have been announced. Many MOUs (memorandum of understanding) have been signed too. Yet I am afraid we are not seeing any groundwork happening. In Jakarta, even the small mono-railway line was supposed to have started almost five years ago, but nothing came out of it. The government has also been announcing ring-roads for Jakarta for almost three years now, but none of this has been done either. Now you also see that the provinces have been given autonomy. Each region, each governor, has independent power. However, what you also see there is that the governor from Central Kalimantan will not cooperate with the governor from East Kalimantan. Take for example, Sumatra, Kalimantan or Papua, they have huge requirements of infrastructure. These regions have immense resources which can be gainfully extracted or employed, but the main issue is in the lack of infrastructure. I feel that firstly, in Indonesia, unless there is a dedicated separate infrastructure body with complete authority on infrastructure, the extraction of the resources will remain very difficult. Secondly, the government has to map the entire country to know what resources are available and what requirements are needed for the infrastructure. They should map the whole of Indonesia and see whether it is benefiting the entire business community as well as the local community.

Thirdly, by saying that this country needs a better infrastructure, the government has to take the initial step, then the private sector will follow. The government has to provide what the financiers or investors need: land, the business environment, subsidies, security. Then people will come and invest here. I heard about Pak Gita Wirjawan, the head of BKPM, the Investment Coordinating Body, providing a ‘one-window’ service for investment, which is centralised. If that can be done, it is a good initiative. If 24 provinces can get together and harmonise their policies, that would be good for investors.

We know the local cultures. In any country that you go to, if you respect its cultures and you understand them, I think you can do business Next, get them into a binding note whereby the ministry that takes care of oil, gas and coal, and the ministry that take cares of railways and transportation, sit together with the finance bank and work out a joint-paper, stating that they can work together to provide a suitable climate for investors. Unless this issue is addressed, you can announce millions of projects, but as you have seen in the past five years, there have been no major projects appearing. 155

energy & natural resources interview

Hasto Kristiyono Managing Director


pt sumberdaya sewatama

Hasto Kristiyono: I have a degree in mechanical engineering from the University of Gadjah Mada and had the opportunity to take a few courses in finance and engineering in the USA. My career started with Freeport Indonesia, a mining company in the Eastern part of Indonesia, from about 1993-2000. The company is the unit of Freeport-McMoRan Copper & Gold Inc, one of the largest copper and gold mines in the world. I was primarily doing maintenance of heavy equipment there. After that I had the opportunity to work for Komatsu Asia & Pacific from 2000 to 2002, where I was a mining support development manager. Trakindo was next, and during my first year with Trakindo I worked in maintenance engineering here in Jakarta, developing technology and figuring out how to manage risks of maintenance contracts. After spending the second year in a general operation management role, I left Trakindo and went to GE for a market development role at GE International in Indonesia. I spent a good four years in GE before the Trakindo Group were kind enough to let me return and run Sewatama in 2008. A business in transition IF: Sewatama started as a rental organisation and is now moving toward a full power solutions company. Can you give us a clear overview of Sewatama’s business today and the path it is taking?


HK: In 1970 Pak Met Hamami (the shareholder and also founder of PT Sumberdaya Sewatama) established PT Trakindo Utama. The core business was supplying and distributing Caterpillar equipment in Indonesia. There was a power rental division set

We are dealing in power solutions services, operating in more than 60 projects throughout Indonesia up then as well. The growth of the power rental division back in 1970s and 1980s was pretty good because the country was in strong need of temporary power. The infrastructure wasn’t really built to a level where you could get a reliable electricity supply at any time. So this division grew to a level where it was deemed necessary to separate it and become an independent company. In 1992, PT Sumberdaya Sewatama was formed and by 2006 had become the leading rental power provider. So Trakindo Group set a new goal to transform Sewatama from a rental company to a full power company. In 2008 I was brought in to run things and we

energy & natural resources interview

set out mapping our path to become a power solution provider. Looking at Sewatama today, we are dealing in power solutions services, operating in more than 60 projects throughout Indonesia. We have a rental fleet of diesel-generator sets with 500 megawatts (MW) of generation capacity. This means that each project is about 5-6 MW. We have experience of running small amounts of power in multiple locations. Also, we have entered businesses that are outside diesel genset rental and have operations in gas power generation, have successfully entered into financing power businesses, and we have

We are tending to have more of a focus in renewable energy, hydro and in biogas become minority shareholders in some projects. In addition, very soon we plan to invest in power businesses as a majority owner and become a full independent power provider (IPP). This side of the business will take a while to develop. IF: How are you set up to manage 60 locations around Indonesia? HK: It is about regionalisation, which means about being closer to the market and the customers. We have set up four different regions: Sumatera, Java, Kalimantan and the eastern part of Indonesia. In each of these areas we have a representative office where we recruit people from operations, sales and equipment management, and get them close to the machines and the market so that they can serve and respond to the customers. The second objective of regionalisation is to create smaller chunks of the business for human resource development purposes. What we wish to do is identify potential leaders and good human resources locally and give them the freedom to develop a smaller chunk of Sewatama themselves. That’s our approach, to empower regional offices to take responsibility and ownership of business growth and success. IF: Could you give us more detail on your approach to becoming an IPP?

HK: We have the option of building a power plant from scratch, but the main aim is to be an owner and operator of a certain size of power plant. The power plant may be coal powered, gas powered or even a combined cycle, or it can be powered by renewable energy. Today we have a business development team that is developing projects in this area and we are tending to have more of a focus in renewable energy and hydro and in biogas. We see mini hydropower as a potential business we may be able to enter soon. Mini hydropower is usually under 10 MW and can be run using a similar model to the one we are used to running. IF: So as more IPPs enter the market and PLN builds more power stations, what will happen to the rental side of the business? HK: I think what everyone, including us, would like to see is for the

the power solutions provider

Hotline: 08001821301 157

energy & natural resources interview

Career-defining moment Every move that I have made has been a strategic move: for example, from the mining environment into dealership, that was a big move for me. Moving from a remote area such as Freeport to big city such as Jakarta, that also was a big switch. Then working for Trakindo, I learnt a lot there. Then of course GE: GE is one of the most respectable companies in the world and spending four years at GE is an experience I will never forget. Now at Sewatama, I have full authority to run the company, so that is again another major step in my career. It is hard to determine which step is the biggest. However, of course ultimately and as in every profession, the moment you get full responsibility to run a company, well, this means something. The last two years have been a great experience for me. Motivation I’ve always carried around the idea that one day I’d like to teach. I want to speak in front of people and share my experiences. I may not have the educational background, but it’s more that I have professional experience that I like to share with people and hopefully my experiences may inspire them. That is something that really motivates me, and what also motivates me is to learn new things. country to have a 100 per cent electrification ratio. We believe that there is still a future for the Sewatama rental business even when all of those big power plants are finally built by PLN and our diesel gensets may no longer be required to supply PLN with electricity. I believe that there will always be a need for backup power. When PLN builds a power plant, it will need an alternative standby backup that is able to supply power immediately when needed, so we see this as being the future of our rental business with PLN. With regards to power solutions for the various industries, we are currently going through a review to better understand the requirements of all industry segments to improve the value we can offer each of them and be more effective as a business.

With regards to power solutions for the various industries, we are currently going through a review to better understand the requirements of all industry segments to improve the value we can offer each of them and be more effective as a business IF: Are you optimistic about the public private partnerships that the government has planned, particularly in the energy sector? HK: I think we have to manage expectations and be realistic,


Biggest challenge faced It was making the decision to leave the comfort and luxury of being at a company like GE and to take on my current role at a much more smaller, Indonesian company. It was a tough decision to make. Everybody knows GE and that they treat employees very well. GE has a very good reputation, excellent training and development is something you can take for granted, you have access to top executives and can knock on any door in the market and it will open. Then all of a sudden I started working for Sewatama. Not many people know Sewatama. So it was tough but rewarding, and turned out to be one of the best decisions I have ever made in my career. Most interesting project I look at transforming Sewatama as my ‘grand’ project. Transforming a company that has been in the rental business for 17 years into a full power solutions company is the most exciting project that I have ever worked on in my professional career. Most important lesson in business I think you have to stick to something that you really believe in. The most important thing is highly ethical business conduct: by putting yourself and aligning yourself to certain values, it really gives you a sense of direction that guides you when you make a decision and helps differentiate you. we have to see if people are really committed to what they say they are going to do, and to get things done right. Both sides, public and private, must be committed to each other and to understanding each other. The biggest enemy of an investor here in Indonesia is uncertainty: they want certainty. If these issues are resolved, I am optimistic.

energy & natural resources interview

Vinod Laroya


Founder and President Director akraya international

Vinod Laroya: I was born in India. I did my bachelor’s degree in the sciences, and completed my MBA (Master of Business Administration) in India as well. After that I worked for three years in a textile company in Mumbai. In 1976 I joined Indorama, a textile company. As CEO since 1978, I helped the company look at a lot of diversified business, including moving from the textiles business to petrochemicals. After a conscious, determined and well-executed period of transformation, Indorama is today the second largest player worldwide in the PolyEthylene Terephthalate (PET) resin business. Its growth is further multiplied by investments downstream and upstream. In 2004 I set up Akraya with personal funds. The way I visualise this company is to invest in and manage business in the areas that

We have knowledge of this country and how to work here. We understand the rules and regulations, and we know the people. At the same time, we subscribe to an international way of valuing businesses we feel really have a future. Akraya’s business model is to seek opportunities which need management and capital, and to grow them organically. We enjoy strong relationships with a number of banks and private equity funds, and both have supported us extremely well in realising our vision. In the first two years, we looked at a lot of projects; most of the projects were either chemical-related or textile-related, because of my background. We spent a lot of time on a large chemical

facility, and then a petrochemical facility, but in the end it was not really possible to acquire the companies because of their legal situation. Under the control of state-owned companies or agencies, the complex regulatory framework in place at the time made it difficult for the companies to divest their stakes. We then started pursuing the kinds of projects that we were interested in, and were ably supported by willing partners who would come in together with us. With a strong base in place, we identified a golden opportunity to acquire a distressed business related to the production of liquified petroleum gas (LPG). It was our first good investment. IF: What are the projects that Akraya is currently working on? VL: Currently we are looking at a number of interesting projects. Our foray into the LPG business is not a temporary one. In 2007 the Indonesian government initiated a program to replace the domestic use of kerosene with LPG. They did this in a period of three years, which is very quick, and it is one of the most successful programs I have ever seen in Indonesia. We are already involved in the production side and are looking for further value-

You are going to spend 20 to 22 million dollars before you can confirm that an area has geothermal energy or not. So there is a long development time added production opportunities, but we are also very interested in the distribution of LPG. I don’t mean filled-up, per-kilogram canisters, I mean distribution in terms of receiving terminals for gas sourced from abroad. Only 40 to 50 per cent of Indonesia’s LPG needs are sourced domestically, so LPG has to be imported. In this case, it is imperative that receiving terminals are built to 159

energy & natural resources interview

Career defining moment In 1978, I had been with a textile company for two years. In a bid to stem continuous losses, the founders asked me to take the CEO position. Within only a few months, the company achieved profitable operations. With the authority to lead the company, we moved away from textiles as our core business, and diversified into polyester and PET resin, both very profitable areas. This then led to integration through upstream and downstream businesses. Today, the company is the world’s second largest PET producer. enable efficient distribution nationwide. That is an area we are currently engaged in. On the power generation side, we have done a coal-based power generating facility involving PT Adaro Indonesia, Indonesia’s second largest coal company. There are a number of opportunities for power generation investments in Indonesia, but we are being selective in pursuing the ones that provide long-term value. Currently we are engaged in bids for two geothermal projects. However, the difficulty here is that geothermal energy is a very new business, and a lot of companies think it is comparable to fossil-fuel based power generation. It is the complete opposite; there is as much or more risk in geothermal projects as in oil and natural gas drilling projects. As a result, we see many tenders awarded at low prices which are then unable to be developed as financing is not feasible. Aside from geothermal energy, our renewable and clean energy initiatives include projects in solar power and methane capture from crude palm oil (CPO) mills. We also have about 15,000 hectares of land reserved for jatropha. Our goal is to produce bio-fuel, but we have slowed down on this because we don’t see jatropha oil as viable bio-fuel for the time being.

A lot of companies think it is comparable to fossil-fuel based power generation. It is the complete opposite; there is as much or more risk in geothermal projects as in oil and natural gas drilling projects Making green energy pay IF: What about the economics of renewable energy? VL: You are going to spend 20 to 22 million dollars before you can confirm that an area has geothermal energy or not. So there is a long development time. With geothermal energy we have to go about it in a step-by-step way. The first step, of course, is to get a licence to explore an area, or to acquire a company with an exploration licence that has already been issued.


Motivation I like to create something new, something worthwhile, that has long-term value; not just the making of money, but to create an institution that will be remembered. To build an organisation that is very well structured and staffed, and has certain ethics. The motivation is not to do everything for today but for the long-term. Biggest challenge faced During the 1997 Asian financial crisis, we underwent massive structural changes in Indonesia. The currency went from about Rp2,200 to Rp14,000-17,000 to the US dollar. That was the biggest challenge. At that time, we had a large exposure on the currency side, as all the money kept inside the country was in rupiah. With hard work and judicious resource allocation, we were able to handle the situation, being one of only a handful of companies that met all its financial commitments on time. If we can handle those kinds of risks, I think we are ready to handle everything. The most interesting project Setting up ASEAN’s (the Association of Southeast Asian Nations) largest PET resin plant in 1995. It was too large for domestic consumption but the visualisation was correctly done; to target the world market. We created a distribution and marketing network spanning 65 countries that comprised of production, shipping, warehousing abroad, and just-intime delivery almost anywhere in the world. We became the largest exporter to the US market. Australia, Europe and Brazil also became significant core markets for us. The most important lesson in business You need to have a strong passion for the business that you undertake. It has to be a part of you. A person should only go into those business areas which he or she enjoys so much that working countless hours is enjoyable. One should remember, however, that credibility is the most important asset one has. That is the mantra for success in any business. Without it, any success you enjoy will be short-lived. We also looked into hydro power, which is a difficult area to handle today because of difficulties in getting the permissions required. You really cannot distribute power yourself, so anything power related is dependent on PLN; sell to PLN or sell power through them. PLN is an entity that is very strong and well-run

energy & natural resources interview

today; they work within the regulations until and unless there is a specific government directive to pay higher prices. We have also looked at capturing methane from decomposing waste products, but there are problems here also. A city, for example, would produce about 13,000 tonnes of waste every day, and that

I also see that there is more participation by the private sector to put ideas forward, which the government is actively developing would need to decompose for a month in order to yield anything. If we did this, we would need a lot of land to store the 13,000 tonnes of waste that comes in every day. Even if we were able to get that land, it would have to be far away from the cities, and cost of transportation would be very high. There are also conflicting regulations between the municipality, the local district and the state level. In Bandung, we have been looking at this project for the past four years, but unfortunately it has not progressed. Infrastructure needs for power projects IF: What are your views of the infrastructure market in Indonesia, for power generation for example? Do you think the government has done enough? How do you see this progressing? VL: The first thing is to define infrastructure in Indonesian terms. Almost everything that relates to the distribution of goods and services is infrastructure. Development in these areas is ongoing;

the pace is slow, although some private companies have done a very good job in setting up logistics and distribution of their products. Still I think, in our generation, a lot still has to be done. For example, when PLN recalculated how much they could pay independent power producers, the price was too small which is why no new projects came in. It is a similar story on the geothermal side. It is hard to see how a viable geothermal portfolio can be created under this framework. You are going to invest a lot of money for geothermal exploration for which there is no guaranteed return, but what is the Government willing to give in return? Having said all that, overall I am very happy. We are seeing more order and some positive changes led by President Susilo Bambang Yudhoyono and his cabinet. It’s a matter of maybe another year or two before things improve vastly, especially the framework for infrastructure-related land acquisition. I also see that there is more participation by the private sector to put ideas forward, which the government is actively developing. IF: Are you keen to promote yourselves as some sort of a local partner to maybe international investors or companies who need local knowledge, or may need a local management company? VL: We structured ourselves a bit like that. We have knowledge of this country and how to work here. We understand the rules and regulations, and we know the people. At the same time, we subscribe to an international way of valuing businesses. Having led a multinational corporation for 28 years, we understand the requirements of large foreign investors. However, to do anything here, it takes time and certain conditions have to be met. It is imperative to amalgamate local knowledge with technical and financial ability. This is what we bring to a partnership. 161

energy & natural resources interview

Jacobus Busono President Director


pura group

Jacobus Busono: When I was 19 years old after graduating from high school I went to Europe. I studied graphic design first in Amsterdam, and after that I went to Stuttgart to complete a diploma in engineering. In 1970 I returned to Indonesia to take over my father’s job as the owner and President Director of his small printing business. For more than 60 years the embryo of the current company – a letterpress printing house – had passed down through my family, from one generation to the next. When I took over, the business had only 35 employees and it wasn’t running very well. I started out by concentrating on the technical side of the printing first, and later got involved in the management. Over the years I built 25 production divisions, one by one. During the 1970s we expanded our operations, with the bold aim of becoming the leading player in integrated printing across Southeast Asia. In the 1980s we became the first company in tropical countries to begin making carbonless copy paper. We also started up our holographic business, which is a vital element for making security paper – especially for banknotes. We were the first non-government company in Southeast Asia to develop the technology to do this. We have now exported our products to more than 90 countries in the world. Our quality is comparable to European companies, but our prices are Asian. Not only that, our group is entirely debt free. That makes us almost totally unique in the business, I think. From security paper and contactless card technology to biofuel IF: So can you tell us more about Pura Group today? What are your main business streams? JB: Pura Group can be divided into six industrial sectors: papermaking, printing and packaging, converting, total security


systems, smart cards and engineering. Our support division facilitates these six. There are other smaller, non-core businesses in the group, but these six are the main ones. Our paper mill is divided into two subdivisions, the production of security paper (including the banknote paper) and speciality paper. In security paper, we are the leader in Indonesia, because

In a jammed place like Jakarta contact-less toll road cards will do a lot for traffic flows we are able to make banknote paper – I non-government company qualified to do There’s a common misconception that paper before, but we are concentrating and banknote paper now.

think we are the only this in Southeast Asia. we made commodity on speciality, security

IF: So, you make banknotes for the Indonesian government? JB: We supply banknote paper to the Indonesian government for the new 1,000, 2,000 and 5,000 rupiah bills. We make the underlined security paper, along with all the special features – the watermark, fluorescent fibres, embedded thread, window hologram stripes and other features. We don’t do the printing; that’s done by national printing firm Perum Peruri. We also create security paper for important documents like diplomas, passports and visas, certificates and security packaging labels. These also combine watermarks, security threads, holograms, etc. We are also able to make features that are visible only under ultraviolet light – this is very helpful if customers want to tell the difference between fake certificates and real ones.

energy & natural resources interview

IF: Okay, can you tell us about your packaging division? JB: Also, within our packaging you can find security features present on hundreds of Indonesian products, but you first have to know where to look. Most people in Indonesia have never heard of us, but the producers know who we are. An example is cigarettes. We make cigarette filter wrapping paper; you can add a lot of things, not only to secure and seal but also to improve taste. This division has the facility for perforation by means of laser beam. Tougher government regulations require manufacturers to reduce tar and nicotine in cigarettes. Greater perforation means smokers inhale less tar and nicotine; and while we’re perforating, we’re also adding security features, and so manufacturers can identify counterfeits. We have markets across Asia – security paper of different kinds for Vietnam, passports for Timor Leste, for example, and Bangladesh is another key market for us. Then there’s the Middle East, some countries in Europe and now Africa. Libya is one of our potential markets in Africa. I should also mention Bolivia in South America. Ours is a truly global business.

There is the big potential of using jatropha crop to power electricity generation in the country We have integrated our divisions to provide multiple security features, depending on the needs of our customers. Often we are involved in cooperation between divisions in the group, because security features and holograms tend to be quite a specialised business. Our hologram division also supports our smart card division – we try to take advantage of synergies whenever possible. That’s our philosophy. We’ve just developed the Sputtogram, a special hologram created from various metals like brass, titanium, stainless steel, copper and gold, among others. It is brighter, has a greater colour range, higher diffraction effect and lasts longer than the conventional hologram. We try and provide a one-stop shop, which is quite rare to find in Asia. This is also not just about a cost benefit. Basically, we are dealing with a security product so we have to carefully guard the


Career defining moment Around 1985, personal changes in my life meant I started to become very interested in philosophy. For me, discovering things has always been important. After some study and introspection, I realised that I could only be an effective manager of the company if I led by example. This meant developing my own good character and making sure that these values were transferred down through management to my employees. This was partly about developing a management style, but it was also about putting into action things that I had learned on my personal spiritual journey; in my growth as a Christian. Motivation Motivation is not difficult for me. My work has always been my hobby – it’s pretty simple: I like my job. The more you like your job, the harder you work; and you work to perform better. The better you perform, the better you feel. It’s a positive loop. Most important lesson in business Don’t be arrogant. When I took over management of the company in the 1970s, I often thought I knew everything, that my ways were the best. I didn’t always listen to other people. That was a mistake. The best work gets done when egos don’t get in the way. Egoism is destructive because it undermines teamwork. Your character can either be a blessing or a curse – it’s your choice. Also: money is not the be-all and end-all. It’s also important to serve others. I’m in business to make a difference. I want to serve my people; I want to serve my nation. The Bible makes it pretty clear about an individual’s obligations to their society. It also tells you that when you give, you get back a lot of intangibles – I’m talking about happiness. processes – the distribution chains. By integrating we can give our customers the peace of mind that comes from knowing that our paper, holograms and special ink are all carefully controlled. IF: Could you explain more about the e-toll road card that you are developing with state Bank Mandiri? JB: We’re currently making a toll road card with an integrated “smart” chip.

energy & natural resources interview

This technology may be common in Singapore and Europe, but in Indonesia it’s still quite rare. There are two types of card technologies, the “contact card” – meaning your card has to be in touch with the reading machine – and the “contact-less card”, meaning your card can communicate from a certain distance.

by approximately 25,000 hectares annually. Jatropha will become a very significant commodity of the future.

Contact-less means that you can drive through a toll-road checkpoint and the machine sensor will automatically scan the card in your wallet, by waving it close to the reader, to let you through and deduct money from your account. In a jammed place like Jakarta this will do a lot for traffic flows.

JB: Currently we have about 20,000 hectares planted and most are in the Gunung Kidul district, in Yogyakarta province, on normally unproductive land. Currently we’re starting relatively small but we want to eventually expand our capacity. Later we plan to grow our land area to 150,000 hectares or more – that’s a very reachable number.

It could also be used for an electronic road pricing (ERP) system, which they are considering using in the capital. An ERP system already exists in central Singapore and automatically charges cars when they enter heavy traffic areas. Jatropha biofuel IF: Let’s move on to some of the interesting work you’re doing in the green energy area. Tell us a little bit about your experiments with jatropha oil as a potential biofuel? JB: Jatropha is a very unique plant – it grows very quickly, especially in tropical countries. It can also grow in harsh conditions – in degraded land, in parched or nutrient poor soil or even in sandy soil.

It’s very exciting – which is why I love my job. New applications are being created every day, so you have a chance to make a real difference

IF: So how big is your jatropha operation now and where are you growing the crop?

We are also adhering to a “Go Green” and “Save the World” global campaign, working with farmers, which also focuses on poverty reduction. In this regard, we have a full support from the governor of Yogyakarta province and the Gunung Kidul Regent. The people in Gunung Kidul, they have been there living for decades, and they understand the fierce nature of their environment - dry, marginal land, much of which is close to the sea and also has high salt content. We’re giving them a way to improve their lives by planting jatropha crops. Also, we’re guaranteeing to buy their harvests. We’ve signed 25-year use guarantees with farmers. This is important because jatropha crops give richer oil yields as they grow. In the first year you will get only 0.2kg of fruit per tree, but after 10 years you can get 4-5 kg and more if you nurture the plant well. Nurturing the plant itself is not hard, and can be done occasionally since jatropha is very tough; it can grow almost everywhere. IF: Looking back at your business as a whole, where do you see the biggest growth coming?

Unlike palm oil plantations, you don’t have to cut down forests to grow it. You can plant on already degraded land. Also, unlike other biofuel crops – sugar or corn, for example – you don’t have to plant on good agricultural land that could be used for growing food.

JB: Certainly in security – for passports, identity cards, driving and vehicle licences. The need for proper security features on these will only increase, both in Indonesia and internationally. Contact-less, radio-frequency technology will also become very important.

However, like palm oil, jatropha fruits are rich in oil. Five kilograms of seeds can produce one kilogram of oil, while the press cake (its waste) even has a calorific value of about 5,000 kcal/kg. That means good enough heat content as fuel for power plants.

In the future we’re hoping to work together with a company to make smart identity cards for all of Indonesia’s 240 million people. We could also create special cards for Indonesian migrant labourers. Such cards would reduce corruption in the manpower sector and reduce exploitation of migrant workers.

So there is the big potential of using this crop to power electricity generation in the country, which currently relies on fossil fuels. As importantly, you can start making biofuels to be used in cars and aircraft and we’re exploring both possibilities. In the aviation industry, prominent airlines all over the world, like Lufthansa and Singapore Airlines, and also the engine manufacturers, like Pratt & Whitney, GE and Rolls-Royce, are intensively involved in the development of biofuel utilisation as aviation fuel. They’ve been quite successful so far. We’ve received so many inquiries from various countries for the jatropha oil, but we can only fulfil partially with our current production size. That’s why we keep on expanding the cultivation

The application of nanotechnology in solar energy is another important focus. During 2007 and 2008 we researched solar window film for glass windows, created by using nanoparticles. The product we have created offers features far more advanced than those offered by our competitors. Most importantly, the film has higher transparency, better heat cut-off, and durability to be used in cars, buildings and house windows. It’s very exciting – which is why I love my job. New applications are being created every day, so you have a chance to make a real difference. 165

energy & natural resources interview

Abadi Poernomo President Director


pertamina geothermal energy

Abadi Poernomo: My education was in mining engineering. But then I studied at the Geothermal Institute, Auckland University. I began my career in Pertamina as a junior engineer in the Geothermal Energy division of Pertamina in 1985. I worked there for 15 years. I was then moved to the Oil and Gas division. The last position I had there was as general manager of an oil and gas field in Sumatra. I was assigned to my current position as President Director of PT Pertamina Geothermal Energy perhaps because of my past experience in the field, and the fact that I have moved within the company, ‘jumping’ between different divisions. By now it’s assumed I must probably know a lot about Pertamina and how things work here. IF: Can you describe Pertamina Geothermal Energy? Why the company was formed and projects it is currently working on? AP: The geothermal division has been around for 30 years, but there was no development, no movement, it was stagnant. Then the House of Representatives passed law Number 22/2001 regarding oil and gas. That seemed to have ignited a bit of spirit in Pertamina’s energy business. One of the businesses that seemed to begin to move was the geothermal energy business. It was given the job to develop the various concession areas. They have been very good resources. After oil prices rose up to US$80 per barrel, the chance to develop geothermal energy increased. The Government started to change strategies; now it has programmes to develop all the geothermal fields in the regions. Developing geothermal energy IF: Can you share with our readers what your mission is? What is the challenge to grow this sector and what is your strategy? AP: It is to make geothermal energy a common power source. It is challenging, but we have the resources. Also, the economical part about it is that geothermal energy works 365 days a year, 24 hours a day. It is all about getting the approval and the development running.


In the short term, we plan to develop up to 1,342 megawatts in electricity from geothermal by 2014 and bring the capacity up to 9,000 megawatts by 2025. But right now we only have 272 megawatts. One of the biggest problems of developing geothermal energy is how to finance it. By this I mean drilling, exploration, producing steam. Financial institutions are hesitant to finance this sector because in the exploration phase there is only around a 50 per cent chance for success, while for the development, the success rate is around 80 per cent. So it is a bit of a gamble. Most of the financing goes to the power plants.

Financial institutions are hesitant to finance this sector because in the exploration phase there is only around a 50 per cent chance for success IF: Who buys the geothermal power you produce? What about the pricings? Are they competitive enough? AP: Up to now, our only buyer is the state electricity provider Perusahaan Listrik Negara (PLN). We must maintain a close relationship with them and bear in mind PLN’s electricity distribution plans, because when PLN stops building transmission lines, I cannot really build anything either. We must work together with them. In regards to pricing, there is a decree from the Ministry of Energy and Mineral Resources on geothermal energy, which sets the maximum pricing at 9.7 cents. So, we are working to get this price to PLN. Indeed, sometimes pricing becomes a hurdle in proceeding to the next step, as sometimes they cannot take your offer because it is too expensive. We normally inform them about how much return in investment we want to make, because we need to price in investment in the upstream activity, which has high risk and

Biggest challenge faced Increasing the current geothermal-based electricity capacity by five times; addressing big hurdles for development of the sector such as financing problems, arranging all the permits, land acquisition, and making sure things get done properly. I need to wake up experts and staff at PT Pertamina Geothermal Energy after a long 17 years of sleeping. Most interesting project It is developing 11 geothermal projects in Java, Sumatra, Sulawesi and Bali islands in parallel. This is a very interesting situation to manage. One of the challenges is the shortage of people. I have only 250 people here for 11 parallel projects. Motivation Developing the largest sources of geothermal energy in Indonesia, which have never been exploited. indeed, we will request a reasonable return. But we have a team from our side and PLN discussing closely about the matter. Supplying other companies with geothermal IF: How do you see the prospects of growing your business, is there a possibility for you to offer your products to other off-takers? Or offering to companies to provide temporary power solutions? AP: We can supply point-to-point to companies that need electricity. Look at coal mines. If they need 100 megawatts, we can transfer directly to them. But the geothermal reservoir must be close to the mines. No further than 100km. That constrains us in expanding our business of providing temporary power solutions. For example, in Sumatra, most of the industry is concentrated in the northern part of the island, while the geothermal reservoirs are mainly located in the south. This is too far to send power through a transmission line built only to support 100 megawatts. If PLN expands its transmission lines, then we could sell directly to the companies; however, I would pay PLN a ‘toll fee’ for using their lines. I am trying to make it happen. But it is not likely to be do-able in Java Island, considering the power demands of the population and that the island is still suffering from power shortage. IF: You mention about the growing support for this sector. What might be a good example of this? AP: At the Indonesia Geothermal Energy World Conference in Bali in April there were more than 2,500 attendants, but what was important to me was that it gave us the opportunity to exchange ideas, and brainstorm on solving difficulties. Financers came to my office after the conference expressing interest. It was interesting to see that other countries, Americans, Australians, all have a similar pattern on how to boost the development of geothermal energy. Japan actually seems to have a lot of money to spend for geothermal energy projects.

energy & natural resources interview

Ilham Habibie


Chief Executive Officer and President Director ilthabi rekatama

Ilham Habibie: I was born and raised in Germany. After being there for 21 years, I moved to the US to work as an engineer. From there I came to Indonesia and worked for Indonesia’s stateowned aircraft maker, PT Industri Pesawat Terbang Nusantara (IPTN). Now it’s called Indonesian Airways. I worked there for a few years as a project engineer, then project manager, then as project leader to marketing, sales and customer services. I decided to call it quits in 2001 and join the family business. We were a holding company. The products were contained in the subsidiaries and in the investments. Today we have got a lot stronger and we are in energy and natural resources. We started in companies working in oil and gas, coal mines, coal bed methane, then another smaller mine producing kaolin or the white clay that is famous in Chinese pottery. IF: How would you best describe the company’s structure as a holding company, and in what sectors are you active?? IH: Mainly energy, resources and manufacturing. There are various subsidiaries and investments. I say subsidiaries when we own more than 50 per cent of the outfit and investments where we have less than a 20 per cent stake but we still have great influence and are directors or even a member of the board. Although often as investors we participate as normal shareholders. IF: When did you decide to get into resources and what drove you to make that decision? IH: During the commodities boom in 2002 we thought it would be something we could hang our hats on, and the rally kept going. Of course there were some interruptions, but in general, it was really sustainable. Most of it has been driven by India and China’s voracious appetite for our resources, especially coal. It was this background that drove us into getting into these sectors. Now we have a coal mining company, we have an oil and gas


exploration company, one developing coal bed methane technology and another mining kaolin. These are the four main areas. IF: Do you want to convert these resources, and then export them? What is the focus? IH: There is oil and gas, and commercial and semi-natural gas products. How would you process these? What you could do with oil is go to the petrochemical industry; what you could do with gas is similar. We haven’t done that yet because we have to grow our oil and gas companies first. With gas we are still making losses because the gas is far away from the infrastructure we need. Instead we plan to supply power stations with it. Meanwhile we will use the oil for other applications such as fertilisers. You can produce urea out of methane gas. With kaolin, you can even establish a paint factory. Energy tariffs IF: When we talk with energy producers the issue is always about tariffs. Are tariffs moving the right direction? IH: There is a split in Indonesia’s business landscape on the subject of tariffs. Everything is connected to the Java-Bali demand – this is the country’s main grid and where over half of the consumers

In the future, I could see that there will be major industries starting in Sumatra, in East Kalimantan and South Kalimantan are. Java-Bali consumers are subsidised because the population’s buying power is small. So the legitimate, government-set price for electricity is extremely low, which makes it difficult for developers to get a decent return, unless they build a very big

energy & natural resources interview

project. In Indonesia there are not too many private companies of that nature, most of them have only one or two megawatts of generation online. For them, the margins can be very tight. IF: What about the situation outside of Java-Bali? IH: Outside of there the tariffs are much better. In the future, I could see that there will be major industries starting in Sumatra, in East Kalimantan and South Kalimantan, processing natural resources, on-shore, which could be exploited by petrochemical companies. You can have a petrochemical company, not necessarily in Java, but also in Sumatra, near the actual wells, or near East Kalimantan near the gas fields, then build the infrastructure. The infrastructure is not there yet but it will be in the future. IF: What do you see outside Java and Bali? Where are the potential regions for the private sector? IH: For us it makes more sense to focus on smaller power projects outside of Java-Bali because we are not a big outfit. You have to understand where your company would fit in. With us, we wanted to stay with the smaller projects, where the margins are bigger and technology plays a good role. Still, there remain challenges in doing business in the regions that have to be ironed out, and finding the money to construct coal- and gas-fired power plants is not always easy. Still problems to resolve IF: The government is trying to attract US$150 billion over the next four years to build infrastructure. Do you think this target is achievable? And what are some of the problems? IH: If you look at some of the people who won projects, some of them don’t have the equity to implement them. I think some of the companies are not really capable of doing that, and from a legal standpoint, it is not so easy to get rid of these companies and then re-tender. So success has not been that great. However, things are changing in regards to foreign direct investment. If you look at the number of people coming to Indonesia, the country is on everybody’s radar. There is a buzz about it, and you can see it. The question is whether these people will be focusing on infrastructure or not. There’s plenty to chose from: power, roads, airports, seaports and telecommunications, to name a few. The stumbling blocks have to be removed, such as when we talk about toll roads. Right now in toll roads, investors have to deal with too many interested parties - the land owners, the local communities and the municipal or district governments. Everyone wants money from the investment and they’re willing to block the process if they don’t get their cut. Currently toll road projects are taking a lot of time, and there are a lot of delays. I think that is something the government needs to look at. I’m not saying that state-controlled industries – traditionally power generation, roads and ports – should be completely liberalised or deregulated, but there is certainly something wrong in the current implementation, because the speed of establishing

Career-defining moment It was when I became project manager of Indonesian Airways, a state technology project to build locally made aircraft. Our main project was to build something like the Boeing-727, with a narrow body, like the planes used in Europe. The plan was to fill the gap of the Fokker 100, which was the mainstay of the 100-seater class. So we thought let’s build our own version of the Fokker in Indonesia, because the largest market for Fokker outside the US was in Indonesia. In those days it was very easy to get money for these kinds of businesses. The design started from scratch. It was a lot of fun. Biggest challenge faced If you asked me I would say I wanted to build airplanes forever. I still have a small airplane company, but that is more of a hobby rather than a big business. That is really in the past. I enjoy what I am doing now, although the airplane business was the most challenging work I have ever been involved in. Motivation I want Indonesia to have a strong industry. Indonesia does not have one although it is rich in natural resources, and the bar should start there. We have to be careful to have some downstream industries that will make use of those resources, and that is a huge motivation for me: to be active in a business that builds industry here. Most important lesson in business Timing is very important. You have to prepare yourself and be quick to take advantage of opportunities. Sometimes you are prepared but there are no opportunities. Sometimes you have a lot of opportunities but you don’t have the capability to do it. There is an old proverb from a Roman philosopher that is still true 2,000 years later: “There is no luck, there is only preparation, and there are only opportunities when these two meet.” infrastructure in Indonesia has not really improved. Regarding power plants, for many years there was a lot of uncertainty regarding the power tariffs. Removing subsidies on power supplied by state utility PLN is part of the government’s medium-term power strategy and it would solve the problem of uneconomic power projects because prices would rise to an economic level. However, doing so is a highly unpopular decision to make politically. People will protest; they are already protesting. President Susilo Bambang Yudhoyono has already gradually raised prices while in office, but he has hesitated in removing subsidies completely. He will need to make such tough choices if the country is to move forward, and at the same time find away to not overly burden the nation’s poor. 169

energy & natural resources interview

Mike Gray Regional Director rolls-royce indonesia


Mike Gray: I grew up near the Congo border in what is now Zambia. From there I went to Leeds University to study, and then Aston in Birmingham for my PhD in engineering. Out of school I started working for Dunlop on energy conservation and cost reductions for rubber processing until I became its energy engineer. That job allowed me to travel everywhere, with the exception of South America. I moved from the rubber industry into combustion engineering and business consultancy for a short period of time. From there I became a managing director of a process engineering company in the UK. At any one time, we had operations in 30 countries building chemical plants.

We are a substantial supplier of aircraft engines for airlines such as Garuda, Lion, Merpati, Pelita and Mandala, and also for the Indonesian Air Force and the Army. We also supply helicopters and the small Nomad surveillance aircraft for the Navy. In the marine sector, we power 70 navies worldwide, including Indonesia’s. Rolls-Royce is the biggest marine systems supplier in the world. Our business in Indonesia developed principally on the back of aerospace but rapidly moved into other areas such as power stations, oil and gas and then marine.

That is what brought me to Indonesia, first with Dunlop and then with Simon Carves.

IF: What does Rolls-Royce do in marine here? Could you tell us about your market?

However, from Simon Carves I was recruited by Rolls-Royce for its nuclear engineering operations. I was managing director of RollsRoyce Nuclear Engineering Services in the UK. We were involved in decommissioning power stations, and manufacturing special equipment for the nuclear industry. In 1999 I came here, and have been here ever since.

MG: We have customers all over the world. We acquired a company called Vickers-Ulstein back in 2000 and we have subsequently added other companies to that. Initially, we tended to be involved in the naval side but we are now very much involved in a big way in commercial, including oil and gas support vessels and deepwater drilling rigs.

The fundamentals of this country are very simple to understand. It is a very big country. So you need to have either air or sea transportation Supplying the air and marine sectors IF: Could you tell us about the history of Rolls-Royce in Indonesia and how the business is structured? MG: Rolls-Royce has had a presence here since 1957, predominantly in aerospace.


We have built 12 ships already in Batam and we have another five on the way. As far as undertaking work in country, we have transferred know-how and technology not just from marine but also from aerospace. These are facilities where we can overhaul our engines in country, as well as look after our products. We do that in partnership with customers. In power, we did a lot of work in power generation and some of the early distributed power facilities here. Hotel Indonesia was the first air-conditioned hotel and the power system for that came from a Rolls-Royce diesel machine. We have built distributed power systems throughout the country, everywhere from the Batam-Bintan-Karimun, Riau islands, in Sumbawa, West Nusa Tenggara, through to Bangka, East Kalimantan and Ternate, Ambon, at the other end of the country.

energy & natural resources interview

For offshore power for customers like ConocoPhillips, BP and Total, we have supplied compression systems as well as powergeneration units for offshore production and exploration. All in all, it is quite a wide spectrum of business across those sectors. Future growth IF: Where is the most potential for growth in these sectors going forward? MG: The fundamentals of this country are very simple to understand. It is a very big country. So you need to have either air or sea transportation. Our product base can support this market extremely well. The second thing is that it has a coastline of 82,000 kilometres that is second only to Canada, so defence is a very important issue, but defence in the widest context. If you take it further there is fishery protection, coast guard, multi-role vessels for environmental clean-up and search and rescue, through to the integrated systems. Sustainability is also key for us. That is why we have transferred a lot of know-how and technology. Sustainable air power is something we have felt strongly about for a long time. With oil and gas, the percentage of GDP from the oil and gas sector here is enormous. It obviously offers great opportunities, as does power generation. You have 240 million people who all want computers, electricity and televisions to watch the World Cup.

You have 240 million people who all want computers, electricity and televisions to watch the World Cup IF: You answered with aerospace and marine at the top of your list. Is that because they are bigger growth areas for you than power generation? MG: It depends on when you are asking the question. The priorities change and the drivers and government drivers change. Consistency is fundamental to ensuring that Indonesia’s engagement with the rest of the world stays on track. That will affect not just Indonesia’s development but also Rolls-Royce business priorities. IF: If you look at potential over 2010-2014, the possibilities reach out across many different sectors for Rolls-Royce. Which sectors will be the most important for your business during that period?

Career defining moment I don’t know if there is one, but being associated with the risks and rewards of contracting in international markets and being at the forefront of technology have been defining for me. These two things brought me to where I am today. Motivation Working in international markets is all about people and opportunities. There are always challenges but the opportunities define the solutions, because you can always find the solution if you put your mind to it. Variety is the other answer, especially in jobs like this, where things change every second in the market place. You also need to have relationships, an understanding of the framework and you have to keep your finger on the pulse. Biggest challenge faced There have been many but the most significant challenge was working in the post-tsunami environment in Banda Aceh in 2004. We didn’t have any business opportunities there, but the challenge was to find solutions for people who had just suffered a massive disaster. You had to bring together all of the elements within Indonesia to solve the problem, and to do it very quickly. Initially, we supported the military in the clean-up operations immediately after the tsunami by supplying gloves, masks, boots, disinfectants and antibiotics. That quickly moved into supplying body bags, of which we supplied 40,000 into Banda Aceh over a very short space of time. All were manufactured here in Jakarta and we were shipping about 2,000 body bags a day. From there we moved into other areas of support. The east coast was devastated. Nearly three kilometres of box-bridging was just screwed up and thrown inland like paper, and the road went under the sea, never mind the devastation to the flattened communities. The scale of the devastation was enormous. Growing up on the Congo border with Belgian uprisings and the civil war in Zimbabwe, my family lost a lot of friends, but I had still never seen anything like Aceh. Most important business lesson You have to be trusted. You need to have relationships where you have trust between you and the customer or stakeholder. You need to have values, as you do not get trust without values.

MG: I would say that all of them are important, but we can’t focus on everything. We shall focus on areas where we have a competitive advantage and the complexity of doing business is lessened.

and walikota, or municipalities, around this country. That is not necessarily wrong but it is more complex as a consequence, because each area has different drivers. You have to look at which of these areas presents the right opportunity, rather than try to do everything.

If you were to take power generation, first of all the decisionmaking process has devolved over 640 kabupaten, or districts,

Pros and cons of decentralisation IF: Is there a balance between the fragmentation caused by 171

energy & natural resources interview

decentralisation and the speedier localised decisions, which might be attractive to a company like Rolls-Royce? MG: Certainly, the generic model here is to find a solution for the particular area that is not just a technical solution. What fuel will be used? How will it be balanced with other energy sources? Is it affordable? What is the subsidy? Where will the money come from? We cannot do that for every kabupaten, so we target certain kabupaten.

Indonesia has done incredibly well to distance itself from disproportionate debt to GDP over the past 12 years IF: What would you say are the biggest challenges that the infrastructure sector is facing in Indonesia? MG: There is no question that there is a requirement for infrastructure investment in power. There are a lot of things legislating against that, such as complexity, lack of legal certainty and bureaucracy. The difficulty of trying to marry those issues to give confidence to external investment is a substantial job. As far as sovereign guarantees in the country, Indonesia has done incredibly well to distance itself from disproportionate debt to GDP over the past 12 years. These things point in the right direction for investment. IF: What developments have you seen at regulatory or policy level that give you confidence that it will be better for institutional investors in Indonesia? MG: The creation of facilities to be able to offset risk is fundamental, but that need not necessarily be just at the national level; it could be at a provincial level. If there were support for provinces as with Riau Islands, for example, and

The creation of facilities to be able to offset risk is fundamental, but that need not necessarily be just at the national level; it could be at a provincial level a number of others to establish institutions that guarantee or provide local guarantees to investors, that sort of model would work extremely well. IF: There has been talk of creating a one-stop-shop for licences and land acquisitions in a standardised way. Do you have confidence that this could be done soon? MG: My view is that you have to devolve that to the provinces, and not have a one-stop-shop in Jakarta.


There are two key issues here. One concerns the regulations associated with power purchase agreements. There is a stateowned monopoly in the form of power company PLN, and investors need certainty that regulations will not change and that purchase

You will only solve the land ownership issues if you talk to the walikota or the bupati and, in that way, locally, you are solving the issue prices and conditions will make projects viable. Another issue is land ownership. You will only solve the land ownership issues if you talk to the walikota or the bupati and, in that way, locally, you are solving the issue. Therefore, you have to work in harmony with local government. There are certainly some parts of the country where local governments are becoming aware of the benefits of supporting direct investment and I think this trend is likely to continue, but maybe not at the same pace in every place. There has also been some marked progress in government-togovernment relationships here that can help with these issues. My simple message is that Indonesia has enormous potential, and it needs countries to be consistent in their engagement with Indonesia.


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transport overview

Transport challenges the country is determined to address Logistics is a highly important field for the socio-economic development of Indonesia, the world’s fourth most populous country, and is a challenging task in an archipelago of more than 17,000 islands

Lack of transport and logistics Infrastructure As a large archipelagic country, Indonesia has unique features in its transport sector.

Unnecessary transactions occur along the supply chain, creating a chain of rents and transfers that charges into the final commodity price

Each island or region has its own characteristics and modes, the integration of which is still developing. Because the country consists of a number of islands, transport across Indonesia has significant scope for development on a domestic scale, more so for inter-modal transport. However, in its early stages of planning, each mode and its infrastructure was planned independently by the related state and regional authorities. Thus, inefficient inter-modal transfer and high inter-modal externalities are apparent across Indonesian islands. Actually the problem is not just about geography and multimodal transport issues. Poor and inadequate road networks, underdeveloped seaports and airports, corruption, arduous bureaucratic procedures and the lack of coordination among government agencies are some known impediments that result in gross inefficiencies. Unnecessary transactions occur along the supply chain, creating a chain of rents and transfers that charges into the final commodity price. This greatly harms Indonesia’s international trade competitiveness and contributes to a high-cost economy. Although perceptions of the business climate are improving on most fronts (Indonesia was ranked 122 out of 183 countries in 2010 and up from 129th, according to the International Finance Corporation), perceptions of infrastructure and transport have worsened. In a report released in January 2010, the World Bank ranked Indonesia 75th among the 155 economies rated in its Logistics Performance 175

transport overview

Unbalanced transport market 1. Dominant road infrastructure

Roads dominate the freight transport system, with more than an 85 per cent share. Railways come second at 7.3 per cent in terms of freight transportation, although its share in passenger transport is much higher than road transport. Both freight and

Being close to other key Asian economies and having a large domestic market makes Indonesia a potential logistics hub, with large scope for current and future development passenger shares for railways are declining following the drop in service quality, maintenance backlogs and competition with the road sector. 2. Aviation growth restricted to passenger transport

Aviation has experienced a significant increase, especially in passenger movement as a result of the liberalisation of the air transport sub sector and the emergence of the low-cost airlines industry. This has resulted in an increase in competitiveness of this mode, especially for short distances. Although this trend remains for passenger transport, the emergence of the low-cost airlines industry has had minimal impact on freight transportation. Freight transportation by air is largely restricted to either exclusive freight aircrafts or premium airlines in Indonesia. Thus, the aviation sector has witnessed unbalanced growth, with higher growth in passenger movement compared with freight movement. 3. Unutilised sea and river transport potential

Sumatra, Kalimantan and Papua hold huge potential for river transport. However, river modes are not very popular, with a share of approximately 1 per cent in overall freight transportation. In addition, Indonesia is located next to the busiest route in the Asia Pacific region, the Straits of Malacca. However, safety and security of ships has been an


issue in the past few years, with the number of ship hijacking figures on the rise. To be regarded as an international trade destination, sea mode plays an important role. Although, for an archipelago such as Indonesia, this number is still low. Goods distribution, which is based on the islandwise concept, has resulted in roads being the main choice of transport, especially in western areas of Indonesia. The role of other modes, such as railroads and rivers, for freight distribution within the islands themselves has not been very well developed. Dry ports, as nodes of distribution for freight, only exist in some locations in Java and Sumatra. The same goes for river modes for freight shipment. 4. Security and manpower Issues

Apart from infrastructure, security and labour concerns across transport modes are the main issues facing inter-modal transfer. Freight terminals at rail stations and seaports lack international-standard security, and this is compounded by primitive technology. In addition, lack of skilled labour and availability of the required manpower to establish secure freight storage and movement across transport modes are primary challenges that need be addressed. Indonesia’s logistics market is growing Indonesia presents great opportunities for logistics service providers despite the challenging situation – lack of government support, poor infrastructure facilities (ie port facilities, telecommunication network, low usage of internet) and less skilled manpower. The current trend in Indonesia shows that the top three logistics functions with a high potential to be outsourced are import/export freight forwarding, inbound transportation and outbound transportation. According to research carried out in 2009 by Frost & Sullivan, a business research and consulting firm based in Jakarta, classic outsourcing is expected to grow at a Compound Annual Growth Rate (CAGR) (2005-2012) of 9.8 per cent, hitting US$1.93 billion in 2012, and is expected to capture Market Attractiveness Index (Indonesia), 2012 Classic outsourcing Market strength (based on market size 2012) (US $ bn)

Indicators (LPI). This represents a significant decline as compared with 2007, when the country was ranked 43rd. Ominously for Indonesia, the fall in ranking reflects stronger efforts by other countries to introduce reforms and improve logistics performance. Vietnam, India and the Philippines all have higher LPI scores than Indonesia, despite their lower income levels. Nevertheless, Indonesia remains among the top eight lower middle-income performers in 2010.

Advance service

Full service

2.4 2.0


1.6 1.2 0.8 0.55



0 0







Market attractiveness (based on CAGR from 2008-2012) Size of the bubble indicates percentage contribution by each of the service modules by 2012 Source: Frost & Sullivan

C-S I. Booking Engine Infras.Focus 18,5x22,


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transport overview

70 per cent of the market in 2012. Advanced services are expected to grow at a faster pace, growing steadily by 16.7 per cent annually, hitting US$550 million (and with 20 per cent market share) in 2012. This translates to a rising adoption of an integrated third party logistics (3PL) services in Indonesia. Full service is expected to steadily grow by 22.5 per cent annually, hitting US$280 million (and 10 per cent market share) in 2012. Indonesian companies are interested in increasing their supply chain efficiency – this includes different logistics functions. According to Frost & Sullivan research in 2009, the logistics cost in Indonesia accounts for up to 19.2 per cent of the total cost; the major components are freight forwarding (49.5 per cent) and transportation (36.4 per cent), while the smaller components are warehousing (9.8 per cent), value added services (2.4 per cent) and IT management (1.9 per cent). Based on the future logistics needs, the activities that are likely to be outsourced in the future are still common basic transport services, which are related to outbound and inbound transportation, distribution, fleet management, import and export freight management and warehousing. Cold supply chain is another rapidly growing area with increasing import and export of fresh produce, including fresh fruit and vegetables, processed food, milk products and halal products. On the technology front, strong incremental usage of logistics technology, especially in visibility tools such as GPS/vehicle tracking systems and barcoding systems, is expected in the near future. Increased usage of information systems and engaging more with logistics service providers is an anticipated trend in the near future, too. Being close to other key Asian economies such as Singapore, Malaysia, Thailand and Vietnam and Indonesia – Logistic Performance Index (LPI) Overall LPI score 2.76

rank 75 Customs score 2.43 rank 72 Infrastructure score 2.54 rank 69 International shipments score 2.82 rank 80 Logistics competence score 2.47 rank 92 Tracking and tracing score 2.77 rank 80 Timeliness score 3.46 rank 69 Source: World Bank


having a large domestic market makes Indonesia a potential logistics hub, with large scope for current and future logistics opportunities. Indonesia on a logistics reform path to greater competitiveness Indonesia is determined to become an important player in international trade markets, and is following through on the logistical front with a series

Indonesia presents great opportunities for logistics service providers, despite the challenging situation of positive reform measures. Indonesia has launched an ambitious public and private dialogue on trade facilitation and logistics. It prepared an action plan addressing the costs of international trade (port facilitation), as well as the unique logistics costs of a large archipelago. The government has launched a National Single Window System. After two years of preparation, the Indonesian government released its logistics blueprint aimed at tackling both short-term actions and long-term reform in the logistics sector, as well as providing a broad strategy to make domestic and international trade logistics more efficient. The government also established a multimodal transport blueprint. The future of Indonesia’s economic growth may depend upon its successful implementation. Actions are needed on a number of fronts – particularly on border management, service sector performance (transport, logistics and freight-forwarding services) and overall logistics infrastructure. The government should try to promote a parallel supply chain, for example using the information and communication technology (ICT) available to shorten the business process and eliminate unnecessary transactions. However, the most important front is the inter-agency coordination in implementing reforms, which may require a higher-level body with a stronger mandate.

transport interview

Emirsyah Satar President Director


garuda indonesia

Emirsyah Satar: Professionally I am a public accountant. I had a career in banking but now I run an airline company. I am actually a certified public accountant (CPA) holder. I feel that understanding the finances of a company is quite important. When I joined Citibank, the first bank I joined, I wanted to become a finance manager. After pursuing a banking career for some time at the bank, I left the industry and moved to a large property group called Jan Darmadi Group. I later returned to the banking industry and joined Bank Niaga, now called CIMB Niaga. I was stationed in Hong Kong, running a Bank Niaga office there. When I came back, the government asked me to be the chief financial officer of Garuda. It seemed to work: a banker becomes CFO of Garuda. I was with Garuda as their CFO from 1998 to 2003. At that time Garuda had a large debt, over US$1.8 billion, and it was overdue. The bank did not have the capability to pay it back. That was back in 1998, during the Asian monetary crisis. While I was there as CFO, we managed to restructure the debt. The tenure of a directorship in Garuda is five years, so when I finished my five-year stretch, I told the shareholders that I had paid my dues, now that the debt was restructured and everything was fine. I left and went back into banking as the deputy CEO of Bank Danamon. Around that time Danamon was taken over by Singapore’s Temasek Group. Danamon had a Temasek guy who was the CEO, and I was the deputy. After almost three years, I was then called back by the Minister to run Garuda, which unfortunately, was not doing too well again. So, here I am now.

Overall, I believe a company must have sustainable growth and sustainable profit. It is not just up to the CEO to provide this. The company as a whole has to implement some sort of system that is open and transparent in order to have sustainable growth. So, that is what we are doing now. If you look at some companies, when you depend too much on the CEO, then once the CEO leaves things in the company can go downhill. One of the milestones that we as a company would like to achieve is that the company launches its initial public offering (IPO) in February 2011. Everybody will know the essential details. Everyone will be able to monitor the company. The directors are chosen in a very transparent way, for instance. They will have to perform. They will have to explain to the public what

One of the milestones that we as a company would like to achieve is that the company launches its initial public offering (IPO) in February 2011

IF: Can you tell us about Garuda’s business?

is happening with the company. For me, an IPO is not only about the money being raised. Of course, money is important. But equally important is the transparency that it brings about, and the governance that we will have put in place. That is why in Garuda we are now at that stage.

ES: Right now, we are in a transformation process which we started in 2005. Back then we were not in what you could say a good position, not in good shape at all. For the first two years, we were essentially in survival mode. We came up with a strategic plan that we divided into stages. We started with a two-year survival stage; the next two years would be a sort of “turnaround” stage, and finally there would be a growth stage. We are now in the growth stage. We have already passed the turnaround stage.

The target for the IPO is to raise about US$300 to $400 million. The money will be used to support the expansion of our fleet. As of now, we have 71 aircraft. The figure will change because we will be getting new aircraft every month. By 2014, our target is to have 116 aircraft. So we need funds, capital basically, to support this growth, not only for the aircraft itself but also for the distribution and the network. The funds are going to be used for that. 179

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Career defining moment When I joined Garuda as the chief financial officer. Garuda was a not in a good situation, especially during the Asian monetary crisis. So it was even more exciting: in fact, I took a pay-cut when I joined Garuda; I was paid very well by Bank Niaga when I was in Hong Kong. But I like challenges. Sometimes I get bored when things are already in the system and sorted out. I just like creating things, creating value, changing things to make them better. So I would say my career defining moment is when I joined with Garuda. Most interesting projects In my early days, one of the most exciting projects was building a hotel, a 750-room hotel in Nusa Dua, Bali. The other project was when I was working in banking. We built a micro-finance centre, the “Danamon Simpan-Pinjam” facility (loan and safe-keeping facility). That was quite challenging.

the garuda experience IF: Garuda was recently named the world’s most improved airline. At the same time it resumed flights to Europe. What did that mean to you, and what do you foresee in the future for the business? ES: This is definitely going to be a new era for Garuda. It is not only just about flying to Europe. There are improvements we have made to the basics of the business. If you look at where Garuda was two years ago, for instance, since then we have refreshed

An IPO is not only about the money being raised. Of course, money is important, but equally important is the transparency that it brings about our delivery. We changed the interior of our aircraft for example. Right now our philosophy is what we call “just nature’s wings” and up to now the colours of Garuda were all very similar. But now we are expanding more to nature’s way. Consequently, in the past, the interior has always been blue, but now it is no longer just blue; there are new colours, more natural-looking colours. We also have a lounge called the Garuda Experience. The Garuda Experience is the best of Indonesia. The theme we talk about here in the Garuda Experience is the human senses. In the interior we talk about sound that comes through the music, we talk about taste through food, we talk about the aroma, we talk about touch – all these things are our services. Aside from


Biggest challenge faced I would still say it is in Garuda; the challenge of changing the culture of the people who work there from a more bureaucratic culture to a market and business-oriented culture. That was very challenging. I tell you, we are not done yet. If you were to ask me what would be the challenge for the future for Garuda, I would say the development of our human capital. In a company, you may have a good business plan; you may have everything on paper. But you cannot obtain human capital easily. You have to train your staff, nourish them, and be determined to change their mindsets and attitudes in order to improve things. Consistency in leadership is the key here. It is a long-term process. Most important lesson in business Be open and transparent. this, I’d also like to mention that the new cabin crew uniform has been launched in three colours: orange, blue and tosca. As to the European market we are now entering, we are only starting with Amsterdam. Eventually, we want to be in five countries: Holland-Amsterdam, UK-London, Germany–Frankfurt, (we are looking at possibly Munich too), France-Paris, Italy–Rome or Milan. But for now, we are going for Amsterdam. We will see how things are going in order to go to the other cities. Europe looks like it is not in good financial shape now, as it happens. So if the demand is not there, the market will no be not there for us, and if that is the case we might not want to expand there, at least for the time being. In the meantime, our cooperation with KLM basically makes it easier for all our passengers who want to go to places outside Amsterdam; flights to other cities in Europe are covered by KLM. IF: The ASEAN Open Skies policy is expected to be completed in 2015. How will it affect your business? ES: It will affect us in terms of our level of competition. This is how I see it: competition is good provided everybody is on a level playing field. This means that other airlines in ASEAN countries

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should get what we get in Indonesia, but we should also receive the same in those other countries; otherwise we will not be on the same level playing field. Anyway, we are now preparing to face this new level of competition. maintaining a profitable business IF: Garuda has posted healthy profits recently. Could you tell us about the reasons for that profit growth, and how will you sustain it? ES: Theoretically, it is very simple: either you improve your revenue or you reduce your cost, and then profits go up. For revenue, we just optimise the way that we use our aircraft. To fly anywhere our customers want us to fly, basically. Then there

As of now, we have 71 aircraft. The figure will change because we will be getting new aircraft every month. By 2014, our target is to have 116 aircraft is the question of getting better yields. How do we do that? By understanding who our customers are, what they want, and what value can we bring to them. Then of course we can convince them why they should pay more for a better service. Customers do have other choices, though. It is just like in a bank. Why would you put your deposit in bank A, which is probably giving you only five per cent interest whereas the bank next to it gives you six per cent? But somehow, on the other hand, you find yourself

Then there is the question of getting better yields. How do we do that? By understanding who our customers are, what they want, and what value can we bring to them still comfortable with the five per cent in bank A because of the bank’s reputation, service and the attitude of its staff. In Garuda we are trying to grow the fleet so that we can service more destinations, as I mentioned earlier. That’s great, but it means that you have to become ever more efficient in terms of your cost base. It does not mean that because we are a fullservice airline, we cannot have low-cost; we should have lowcost. And we have done a number of things to achieve this. First, what we did was focus on procurement, which is very important. We implemented a system called e-procurement. It is very transparent. When we built the system, we hired an international firm to do it for us. My message to them was very simple: build us a system which is transparent, which follows the industry practice and also follows the Presidential Decree Number 80 on procurement, because we are a state-owned enterprise. When the system is in place, nobody will be able to intervene with it, including the CEO. We managed to save a lot of cost. I am not involved directly in procurement because when someone asks me about it, I simply say, “Just go into the system and you can see everything”. That is why I said the system must be in place; there must be transparency. 181

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Edie Haryoto Chief Executive Officer angkasa pura 2


Edie Haryoto: I started my career in railways but moved over to airports after a cabinet minister asked me to run Angkasa Pura, the state-owned airport management authority. I didn’t have any experience in airports, but the management requirements are basically the same. I have been in this position since 2002. We manage not only the airport but also air traffic navigation. However, there will be some changes to that. The government regulated that air traffic services will be separated from the main airport management business. Now we are in the process of separating them. All of our airports are overloaded. There has been steady passenger growth in Indonesia since the airline market was deregulated in 2000 and budget airlines are meaning that many more Indonesians can now afford to fly. In 2005, growth surged

There has been steady passenger growth in Indonesia since the airline market was deregulated in 2000, and budget airlines are meaning that many more Indonesians can now afford to fly by 34 per cent at Jakarta’s Soekarno-Hatta International Airport, which was a world high. Now growth is stable at around 10 per cent per year. That figure is still the highest among the Association of Southeast Asian Nations (ASEAN) countries though. The demands of rapid growth IF: With this sort of growth, how do you plan to build capacity? EH: That is our main challenge. Building infrastructure is not easy. It could take as long as three years just to get the land cleared for a new terminal. It is really difficult to increase capacity. For


example, Soekarno-Hatta was the 35th busiest airport worldwide in 2009. It moved 37 million passengers. Kuala Lumpur does about 25 million and Singapore about 43 million. Our real capacity at Soekarno-Hatta is only 22 million passengers a year. We are overloaded by 15 million passengers. We need to build the new terminal and then link Terminal 2 and Terminal 3, which is still up for tender. Terminal 3 will eventually be able to handle 22 million passengers a year. Terminal 1 and 2 are 18 million; combined with Terminal 3 should have us at 40 million. However, we will eventually need to accommodate around 65 million in the next few decades, so we will need to grow again. IF: When do you see that happening? EH: Our estimate is by 2025. Above 65 million we must build a new airport. In our master plan, we are aiming for 100 million passengers a year into Jakarta alone, but to build a new airport we will need 3,000 hectares of land. Now we only have 1,800 hectares. Right now it is impossible to buy the 1,200 hectares we need. It is just too expensive. That is why we asked the Government to revise the master plan. My proposal was to build an airport on an island, like Hong Kong. IF: Is it true that it is sometimes easier for domestic travellers to go via Kuala Lumpur to enter regional Indonesia than through Soekarno-Hatta? EH: Travellers can go through Kuala Lumpur for a stop over, and then transit to Yogyakarta, Palembang, Denpasar and Surabaya, so there is no need to go through the capital. This is why we must build Soekarno-Hatta so it is competitive with Kuala Lumpur. At Kuala Lumpur it is very easy. The transfer and design of the airport has been built for convenience. That is very important. Secondly, it is much cheaper to fly on Air Asia – from Bandung via KL to Banda Aceh and then back to Bandung – than flying on a domestic carrier.

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IF: Do you see investment into airports coming from the private sector? EH: The government asks me to compare our airport with Changi or Bangkok. I told them the budget to improve the airport is in their hands. The problem is with them, not with me. If we build an airport there is profit, but it would cost Rp5 to 6 trillion to get it done. We can only do things one step at a time, but it would be better to do it all at once. Like Terminal 3, right now we are at step one, and there are five steps to go. I think it would be better if the Government took over the financing and then we paid them back.

We will eventually need to accommodate around 65 million passengers per year in the next few decades, so we will need to grow again However, if they ask me to go to the private sector for funding then that’s okay too. The decision to build is the most important part of this equation. The first problem is capacity, the second is design. It was designed to provide for the movement of passengers. They check in at Terminals A to H, and then they board, but in Singapore they all enter at one location and then go shopping or eat. That doesn’t happen in Jakarta. opening up the skies IF: Regarding the ASEAN Open Sky policy, do you think it should be truly free and the airports allowed to be open 24 hours a day? EH: Again, this should be a gradual process. When the airport on the island is ready, it would be okay. A bilateral agreement should be executed, but it should be flexible, and not 100 per cent open and free. Everything has to be done at the right time. However, it is a government issue, not ours. We also need to make the airports fiscally competitive. We could do with a second big airport built in a place like Medan in North Sumatra. Medan is strategically placed because the international routes are crowded in the north of South Asia – most of the traffic comes from the Middle East, Europe, China and Japan and Korea. Currently, it’s impossible to fly from Tokyo to Amsterdam direct; there must be a stopover. Medan, as a location, could easily compete with Bangkok or Singapore. Soekarno-Hatta is too far south. So we have a plan to make Medan’s existing airport into a truly international port. IF: We talked about Soekarno-Hatta. How many airports do you manage now, and how are they running? EH: We administer 12 airports in the west of Indonesia, but the only profitable airport is Soekarno-Hatta. The others are all lossmaking ventures. If passenger movement is below two million per year, then we lose money. Soekarno-Hatta and Medan move over two million people and Pekan Baru and Palembang airports are

close to that mark. Maybe in about three to four years they will get there as well. IF: Why are they still open if they don’t make money? EH: If it is a small airport and it is losing money it may be a gateway for other profits. That’s why the government is always telling us to build even if they are in the red. For instance, at Tanjung Pinang Airport, in the capital of Riau Island province, there is only one flight from here to there a day, but the government still wants an airport up and running. Padang and Palembang airports were built by the government with loans from Japan. The loan, the contractor and the technology were all provided. The government gave it to me and we run it.

We also need to make the airports fiscally competitive. We could do with a second big airport built in a place like Medan in North Sumatra However, the depreciation costs are so high. Investment was also high. Even if we don’t pay back the investment, the depreciation alone is difficult for us. It is a lot of money. I think sometimes it would be better if we were able to build and manage the new airports ourselves, without any state interference. Things would progress much faster because there wouldn’t be so much bureaucracy. At the time of the interview, Edie Haryoto held the role of CEO at Angkasa Pura 2 but has subsequently left this post 183

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Richard Lino President Director


pelabuhan indonesia (pelindo) II

Richard Lino: My background was civil engineering. I graduated from Bandung Institute of Technology (ITB). I started my career with a job in government in early 1976. I spent one year over there and got transferred to Tanjung Priok port to look after the engineers in the site. During 1977-1978, I had a chance to continue my study for a postraduate programme on port and harbour engineering. Then I was involved in a lot of projects here, including with the Asian Development Bank (ADB) and the World Bank, which was handling a Japanese loan for Pelindo II’s ports in Tanjung Priok (Jakarta), Palembang (South Sumatera province), Panjang (Lampung province) and Pontianak (West Kalimantan province). I was involved in engineering design and coordinating all the developments until 1990, before leaving the job to run my own business for 20 years. I had a chance to get involved with a business venture in China for two and a half years to develop ports there with my partner. Then in April last year, the Government of Indonesia asked me to return. I was appointed president director of Pelindo in May 2009. It was surprising to me because after having gone through 20 years of supposed developments in the country’s biggest port operator, it didn’t seem to have been progressing at all. Twenty

Ships in Indonesia stay in port longer than they do sailing on the seas. Sending a container to a domestic port is more expensive than sending a container to China years ago, it was a very dynamic company. There was a certain “spirit” in the company. When I came back, I realised that we had lost that; we had lost its soul, even though the company is very rich. I believe this is why we are far behind other comparable ports organisations in Asia today.


Another reason that lagging behind occurred, I believe, is the very high logistic costs in Indonesia compared with most other ports of the world. I think the main reason is because ships in Indonesia stay in port longer than they do sailing on the seas. Sending a container to a domestic port is more expensive than sending a container to China. It’s ridiculous. If this is the condition, then we will lose our competitive position. IF: Can you highlight Pelindo II’s business, what major steps that you have taken since you took command, and what your expansion plans are? RL: Pelindo II is one of the port operator companies owned by the government. We are working closely with others to improve its competitiveness. There is a new law, which allows private companies to build ports. In a bid to win competition, productivity will be our main focus. We launched a programme to make ports work for 24 hours a day and seven days a week. The programme was initiated when we had an economic summit in October last year. I attended the summit as a business representative who was involved in the transport sector. When people spoke about transport on a global basis, 95 per cent of the people on the floor spoke about marine transport, and not road transport. Most of the complaints I heard were about the lack of berths at ports. So I stood up and said, “Look, I’m not going to build any more berths for you if you are all going to work only until 5pm in the evening. We have to work harder, 24/7, and only then I will build it.” It is not fair to ask me to put so much investment into the sector otherwise. So that’s why the 24 hours a day and seven days a week work idea really happened. This is now implemented in all ports managed by Pelindo II. If you go to Palembang today, for example, productivity has doubled without any new investment. So the profit has almost doubled and productivity has improved. This year we are also investing a lot of money to buy cranes. In most of the Indonesian ports today, except for the container

transport interview

terminal, the loading and unloading is done by ship gear or a construction crane, which is not effective. The ports are supposed to have cranes with their own jetties and they should have ratings of 40 tonnes, not five tonnes or 30 tonnes. What difference will that make? It will mean that the ship can have more time to sail because its time in dock will be reduced. So my main job for the next couple of years is to increase productivity in order to reduce the logistics costs to businesses. We are ordering 50 cranes this year and expect them to arrive by early next year. We will distribute the cranes to Tanjung Priok port and other small ports, like Palembang, Panjang and Pontianak, in order to have the ships stay in ports for a shorter

Next year we can tell our customers that they can come to the port of Pelindo II and they can expect nearly zero waiting time. That would be a real revolution time. The facilities in those ports are very poor at the moment, and the productivity is very low. That’s why people pay more by using land transport and the ferries. With improved facilities, people can send 40 tonnes of cargo from Sumatra to Java and vice versa via ship, as costs will be cheaper. Next year, I can ask my customers to pay 50 per cent more since the productivity will have increased three-fold. I think they will be happy to pay. This company will then be very strong financially. It’s not just a vague plan. We have already started implementing this. Something else I’m doing is to send 25 of my university students to do their masters degrees on subjects relating to logistics at the Erasmus School in Rotterdam, and also at Delft University. Some have also been sent to Shanghai, Melbourne and Sydney. Once they are back, they will already have much crucial international experience, since we serve mostly international customers. We also send our staff to visit other international ports to see how they do things. This is the way we try to transform and change people’s minds within the business. You have to be at the same level as the other ports of the world. a competitive port infrastructure IF: How do you see Indonesia progressing in the next few years in terms of port infrastructure? RL: For so many years people have asked whether we can compete with Singapore or not. We have always wanted to be a world-class port, but people have always asked for the concrete plans to achieve this. Now, I tell people that if we are not doing this now, the supply of the container ships bound for Tanjung Priok would deteriorate to only 30 per cent of the current numbers, as 70 per cent of ships would be redirected to other regional ports because we have no appropriate facilities. Last year, the containers here were only worth 4.2 million twenty foot equivalent units (TEUs). That is the peak.

Motivation I came into the business as a professional port engineer. It has always been my dream to take part in the sorts of projects I do today. Above all, I want to be able to help bring large vessels into Indonesian ports and to bring the infrastructure up to the level of other major international ports. Being back in service with the government after having spent around 20 years abroad carrying on my own business is more like national service. I’m not saying I’m rich, but I think I’m rich enough. I’m doing what I’m doing just for this country. Biggest challenge faced Twenty years ago, the Tanjung Priok port was only behind those of Singapore, Hong Kong and the Port of Japan. Compared with most of Asia, we were in a strong position; in fact we were much more advanced. However, when I came back, I found that it had been left behind. It lacked a proper management system, and high logistic costs in Indonesia had hampered its development. Now I need to improve its competitiveness level. I have always loved challenges, as they have given me the energy to keep moving. Most interesting projects During the times before I left Indonesia I was heavily involved in the development section. I had built the first container terminal in Indonesia. I also developed the terminals in Panjang and Pontianak ports to be containerised terminals. It was a very exciting time. Most important lesson in business You need to have the guts to make some changes. I left the government 20 years ago due to some disappointment. I wanted to do something good but people never appreciated it. When the minister called me for interview for the president director job, I told him, it may be a wrong choice. I will probably do the same. When I came back, I had two choices: whether I will do what other people have done, just accept everything and play golf every day, or work hard to change and improve the company. However, I believe we have to always look outside for improvements. We are supposed to be the hub of Indonesia; if not the whole of Indonesia, at least significant parts of the country such as Java and Sumatra. The north part of Sumatra might still go to Singapore, but we have the potential to do it ourselves. IF: Can you say some more about your ideas on improving logistics and infrastructure at the ports? RL: We are planning to invest Rp3.4 trillion or about US$350 million. We will sign the contract this year. About Rp2.7 trillion will be disbursed this year and the remaining will be disbursed in the first semester of 2011. The project is made possible due to the increase in productivity we have achieved. So we have bought new cranes and in order to put the cranes in the jetty, 185

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we have had to strengthen the jetty. That’s the whole idea of the project. All the equipment should come by the end of next year at the latest. So, next year we can tell our customers that they

With improved facilities, people can send 40 tonnes of cargo from Sumatra to Java and vice versa via ship, as costs will be cheaper can come to the port of Pelindo II and they can expect nearly zero waiting time. That would be a real revolution. I am expecting other ports of Pelindo will also follow. I think everybody realises now that this change is needed. They have already seen some improvements as a result. We have increased our profits considerably, as I mentioned. It’s the sort of winning record that creates confidence among investors and clients. We also have another project to build a new container terminal at Tanjung Priok – a project decided upon by the Vice President. Thus far we have got permits to build three and a half kilometres of new container terminal with a depth of 18 metres. I hope this project will start by the end of this year. The new port will have the capacity of serving five million TEUs. However, most importantly, I told everybody that we have to start developing a new port In Jakarta. Although it may take 10 to 15 years to materialise, it will be highly significant and a real step forward. The existing port is clearly too congested. We


plan to begin the development in the next two or three years. We will start with the reclamations and build the jetty. Then we will select partners for building the “superstar” equipment, as it’s termed. My target is to be able to bring the biggest vessels here, just like ports in Japan, Malaysia or Rotterdam. One of the options is to invite the shipping lines to invest in the superstar facilities. We aim to cut logistic costs in Indonesia and make it the benchmark for other Pelindo companies to follow. shipping perspectives IF: How do you see the current condition of Indonesia’s shipping sector? What are the opportunities for the industry to move forward? RL: If you look at the Indonesian shipping sector, more than 90 per cent of the ships are more than 30 years old. I can also understand why the operators are not investing in ships. It is because ships stay in port longer than they need to. Yet a new ship’s running costs are much cheaper than an old ship, just like a car. Therefore, for the sake of productivity, shipping lines need to invest in new ships, because their ships will sail longer and the running cost will be cheaper. If we improve productivity at the ports we will help them achieve this. IF: How would you promote the company to the international market? RL: We are going to tell people that within two to two-and-a-half years they will see a new jetty here. We will start to do this from the middle of next year. A new kind of competition will grow. In fact we might start off this year after the government announces this as a big project. Then we will look for the possibilities for partners to invest.

transport interview

jakob friis sorenson


President Director maersk line

Jakob Friis Sorenson: I’ve been working with the AP MollerMaersk Group for 23 years. I joined their internal shipping school back in the early days and right after high school. My first posting was in Indonesia in 1989. It was the days of Suharto, and a lot of infrastructure was being developed. I left here in 1992 for a three-year stint in Japan. Following that I had a brief period back in the head office in Denmark and then back to Asia. I spent 1996-99 in Malaysia, then four years in India. In 2003, I headed to Singapore for three years as Southeast Asia head for Maersk Logistics. In 2006, it was back to Indonesia again. My wife is Indonesian and I am very passionate about Indonesia as an opportunity destination. IF: Could you give us an overview of Maersk’s business operations in Indonesia? JFS: Maersk Line has been in Indonesia since 1928, where we had our first port of call, so that’s a long time before the invention of the container. Apart from container transportation we have also been in bulk shipments and oil and gas shipments. We have been in the container business here since the 1970s. So we are committed to Indonesia over the long run. We probably have the largest market share for the import and export of containers. We have separated the branding of our activities so that Maersk Line is the brand we use for long hauls to the United States, Europe and South America. For intra-Asia, which is seeing massive growth, we brand it as MCC Transport. MCC Transport is our sister company which is headquartered in Singapore. We use them as a feeder company from Indonesian ports. They have an expanding business that goes between North Asia, Japan, Korea and, not least, China, into Indonesia and back again; and we, as Maersk Line, use them as our feeder operator, get a ride on their short haul and connect to the mother vessels. One of my ambitions at Maersk is that we get big mother vessels in for the long hauls to call at Jakarta directly.

That links into the domestic transportation of containers as well as getting the infrastructure, the port facilities, the physical infrastructure in Jakarta ready so we can accommodate the fifth generation of ships, which carry 5,000-6,000 containers. That is probably the maximum we can get into Jakarta, and they are not even the biggest ship around today. The latest generation of container ships will carry 12,000-13,000 containers. From central to regional IF: How is decentralisation affecting your business? JFS: On the port front, we are still working with a state monopoly called Pelindo, and you have Pelindo 1, 2, 3 and 4. There are some ambitions about making Pelindo a competing company with other operators, and we have still to see how that’s going to be demonopolised. I think the decentralisation is in fact empowering Pelindo 1, 2, 3 and 4 – geographically. Pelindo 1 is in Medan in North Sumatra, Pelindo 4 is in the eastern part of Indonesia, while 2 and 3 are dividing Java together – but it is giving some more opportunities for the ports in the provinces to develop, and I think that is a good sign. Another thing that we’re looking at is how the decentralisation is attracting industries, which are our customers, to establish themselves in areas other than the greater Jakarta area; and I think central and eastern Java is certainly attracting investments of various kinds. But with so many islands, you would like to see both Sumatra and also the eastern part of Indonesia getting more involved in investments, industries, manufacturing, and more upstream manufacturing than just selling commodities. It’s having a positive effect, but it’s a long-term venture there. IF: Ninety per cent of Indonesia’s exports are seabound – in the short to medium term, what challenges is the sector facing? JFS: Indonesia is by and large a domestic economy, however importing and exporting also means a lot. Most of what is in 187

transport interview

containers is semi-manufactured or manufactured goods, and this is a sector that continues to grow. While we need more infrastructure in the ports to increase capacity, the past few years has seen efficiency improve and the downturn in volume during the recession has given previously congested ports a bit of a break. That break has been used to do various improvements; there

While the new shipping law is here, the road map ahead – for how Pelindo is going to de-monopolise – is not quite clear have been reforms at the customs office. We now have the single national window, which is a one-stop shop customs clearance. The port here in Jakarta has become more efficient as well, with Jakarta’s national container transporter, the Jakarta International Container Terminal, showing the way. It’s helping us in the short term, but we will need a next generation of port developments in this country. So there’s plenty of room for further development in ports, both on Java but also in the outports, in the islands. De-monopolising IF: Is the sector becoming more competitive in terms of new entrants coming in and looking at those opportunities? JFS: That’s the idea. Pelindo will be de-monopolised and you will get competition, with various operators competing against each other. That should increase efficiency and decrease unit costs. However, that is not visibly happening at the moment. I think, while the new shipping law is here, the road map ahead – for how Pelindo is going to de-monopolise – is not quite clear yet. IF: The 2008 Shipping Law which would de-monopolised Pelindo is supposed to be fully implemented by 2012. How do you see it panning out? JFS: That’s the target, yes. I can see a very good central role for Pelindo as the future landlord. However, the role would be as a link between the provincial government or the state government, and then private operators who can rent and develop ports and compete against each other while Pelindo has the landlord role; just like we know it in many models such as New York, or Felixstowe in the UK, or Southampton or Rotterdam. IF: Is Pelindo welcoming that move? JFS: I think Pelindo is still looking to find out where their future role will be: are they going to be just another operator competing with foreign entrants? That decision has been made for them in the law – they will be an operator. However, whether they will be an intermediate operator or the regulator will be a government body that will be established, the role of Pelindo as an operator is still a little bit open.


Career-defining moment I managed to get a big distribution centre established in Malaysia back in 1997 for IKEA. Prior to that, they didn’t have any distribution centres in Asia and everything produced here was shipped back to Sweden; once IKEA had to stock their stores in Asia, they sent it back again. It was a big game-changer for me careerwise.It worked out, and today IKEA has “in-sourced it back” from Maersk Logistics. It was also a benchmark for them as well, and they’ve opened up several other distribution centres in Asia since. Motivation I think the privilege of being in transportation and logistics is that we do get to know our customers’ business intimately. I think that’s quite fascinating, getting a pretty good insight into what’s going on in the global economy through our customers’ business. Also, if you look at how we are indirectly assisting in improving peoples’ lives through imports, exports and the domestic business that is done here, these things improve people’s standard of living, health and education. I think there’s nothing wrong with taking some of the credit for that kind of development when you are in the transportation business. Most interesting project It’s the ongoing project in Indonesia. It’s the potential we have in Indonesia for developing domestic containerised transportation – it’s still a fairly nascent industry in Indonesia, and a lot more could be transported by containers. It is more cost-effective, safer and better for the environment. I think it’s an enormous opportunity. Biggest challenge faced What we experienced in the global container business in 2008 and 2009 was as tough as it gets. As an industry, since the 1980s we’ve been used to it growing and growing and growing. However, 2009 was the worst year ever, with volumes tumbling 18, 20, 25 per cent in certain markets. The entire industry, which is asset-heavy with expensive ships, was in total shock. Most important lesson in business If it’s too good to be true, it’s too good to be true. There’s no free lunch. I think at the end of the day that is probably the best lesson. IF: In terms of public private partnerships, is there a place for PPP in the ports and shipping sector? JFS: Certainly, because there are a lot of things that have to be integrated in port infrastructure – the physical harbour facilities, but certainly also the infrastructure behind them such as access roads, energy, power, electricity; and hopefully industries that establish themselves nearby because of the logistics opportunities that are created.

transport interview

Djarwo Surjanto President Director


pelabuhan indonesia (pelindo) III

Djarwo Surjanto: After graduating in civil engineering from Bandung Technological Institute, I started to work for the Ministry of Transportation, Directorate General of Sea Transportation, in 1977. Then I took a masters degree in port & harbour management, hydraulic engineering, in Delft, the Netherlands. Before being appointed to Pelabuhan Indonesia III as managing director in June 2009, my previous post was managing director of Pelabuhan Indonesia IV from 2002 to 2009.

IF: Can you tell us something about Pelabuhan Indonesia III? DS: First of all, we should look at the big picture. Commercial ports in Indonesia are managed by four state-owned companies on a regional basis: Pelindo I (headquartered in Medan), Pelindo II in Jakarta, Pelindo III in Surabaya and Pelindo IV in Makassar. Pelindo III manages 43 ports in seven provinces: Central Java, East Java, Central Kalimantan, South Kalimantan, Bali, West Nusa Tenggara and East Nusa Tenggara. There are also five subsidiary companies with various lines of business, such as terminal operation, equipment supply and maintenance, and hospitals. The company serves over 86 million people or 37 per cent of the population of Indonesia. There are over 3,000 employees and total assets are more than 4.2 trillion Rupiah (about US$451 million). The ports handle various types of cargo, from general cargo, dry bulk (mining product and grain), liquid bulk (CPO, chemicals, product oil), to containers, with a total capacity of more than 110 million tons and 2.9 million TEUs in year 2009. In the same year, 72,840 ships called at Pelindo III’s ports. As major port, Tanjung Perak is the trade and shipping hub of eastern Indonesia. It contributes more than 60 per cent to Pelindo III’s total profit. Pelindo III entered into a business arrangement with P&O Ports Australia in 1999 to operate a container terminal, PT Terminal Petikemas Surabaya. Pelindo III owns 51 per cent; P&O Ports owns 49 per cent. However, P&O Ports’ share is over by Dubai Port World (DP World). Pelindo III is also a member of INAP (International

Network of Associated Ports), APA (ASEAN Ports Association) and IAPH (International Association of Ports and Harbours). Developing port infrastructure IF: Ports are a crucial part of the infrastructure in this country, Indonesia being the largest archipelago in the world and having about 90 per cent of its external trade done by sea. Could you please tell us the biggest challenges and opportunities this industry faces? DS: Pelindo III faces a big challenge in developing sea-born logistics activity to increase Indonesia’s Logistics Performance Index, which was ranked 75 in 2010. With the 43 ports from the big cities to remote areas, Pelindo III has a big opportunity to develop these

In principle, Pelindo will transform itself from a port management company to a terminal operator company ports as an efficient logistics chain. It is able to drive a mass-scale logistics business together with other logistics businesses (shipping lines, warehousing, road transportation), with which the company has developed a long-time business relationship. IF: You recently announced plans to build a new multipurpose terminal in Lamong Bay in the East Java capital of Surabaya, which will cost Rp1.3 trillion (US$ 144 million). Could you please tell us a bit more about this project and it’s financing? DS: The Lamong Bay Terminal will be built to increase the capacity of Tanjung Perak port. Today, Tanjung Perak is facing a situation where congestion has reach a critical level; thus it requires additional port facilities. There is no available land in the existing Tanjung Perak area for development unless a new terminal area is built at Lamong Bay. In running the project, 189

transport interview

Pelindo III has support from the Governor of East Java, which is very important for us. The terminal will be developed on 50 hectares of reclaimed land in the middle of the bay. It is like an artificial island in a shallow water area, connected to the mainland by a 2.5km bridge. The first development phase will be self-financed. However, Pelindo III will invite external funding for subsequent phases, either in the form of bank loans or investment sharing with strategic partners. There are other complementary infrastructure project plans within the Tanjung Perak project. One major one will be the development of the Surabaya Western Access Channel. The project will involve a large-scale dredging operation to enlarge the channel from 100 metres to 200 metres wide to accommodate two-way traffic, and also to deepen it from -9 M LWS to -14 M

The participation of private entities in port development projects can bring huge benefits to the port in terms of increasing investment capacity, securing cargo volumes and enlarging the cargo network LWS. The project cost is approximately 500 billion rupiah. Other projects will be done outside Surabaya, such as an infrastructure revitalisation project at Tanjung Emas Port, Semarang; additional container terminal facilities at Banjarmasin Port; the development of an international cruise terminal at Benoa Port, Bali and the development of other small ports within Pelindo III. IF: The industry is in the process of liberalisation, with a 2008 law opening ports to the private sector. How has this reform affected Pelindo III? DS: The 2008 law giving the private sector an opportunity to operate a port or terminal has affected Pelindo in how it runs its business. In principle, Pelindo will transform itself from a port management company to a terminal operator company. Up until now, Pelindo III did no direct cargo handling activities, except at its container terminals. They were done by stevedoring companies and Pelindo III took part as infrastructure provider, providing berths, yards and workshops. It had no access to control cargo handling performance and productivity. Due to the 2008 law, Pelindo III can now function as a terminal operator. It must take an active role in leading the entire cargo handling activities in its terminals. In doing so, Pelindo III may ask a partner to work with it and meet the company’s performance standards. On the way to reach this high level of performance, Pelindo III has a plan to reconfigure several terminal infrastructures and procure brand-new cargo handling equipment with bigger capacity. We expect this to result in increased productivity in the near future. Pelindo III will be able to develop a much increased service level guarantee for its customers.


Career defining moment The development of the Asian Development Bank (ADB) funded Toli Toli port, Central Sulawesi in 1990 was a big moment in my career. Running a project funded by the ADB means an obligation to meet construction standards and specifications higher than local ones. At the same time, lots of materials and equipment required by the ADB standard could not be obtained in the local market. Some of them had to come from outside the country. The mobilisation and transportation of these materials became a challenge in itself. The project had to be completed on schedule although it faced lots of obstacles. There was tight supervision from ADB staff, but the project was completed on time and finally a passenger ship with 1,500 passenger capacity could berth in the port for the first time. Motivation My motivation is to make Pelabuhan Indonesia III more productive and efficient so that the company can make a positive contribution to the national logistics system. Most interesting project I think the most interesting project for me was one I did in 1996. Being the technical director of Pelindo III, I was assigned to develop the extension of the Container Terminal Surabaya berth. The facilities of the old berth were built in 1986 via financing from the ADB. Ten years later I was assigned to extend the berth under different conditions, namely by using a domestic contractor and consultant since the funding came from within Indonesia. However, with hard work and strong belief we got it finished. Most important business lessons I strongly believe that all tasks will end successfully if there is synergy and harmony among the team, so that all the obstacles can be overcome. You need to find out what the strong points are of every single member of the team, and minimise their weak areas, because in my opinion success only results from teamwork. Another important lesson for me is that a port’s business depends very much on its partners because the nature of business is complicated, and trust is the most important factor. It is extremely valuable capital for a business relationship. IF: The end of Pelindo’s monopoly will mean an injection of competition in the ports system. Do you think this is beneficial to Indonesia’s shipping industry? DS: First, let me redefine monopoly. There are 1,888 ports in Indonesia and 754 of them are public ports. Pelindo manages around 14 per cent of public ports. However, Pelindo has a regulatory function by law; then anybody with plans to develop and operate a new commercial port must enter a cooperation agreement with Pelindo. The 2008 law frees private entities from an obligation to have a partnership with Pelindo in building and operating new commercial ports and terminals. Second, there is a need to develop a vertically integrated shipping business.

transport interview

As a capital-intensive industry, shipping needs a fully controlled and integrated door-to-door process in order to guarantee a high productivity level. The new regulations will benefit the shipping industry by improving its bargaining power over port or terminal operators. What this means for Pelindo is that it now has a strong incentive to continuously improve its productivity levels so as to

As a capital-intensive industry, shipping needs a fully controlled and integrated door-to-door process in order to guarantee a high productivity level retain its customers. It is a fact that unsatisfied customers will have a good reason to leave and to operate their own terminals, thus avoiding the sort of low productivity and high uncertainty that are frequently found in public terminals. Bigger trends in shipping IF: A real size-based revolution in container ships is happening in Southeast Asia, with a trend towards using larger vessels of around 12,000 TEUs. This is expected to bring efficiency savings. How is your company preparing for this trend and does it have the necessary container and storage facilities needed? DS: The government of Indonesia is conducting a comprehensive study on what a national container hub port should be like. However, in my opinion, the hub port will not be built in one of Pelindo III’s ports. But we want to see further details. None of Pelindo III’s ports were designed to accommodate large ships.

Some facilities face nautical and natural constraints, which make them unviable to be developed further to meet the requirements of large ships. On the other hand, the development of new facilities costs huge amounts of money without a guarantee of securing cargo volume. Looking at this situation, the development of Tanjung Perak port is heading in a direction to accommodate medium-sized ships with maximum draft of 12 metres. The projects of Lamong Bay Terminal and Surabaya Western Access Channel are designed to meet the large-ship requirement. IF: The government is promoting PPP-type projects. Do you think the port sector could benefit from such a scheme? DS: The participation of private entities in port development projects can bring huge benefits to the port in terms of increasing investment capacity, securing cargo volumes and enlarging the cargo network. It will also bring a technology transfer. Pelindo III does not have any particular experience in this PPP type of project. However, I had a very interesting PPP experience during my assignment as President Director of Pelindo IV, Makassar, several years ago. It was about the development of Samarinda container terminal. At that time, annual container turnover in the port had reached 170,000 TEUs. The need for a larger container terminal became obvious and crucial. Samarinda port is located in a narrow land area, so development of the facility had to be done outside the existing area. The development of the new facility was a relatively big investment given Pelindo IV’s investment scale. At the same time, Pelindo IV did not have the capability to fund all its investment programs, so the development of the Samarinda port was done by promoting a PPP scheme. A partner was then selected from several candidates to build and operate the terminal for a 50-year period, with a build, operation and transfer (BOT) concession. Today, a new container terminal of Palaran in Samarinda is operating. 191

transport perspective

Toll roads Scott Younger, chairman of Glendale Partners and Nusantara Infrastructure Tbk, summarises the state of play in the road sector

The main theme of last April’s Infrastructure Asia 2010 conference held in Jakarta, apart from the obvious strong political overtones to this ESCAP (UN Economic and Social Commission for Asia and the Pacific) event, was public private partnership (PPP). The feeling was promoted that PPP was going to be the way in which much future infrastructure development would be successfully executed. The public and private interests of society would coincide, each party undertaking its predetermined role in delivery. However, while the fundamental factors, for example, the apportionment of risk, remain improperly addressed it really doesn’t matter whether the mechanism for infrastructure projects follows a true PPP route or not. For toll roads, the expected part to be played by the public sector as contribution to PPP is through local governments facilitating land acquisition.

Progress on the toll road programme is more likely than that under projects earmarked in other infrastructure sectors It is well recognised that a major push on road building across Indonesia is required over the next four years; the remaining life of the current government. A target completion of some 817 kilometres (km) of toll road linkages has been set, along with upgrades and extensions of several hundred thousand kilometres of national and sub-national roads, to be built across the regions using normal budgetary funding and occasionally special funds. Following the 1998 Asian economic crisis, there has been very little investment in the road transport sector, whether just to maintain the condition of the existing network or pursue longdelayed new construction. Yet all generally acknowledge that a vibrant road sector is essential towards achieving and sustaining a minimum economic growth rate of 7 per cent going forward. One of the “unseen” consequences of the 1998 crisis was the loss in skills base, with road sector staff leaving for other


forms of employment or just waiting for conditions to improve. Unfortunately, it was several years before government felt able to allocate budget to the sector and, in the meantime, the network continued to deteriorate, as did the quality of human resources. The consequence of a lack of attention to skills training and maintenance of any road network is expensive. It is the toll road sections, however, that are due to attract private sector interest and financing, with key expansion required in the industrial heartland of Java. The latest link to be opened, in January 2010, has been the section W1 of the Jakarta Outer Ring Road. However, the full benefit of this link will not be realised until the adjoining section, W2, to the immediate south between Kebun Jeruk and Ulujami, is completed and this remains a couple of years off. The acquiring of the land on this 8km link has been a painfully slow and drawn out process, despite new mechanisms to ease the continual problems of land acquisition that have bedevilled progress on most toll road sections for many years. There are some dozen or so projects held by various concessionaires with a spotlight for action, but so far there has been little sign that steps are to be taken to activate the work required, with one or two exceptions that form part of the JORR2 circuit. In most cases the concessionaires require the inputs of new shareholders, and revision to the law now allows the introduction of fresh parties with funds. The Minister of Public Works – himself under close scrutiny from the new independent monitoring watchdog set up to assess the performance against set targets of government ministries – is contemplating putting reluctant concessionaires on short notice to get on with completing their concessionary links or moving aside. It should be expected that some actions will take place, but the rate of progress will continue to be much slower than desired and elements of the four-year target are likely to remain outstanding at the end of this government’s term. Despite this, progress on the toll road programme is more likely than that under projects earmarked in other infrastructure sectors, whether or not through the adoption of the PPP approach.

Information & Communication Technology

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information & communication technology overview

Expansion in information and communication technology Multinationals and local vendors are likely to capitalise handsomely in the fourth largest telecommunications market in Asia Pacific as hardware, software and service sectors demonstrate rapid growth

Indonesia should have been the other “I” in the so-called BRIC country classification in vogue since its premiere by Goldman Sachs. While the growth potential across sectors is quite significant, the case in point is the information and communication technology (ICT) sector.

Indonesia enjoys wireless penetration higher than India and China

Indonesia enjoys a population larger than Brazil and Russia, GDP per capita higher than India and wireless penetration higher than India and China. Even in the global recessionary environment of 2009, the overall ICT industry in Indonesia grew by a whopping 29 per cent. Frost & Sullivan, a business research and consulting company based in Jakarta, expects the growth to come down in 2010 but still be at an enviable figure of around 18 per cent. The biggest sector in the ICT industry in Indonesia is the telecommunications sector, especially the mobile sub-sector. Indonesia has 11 wireless and seven mobile operators. The rest are “fixed” wireless Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA), ICT Revenue breakup ($ mn) Network services

IT Services




25000 20000 15000 10000 5000 0





’12 ’13 ’14 Source: Frost & Sullivan 195

information & communication technology overview

hardware vendors and upcoming hardware offerings from emerging Asian and local vendors. The software and IT services market in Indonesia was worth around US$1 billion in 2009 and is expected to demonstrate growth at the fastest rate to reach US$1.7 billion in 2015. Currently the software and IT services penetration in Indonesia is significantly lower than many other countries in the region and therefore presents a higher opportunity for growth in the future. A mix of multinationals serves the market and local vendors are expected to garner an increasingly higher proportion of the growth with the latter. The overall ICT sector in Indonesia is expected to grow at a Compound Annual Growth Rate (CAGR) of nine per cent over the next three years, therefore presenting a very significant growth in opportunities. which is more than any other Asian market with the exception of India. The major mobile operators are Telkomsel, Indosat and Excelcomindo (XL). There are several

In the global recessionary environment of 2009, the ICT industry in Indonesia grew by 29 per cent small challengers such as Hutchison CP Telecom Indonesia, Natrindo Telepon Selular (Axis), Mobile-8 and Smart Telecom. The Fixed Mobile Access (FWA) operators are Flexi (Telkom Indonesia), Bakrie Telecom, StarOne (Indosat), Hepi (Mobile-8) and Sampoerna Telecom. Indonesia’s connections penetration level increased to 80 per cent in 2009 and is now projected to reach the 100 per cent level in 2012. Based on present trends with multi-SIM, Frost & Sullivan expects that the total connections will increase from more than 192 million in 2009 to 290 million in 2015. The total market revenues in Indonesia were US$7.5 billion in 2009 and are projected to grow to US$9.8 billion in 2015. The ICT hardware market is the second biggest segment, with US$3.7 billion in 2009 and is expected to grow to about US$3.9 billion in 2010. As an emerging economy, the low PC penetration and lower usage of ICT in businesses augurs well for the growth of the hardware segment so as to touch US$5.5 billion by 2015. The growth is expected to be led by both the mainstream multinational


Some of the key opportunities moving forward include: ■ Network expansion by the wireless carriers across radio access, transport, core and Operations Support Systems (OSS), with a higher proportion to the core network ■ Higher notebook and netbook adoption by consumers and businesses ■ Higher adoption of Enterprise Resource Planning (ERP) solutions and higher propensity towards nonpirated software ■ Demand for system integration, increasing outsourcing and usage of professional IT services Indonesia is the fourth largest telecommunications market in Asia Pacific and one of the fastest growing in the hardware, software and services sectors. Given the size of the population,

The ICT sector is expected to grow at a CAGR of nine per cent over the next three years robustness of the ICT sector in 2009 and expected healthy economic growth in the future, the Indonesian ICT sector presents many opportunities for the existing players as well as organisations looking at entering the market. The opportunity, however, needs to be understood in the context of the cultural and business environment paradigm that includes having “skin in the game”, credible local presence and the ability to understand the relatively long gestation period required for closing business.

Information & communication technology interview

Rinaldi Firmansyah President Director telkom indonesia


Rinaldi Firmansyah: I have an engineering background both as an undergraduate and through working for the Schlumberger and Siemens agent in Indonesia, Dian Graha. After a financial and business-related MBA I worked for Citibank, Bahana Securities/ Investment Bank and I am now working in telecommunications, a capital-intensive industry that matches up with my strong understanding of investment and returns. Shift in strategy IF: Can you please tell us more about Telkom? How is your business structured? RF: PT Telekomunikasi Indonesia Tbk is the largest telecommunication and network services provider in Indonesia. Serving millions of customers nationwide, we provide a strong

To meet the challenge of the growing demand for seamless connectivity and mobility, we have broadened our business portfolio to encompass TIME – telecommunications, information, media and “edutainment” portfolio of telecommunication, information services and media, including fixed wire line and fixed wireless telephone, mobile cellular, data and internet, network and interconnection services, IT services, pay TV, directly or through our eight subsidiaries. During the first half of 2010, our customer base had grown 14.7 per cent to 112.6 million customers. We are now serving 8.4 million fixed wire line telephone subscribers, 15.9 million fixed wireless telephone subscribers and 88.3 million mobile telephone subscribers.

To meet the challenge of the growing demand for seamless connectivity and mobility, we have broadened our business portfolio to encompass TIME – telecommunications, information, media and “edutainment”. By enhancing our infrastructure, deploying next generation network technology and mobilising synergies across the group, we are enabling and empowering home and business customers by delivering greater quality, speeds, reliability and customer service. Telkom is shifting its focus to data services to earn higher profits as subscriber growth slows, and it needs to invest heavily in telecoms infrastructure, including towers. Our cellular subscriber base has had double-digit growth at 16.2 per cent during the first half of 2010. Our data service subscriber growth has been even faster at 73 per cent for fixed line broadband and 233 per cent for mobile broadband. Telkom is ready to accommodate growing needs of data and broadband services. Telkom has been preparing for growing demand for data and broadband services since several years ago. Within the past three years, our capex for backbone infrastructure has increased approximately three times. For the past three years, we have increased our Cellular BTS to 34,005 in the first half of 2010 from 26,872 in 2008. Other than BTS, we just completed the development of a land and submarine backbone in Aceh and a loop of Java, Kalimantan, Sulawesi, Denpasar, Mataram with a capacity of gigabytes and now have a submarine development in the eastern part of Indonesia from Mataram-Kupang. We upgraded the network to be IP based both for fixed and cellular. All of those will be able to cope with growing data and video demand. IF: What recent achievements best demonstrate Telkom’s success over the past 12 months? RF: In the midst of stiffening competition in the telecommunications industry in Indonesia, Telkom is able to maintain its leadership in 197

Information & communication technology interview

market share and revenue share, either in fixed line and cellular. In the first half of 2010 our cellular market share was 47 per cent of the industry, and our broadband has been growing significantly, both fixed broadband and mobile broadband. Fixed broadband subscribers grew 73.6 per cent in first half of 2010, from 816,000 to 1,416,000. Mobile broadband subscribers increased 233.6 per cent from 892,000 in 2009 to 2,976,000 for first half of 2010.

Private sector participation and public private partnership in telecoms has been going on for quite a while, with the presence of telecommunication kiosks starting in 1990s Acknowledgement of our quality of service was reflected in the customer satisfaction award we received. We were awarded the Indonesian Customer Satisfaction Award 2009 by Swa Magazine and Frontier Consulting Group for Speedy as Best Wireline/Fixed Internet Service Provider, as well as for Telkomsel Flash as Best Wireless/Mobile Internet Service Provider. We were also named Indonesia’s Most Admired Company (IMAC) 2010 by Business Week Magazine and Frontier Consulting gave us an award for Speedy as an Internet Provider. IF: What most excites you about the telecoms sector in Indonesia today? How will the sector grow and what opportunities will there be? Also, what are the biggest challenges it faces? RF: Telecommunications today is a fundamental driving and enabling force, not just in business, but reaching deep into people’s everyday lives. However, the face of telecommunications is changing rapidly. The traditional fixed wire line sector – Telkom’s legacy business – went into decline as consumers shifted to cellular services that were better suited to increasingly mobile lifestyles and business modes.

Government has triggered competition in the telecoms industry by granting licences that make Indonesia one of the most competitive telecoms markets with 11 operators However, even growth in the cellular business can now no longer match that of recent years, which is why Telkom has actively sought out new areas to ensure the competitive growth of the company over the long term. These new wave businesses – which include fixed and mobile broadband (Speedy and Telkomsel Flash), IT Services and the enterprise business – are our key growth drivers for the future. In 2009 our new


Career-defining moment When I decided to move from a pure engineering job to take an MBA at IPMI-Jakarta and then started working for Citibank with no banking experience. This redefined my career as being one in the financial sector until joining Telkom as CFO. Motivation To strive to be the best in whatever position, while not forgetting to develop your skill set. Biggest challenged faced Transforming Telkom from its core as being atelecommunications leader to being a leader across telecommunications, information, media and “edutainment” (TIME). Most interesting project Reshaping Telkom’s aspirations to be the TIME leader. Most important lesson in business Be persistent and never give up. wave revenues grew by 82.8 per cent, and we expect growth to continue to be strong in 2010. One of the challenges we face is to mitigate the decline of the legacy business (fixed line). While this decline is inevitable, we will continue to slow its pace by offering advantageous programs such as more progressive flat tariffs. We will also seek to maintain the growth of fixed and mobile broadband at its current rate by continuously improving the network, including through our investment in submarine cables, and by offering attractive pricing and content. IF: How do you see private sector participation and PPP developing in the telecoms sector? What else can the government do to help? RF: Private sector participation and public private partnership in telecoms has been going on for quite a while, with the presence of telecommunication kiosks starting in 1990s. Telecommunications deregulation in 1995 gave even greater latitude for the private sector to take part. Internet access is one area that involves the private sector heavily. Internet access service is one area with high participation of the private sectors that in turn has proliferated the growth of internet cafés. Government has triggered competition in the telecoms industry by granting licences that make Indonesia one of the most competitive telecoms markets with 11 operators. Early this year the government conducted a tender for a Wimax high speed telecommunication licence. This also spurs private sector involvement in developing the telecoms industry. Government can play a more proactive role to help telecoms players in Indonesia develop and grow by setting a clearer roadmap and enforce regulations strictly. If this can be realised, I think the telecoms industry in Indonesia will grow even faster.

Information & communication technology interview

Richard Kitts President Director


nokia siemens networks

Richard Kitts: I am English, and have been in the telecommunications business for over 25 years. Like many senior managers I started at the bottom. I first got into telecoms in Her Majesty’s Royal Navy. From there I moved to the European Space Agency and NASA as an engineer, which was very interesting. I was working on manned and non-manned space flight missions, putting TV satellites in space. From there I moved to Australia and to a company called AWA Communications, which was the last Australian telecommunications manufacturer in 1991. That was my first business role. I was responsible for additional microwave transmission into emerging markets at the time. This was when analogue telephony was first starting off, so we were providing transmissions equipment in Latin America, Southern Africa and the Caribbean.

The transmission backbone is a massive civil engineering and telecoms project. It provides state of the art broadband, and will open up broadband for the major corporates in the country From there I moved to Motorola, heading their sales for public safety and law enforcement. This was a precursor to where we are in the industry today. I spent seven years in Motorola, before I joined Nokia Networks in 1999. It took a transition of about 15 years from being an engineer to being a business leader. Since then I have worked pretty much all around the world. I have been in Indonesia since early 2010, and it is the most intriguing and interesting country I have worked in. I don’t like working here – I love it.

NSN in Indonesia IF: Can you tell us about Nokia Siemens Networks in Indonesia? RK: Nokia Siemens Networks has been here indirectly through our German parent, Siemens, for over 150 years. I guess we are part of the fabric of this country. I have a staff of around 3,000 people, which makes us the biggest telecommunications vendor from a staffing perspective. We have business relationships with pretty much all of the mobile operators and the major fixed operators, so we do business with Excelcom, Indosat, Telkomsel, PT Telkom, Hutchison and then some of the new players like ICON+. Our business goes through different channels, but we are a full service telecommunications supplier, so we do fixed networks and mobile networks. The strong fixed pedigree comes from the original Siemens background and the very strong mobility comes from both, but obviously Nokia Networks was more focused on the mobility side. We provide 2G and 3G mobile networks and services, and are preparing for very high-speed mobile internet. Services are a major part of our business, whether it is managed services where we take over the operation of the customer’s network completely, or if it is just implementation services or maintenance, or optimisation of the network. We are also establishing a centre here to provide managed services globally. Indonesia was selected specifically because of the skill sets that reside in this country. IF: Are there any other areas where you are making significant investments or developing partnerships? RK: We have over 300 partners and sub-contractors that work with NSN. We also have a value-added retailer programme that we are starting to open up, because much of the carrier technology that we provide today to operators is also applicable 199

Information & communication technology interview

to enterprises such as mining and petrochemicals. We also have an R&D centre in Jakarta, which provides global support for software for intelligent networks, so very complex software is developed in Indonesia for the global market. IF: Do you think your company’s history here has helped you navigate the legislative and regulatory environment? RK: There is certainly a historical element to it. I have engineers here with over 20 years’ of service with us. To get that kind of competence, skill set and history of what the networks are and how they work, you can’t buy that. Although I have got much to learn, I would not say it has been particularly difficult to ramp up in this country, but maybe people that have come without an established organisation would require a much more intensive ramp up time and probably some assistance locally. Transmission backbone IF: You were recently awarded a network deal to expand the backbone network to Sumatra. Could you tell us a bit more about this? RK: The transmission backbone. It is about 3,500 kilometres of fibre that needs to be laid, which will provide broadband services and connectivity right the way through Sumatra. It is a massive civil engineering and telecoms project. It provides state of the art broadband, and will open up broadband for the major corporates in the country. IF: Do you think decentralisation has been an asset for Indonesia or Nokia Siemens Networks? RK: It is often a strength and a weakness. In a country this big you need to have strong management in the regions and you need strong coordination centrally. Typically our structure has very good communication channels out to the regions, where I give a lot of autonomy to executes on the ground. It is just such a big country that you can’t use a one size fits all approach. Mobile data services IF: What most excites you in the Indonesian telecoms sector today and what are the biggest challenges? RK: I have never seen a market more suited to using internet services and mobility than Indonesia. It is almost like the population is genetically predisposed to it, and because of that you are going to see a massive explosion in mobile data and that has an impact.

Career-defining moment After nine years in the military I remember walking out of the Royal Marines Barracks in Poole and getting a bus to the train station. I saw a guy in a nice suit getting into a brand new Jaguar and driving off, and I said to my friend, “I wonder what he does?” My friend said, “I think he works in sales.” I remember thinking it was time to do something different after a long career in the military. Biggest challenge faced Working in the Indian telecoms market as cellular was starting to take off. It was such a big task, and the growth and the speed of the development in that country was indescribable. Being there during that time and keeping up with the pace was extremely challenging. Their needs were extreme as well – commercially extreme, operationally extreme. That was a massive learning curve for me. Most interesting project We built a telecoms network in the Torres Strait Islands for the Australian Customs Service. It involved building a network in very remote islands. We were dealing with really interesting tribal heads of Aboriginal groups. The logistics of building in the middle of the ocean with no connectivity and no services was really interesting. Most important lesson in business To do what you believe in and always keep your integrity. No matter what position you find yourself in, you need to take a position that you are personally comfortable with. If you can do that then you are on a good track. technology. The second thing I think is very interesting is doing this in a green way. We believe we can save a mobile operator up to 60 per cent of their power costs on their mobile infrastructure with new technologies. IF: Are other network operators as aggressive with their green developments? RK: Yes, as an industry by 2015 the GSM Association wants to have delivered something like 100,000 green base stations. By green base stations we mean very, very low power consumption.

When you introduce things like smart phones, most of these devices are from different manufacturers and operate in different ways, which means there is more complexity. One of the biggest challenges is to remove the complexity and remove the problems that the data explosion is going to create with our customers.

In countries like Indonesia we have issues with the power grid, which is in a very challenging environment. Sometimes power is available and sometimes it is not. So there are three areas: “Grid”, where things work most of the time, “Bad Grid” where you get frequent outages, and then you have “Off-Grid” where there is no power supply at all.

We need to help them manage this complexity in the most costeffective way, which means driving down the cost with simpler

As a company we are focusing strongly on providing power solutions for all three areas. It is one of the cornerstones of our strategy.


information & communication technology interview

Sutanto Hartono President Director


microsoft indonesia

Sutanto Hartono: I got my undergraduate degree in chemical engineering from the University of Notre Dame in Indiana, the United States. Soon after, I began my career with Procter & Gamble here in Indonesia. After going back to the US to get my MBA at the University of Berkeley, California, I was recruited by Booz Allen & Hamilton as a Southeast Asia associate. I stayed there for about three years, working in finance and the manufacturing side of the operations. Then I was recruited by Sony Music to set up their shop here. Back in 1996 foreign investment was not allowed in the country’s recording industries. After a new regulation was implemented, Sony decided to set up everything from the ground up, and they wanted me to build it for them. After we got the company up and running, I was asked to head Sony’s Southeast Asia operations. In 2003, I was recruited by Rajawali Citra Television Indonesia, the largest television network in Indonesia. Then in January 2010 I joined Microsoft as its country head. Cloud computing: no pie in the sky IF: How would you best describe Microsoft’s business in Indonesia today? SH: It is still largely driven by selling solutions to our clients, like business productivity, Windows Operating Systems, or some of our enterprise application platforms. Now we are moving to Web 2.0, where we are not only connected, but also actively engaging and collaborating with users. The new revolution is in providing cloud computing technology. I find this very exciting for Indonesia. What sets Microsoft apart is our early commitment to adopting cloud computing. We are competing with Google, which also has strong data centres, but Google focuses on the consumer, while we focus both on the consumer and the enterprise. So this is a defining moment – if this strategy works, then we will be able to deliver to our consumer in a much deeper way.

Cloud computing basically provides your computing needs online. The beauty is that you don’t need to invest, because you don’t even need a server. You just need a cable or PC connection. So you don’t need to invest in infrastructure, hardware and IT. We take care of all of that for you. That’s why I am very excited, because not only is this a new technology, but more importantly, it’s a big change in the business model in Indonesia. IF: How effective has the consumer strategy been? SH: It is too early to tell, but this is where I hope my media background will help. I think we have a very good proposition, it’s just how to make people aware of it. That’s also where cloud computing comes in for corporate consumers. If it’s subscriptionbased, you can’t pirate it.

We believe Indonesia will have a different technology revolution, where mobile devices will be the key for people to penetrate the internet, and this is already happening Potential for market growth IF: Can you give us an overview of IT in Indonesia? How many people in Indonesia use Microsoft? What is the potential? SH: The reason why we are excited about Indonesia is that, if you look at the base usage, it is still relatively low, but it is one of our biggest growth sectors worldwide. PC shipments were 4.2 million units last year. Just to give you a benchmark, Japan is about 20 million and China, the largest, is 100 million. However, as far growth percentage goes, we are at 62 per cent. The challenge we have is that we believe Indonesia will have a 201

information & communication technology interview

different technology revolution, where mobile devices will be the key for people to penetrate the internet, and this is already happening. Facebook access from mobile devices is higher than Facebook access from PCs. And Facebook’s growth is spectacular: they had about 4 million users in early 2010; today it’s about 20 million.

Facebook’s growth is spectacular: they had about 4 million registered users in early 2010; today it’s about 20 million IF: How does Microsoft apply solutions to mobile technology? SH: One of the things that we are proud of is that our solution is the only one that works on three different screens: PC, mobile, and browser or TV. Where we are not strong is with phones using Microsoft Windows OS. BlackBerry is very strong here in Indonesia, and that is because of BlackBerry Messenger. The beauty is that Microsoft is also strong in creating inter-operability. So I can easily install our Microsoft Exchange Outlook Email, for example, in my iPhone or BlackBerry. IF: According to the government, about 30 to 40 million SMEs are not yet using IT solutions. What is Microsoft intending to do with this sector? SH: They most likely have a PC, and would have an operating system, and some basic application like Microsoft Office, and this is where cloud computing comes in. The immediate opportunity may not come from large enterprises, because they already have infrastructure in place. We believe that the smaller enterprises can adapt to cloud computing technology earlier, because they have nothing to lose. There are smaller local banks here, and they do not have the economics of scale to buy core banking applications. So they are much more interested in subscribing to a core banking application, at about US$2,000 a month. IF: Are there any sectors that have great potential from an IT point of view? SH: Any enterprise that has a large PC-installed base would be a good target. That applies to banking in particular. Banking fits what we want to do. Telecommunications and government are other areas. They have to process tonnes of data. The central bank would be another good example. IF: How do you see Indonesia developing? Where are the opportunities? SH: As with other industries, the challenge here is the country’s size. There are a lot of unique environments to engage in. One example is mobile phone penetration – it came very slowly, and basically top down from the middle-upper class. Then, as with any service in Indonesia, people do not mind paying for it as


Career defining moment I would say Sony Music. I was given this opportunity to literally start a company in Indonesia from nothing; I was the first employee recruited at a time when the company didn’t even exist. I noticed that the recording industry was still dominated by the traditional players, because the government was protecting them. However, I was able to adapt and create a different benchmark. Not only did I manage to make Sony Music number one three years after it started, but I also left behind an industry that had changed from where I began. Motivation I’m always looking for an opportunity where I can make a difference. That’s always a question I ask myself, whether my role would make a difference, not only in the company, but also in Indonesian society. That is what keeps me excited about going to work every day Biggest challenge faced This was when I was a management consultant. I was constantly given new challenges to figure out in a short period of time. Whenever I switch to a new industry, like today for example, I am facing the challenge of understanding something entirely new. Especially in information technology, where there is a raft of technical requirements. I have to learn them while I’m doing my job. Most interesting project When I worked for the radio station RCTI. The station had been on air for 14 years and for all that time it was number one. However, it was slipping, so the challenge was to bring an entirely new culture to the company. The industry’s rules and the environment were changing quickly. We had to convince our people that we needed to embrace change. So that was quite interesting. Most important lesson in business It is a combination of sincerity and respect. When you walk through your business life, you should always maintain that level of sincerity and respect. If you do, it is very easy to pick up the phone and ask people for help when you need it. A lot of people forget that and just build a relationship when they need it.

As with any service in Indonesia, people do not mind paying for it as long as they can pay by instalments long as they can pay by instalments. When that happened the demographic opened right up to include most levels of society. So cash affordability is a key element. Part of being a multinational is understanding the balance between profiling a local solution versus a standard global solution. Maintaining that balance is the most important factor for all industries here.

Water & Waste

water & waste overview

Openings for private companies in water and waste Waste as a power solution offers generating capacity at locations where supply problems occur and can be part of a wider solution to local electricity demands. Water treatment also presents private sector opportunities

Environment The expanding economy and rapid urbanisation in Indonesia have paved ways for the development of new and existing environmental infrastructure. Continuous environmental advancement is part of the government’s long-term development plan under the PJP II (the Government of Indonesia follows five-year development plans known as Repelita and 25-year long-term development plans known as PJP. PJP II is for the period 1994-2019).

Water demand was approximately 35.81 billion cubic metres in 2009, and is expected to reach 62.25 billion cubic metres in 2015

Overview Indonesia has the second highest water demand in Southeast Asia. Frost & Sullivan, a locally based business research and consulting company, estimates the total water demand in Indonesia to be approximately 35.81 billion cubic metres in 2009, and is expected to reach 62.25 billion cubic metres in 2015. About 80 per cent of Indonesia’s total population has access to safe water, while 94 per cent of its urban population has safe water access. Frost & Sullivan also estimates that in 2009 waste generation in Indonesia amounted to approximately 90 to 100 million tonnes, of which 30 to 40 per cent was attributed to domestic waste, with the remaining percentage being attributed to agricultural, construction and hazardous waste. As the world’s fourth most populous nation, environmental needs related to water and waste are becoming pressing issues. In line with Indonesia’s socio-economic development plan, the water and waste industries offer tremendous opportunities for market participants, business investors and stakeholders. In 2009, market revenues of water and waste technology equipment totalled approximately US$205.1 million, of which


water & waste overview

The Mahakam Delta in East Kalimantan

about 73.1 per cent was attributed to water technology equipment. The equipment market for these environmental technologies includes pumps, water filtering or purification equipment, oil-separation equipment

The excess of waste creates opportunities in the energy sector, as waste can be used as a source of renewable energy and other related equipment for water technologies, while the marketplace for waste technology equipment encompasses machinery for treatment systems, mechanical appliances such as conveying and sorting equipment, and trash compactors. Opportunities With a population of nearly 10 million in Jakarta, waste generation in this city offers significant opportunities for environmental technologists and services. In addition to products and services for the basic value chain of waste collection and treatment processes, the excess of waste creates opportunities in the energy sector, as waste can be used as a source of renewable energy. These opportunities should be able to contribute in solving both waste excess and provision of electricity, and these auger well for local and foreign investors to establish business partnerships and presence in the Indonesian waste management market.

Indonesia’s high agricultural output has put forth the needs for advanced treatment processes and innovative technologies, such as composting and waste-to-energy. Other specific needs include technologies in recycling, landfill and medical waste treatment. Additionally, one of the most pressing issues in the country’s waste management is the collection and transportation of waste at source. While coordination in waste collection is taking shape, ample opportunities are present in the area of expansion of waste logistics, such as trucks and recycling bins, compaction and sorting equipment, and transfer stations. Water supply and waste water coverage in Indonesia is bound for improvement. As such, infrastructure development for new treatment plants and rehabilitation of existing plants and water distribution systems are forthcoming for market participants across the value chain, from

Water and waste markets augur well for foreign participation and contribution equipment suppliers to engineering consultants and water specialist contractors. Public private partnership (PPP) is one of the possible ways to penetrate into these prospective areas. In the water and waste water sectors, prospects are present in both municipal and industrial segments. Specifically, the markets are optimistic 205

water & waste overview

for equipment and technology suppliers that innovate high-efficiency pumping equipment, filtration equipment and other supporting technologies such as valves.

Indonesian water and waste markets will expand consistently, with opportunities for both local and international market participants. These markets

Besides water technologists, solutions experts are sought in Indonesia. In heavily populated cities such as Jakarta and Surabaya, issues of comprehensive water supply and sanitation are intertwined with fresh water scarcity and water pollution. Water operators, including all stakeholders across the market value chain, are improving their services and product propositions despite the possible escalating cost of treating water.

Private sector participation will be the main catalyst in the development of both water and waste markets in Indonesia

Perspectives Private sector participation will be the main catalyst in the development of both water and waste markets in Indonesia. The private sector should note that the government is in favour of waste prevention and minimisation, and water conservation as primary objectives of its environmental conservation plan. The intention of Indonesia is to push these markets to be more intensive in community development rather than solely depending on capital-intensive technologies. As such, recycling, composting and rainwater harvesting are areas of importance. Nonetheless, doors and opportunities still exist for advanced technology investors in the space of incineration and membrane technologies. Additionally, the future will see more efforts and activities in support-research studies that emphasise informed choices or technologies, affordability of technical options, and decentralised models of waste and water treatment. Support by the government is apparent as Indonesia pushes to improve and conserve its environmental condition.


will likely be primarily affected by continuous increase of population and urbanisation. The changing human demographics in Indonesia will likely spur the change from predominantly compostable organic waste into higher volumes of waste streams consisting of packaging waste, paper, plastic and other inorganic materials, and development of water conservation equipment. With the ever increasing volume of waste and water demand in Indonesia, pressure on the delivery of local municipals will be more apparent. Besides primary water and waste technologies, opportunities will also lie in the use of more sophisticated support tools, such as information technology applications that will enable better monitoring and analysis of water and waste conditions. The overall water and waste market sentiment in Indonesia augurs well for foreign participation and contribution. Companies must be able to attain leverage on the current and specific needs of the country and gain a holistic understanding of the fundamental requirements of Indonesia’s water and waste management before hastening advanced technologies and applications that may not be relevant.

water & waste interview

Philippe Folliasson


President Director palyja

Philippe Folliasson: I have been working in the water industry for the last 20 years, 15 years with Suez Environnement, a leading company in the field of water, wastewater and solid waste management worldwide. Leading a company like PALYJA that handles the water production and distribution of one of the largest city in the world, requires a global view, taking into account operational, technical, financial, regulatory and sociopolitical perspectives. Municipal water supply is managed at about 90 per cent in the world by local government and stateowned entities and there are still major challenges in raising the standards of this ‘essential of life’ and in enhancing the access to this basic service along the lines of the Millennium Development Goal (MDG). Today it is estimated that there are more than one billion people worldwide with no access to safe water and two billion with no access to sanitation. IF: Can you please tell us more about PALYJA? Who are the main stakeholders in the business? How would you best describe your business today? What is the scope of your work and how are you benchmarked? PF: The 25 years concession contract, signed in 1997 between Jakarta public water utility (PAM Jaya) and PALYJA, covers water

plants and a 5,500 km distribution network. PALYJA is accountable to the city of Jakarta, in particular to PAM Jaya to which it is bound by contract and to the regulatory body, appointed by the governor of Jakarta, overseeing the contract implementation and in charge of benchmarking the two operators (AETRA is the operator for the Eastern half of Jakarta). The Cooperation Agreement, which consists of a 25 year concession contract, is the backbone of our partnership with the city of Jakarta. Yearly contractual technical targets (volume of water sold, non revenue water, water produced, number of new connections) and service standards (water quality standards, pressure standards at customer connections, time to repair a leak, time to connect a new customer) are contractual commitments to be achieved and for which PALYJA is accountable (penalties are triggered in case of non compliance). IF: How has Jakarta’s water provision and supply changed since PALYJA’s involvement? PF: Since PALYJA operate early 1998, the service has evolved as follows: ■ service

Today families with no access to piped water pay to secure water from local vendors at between 25 to 50 times the regulated price for piped water production, distribution and customer services for delivering drinking water to about three million inhabitants of a total population of five million. Today, with 1,400 employees, PALYJA serves 417,000 customers, has four major branch offices and 12 customers services offices; operates three water treatment

coverage has been doubled from one inhabitant in three having access in 1998 to two inhabitants in three with a service connection, representing about one and a half million inhabitants getting access to the water system over the last 12 years; ■ water delivered to the population has increased by 50 per cent with almost the same water resources coming from outside Jakarta showing major efficiency gains performed (water savings); ■ the distribution network losses (non revenue water) consisting of leaks and illegal connections have decreased from 62 per cent in 1998 to 43 per cent in 2010; ■ the production plants, built in the 1950s and 60s, have been totally refurbished allowing compliance with more stringent water drinking standards and in spite of raw water quality not complying with the provincial regulation; 207

water & waste interview

over 2,000 km of pipes have been laid both for rehabilitation and extension; ■ since 1998, US$150 million has been made both in production and distribution facilities and in spite of major financial crisis and political crisis faced by the country over the last decade or so.

Career defining moment My appointment as CEO of PALYJA was obviously a milestone in my career. With 12 years of achievement, 1,400 employees, a strong partnership with the Astra Group, and still 13 years to go before the end of the contract, leading PALYJA represents a major professional and human challenge. Indeed, there are so many opportunities to keep improving the water service we deliver to the population and increase its access to the population.

In terms of tariff, before the operation by PALYJA, water tariff was on average about US$0.6/m3 (Asian Development Bank data, 1995 – and at that time exchange rate USD/IDR was about 2,000). Today in 2010, low-income families pay about US$0.1/m3 whereas key accounts pay US$1.2/m3, as the city applies a tariff grid based upon cross-subsidy (exchange rate in 2010 was about 9,200 IDR for one USD).

Motivation Bringing to the population of Jakarta one of the ‘essentials of life’ is a key motivation. Today, there is still one inhabitant in three with no access to water and at least 20 per cent of the water demand not yet met. Improving the service will help bring more welfare and fairness to the inhabitants of the Jakarta. Today families with no access to piped water pay to secure water from local vendors at between 25 to 50 times the regulated price for piped water. In addition, Jakarta is committed to making sure that key accounts will keep reducing the use of groundwater (deep wells) and therefore PALYJA is a key factor to the success of that policy while supplying the necessary water required.

Jakarta, through its public private partnership (PPP) scheme, is running its municipal water supply based upon ‘full cost recovery’, that is to say that water is paid by water users and there is no public subsidy. If you compare with most of the Asian cities, this is a fairly unique situation. For instance, Malaysian water tariffs cover operational expenditure (OPEX) whereas the States often supports investments (CAPEX). In others words, most of the cities in Asia will tend to finance the municipal water service through a combination of water rates and subsidies, which makes sense when the public or the private operator must not only maintain and improve the existing assets but also expand the service to those not yet connected. Historically in Europe, most of the water infrastructure development has been paid in the first place, after the Second World War, by the central or local governments and PPPs were developed later on to operate and renew those assets.

Biggest challenge faced In order to meet the needs of domestic customers and key accounts, PAYJA requires additional water resources as soon as possible, and more investment at a stable pace to cater for maintenance and expansion. The key challenge is with respect to this first point, and that is working with central government and local government to develop and finance new projects to bring more water to Jakarta.

In the case of Jakarta, the challenge of both improving and expanding the system remains difficult as not only is there no public subsidy but the water tariff has been frozen over the last four years, whereas cumulated inflation during the same

Most interesting project The most rewarding part of the mission of PALYJA is the extension of the service to families not having yet access to piped water. This was achieved through ongoing expansion (215,000 new connections over the last 12 years) and ad hoc programmes such as the Global Partnership on Output-Based Aid (GPOBA) with the World Bank targeting low income neighbourhoods.

Service coverage has been doubled from one inhabitant in three having access in 1998 to two inhabitants in three with a service connection, representing about one and a half million inhabitants getting access to the water system over the last 12 years period was in excess of 20 per cent. This unbalanced situation is unfortunately leading to the downscaling of investment because of the cash shortages, which undermines the ability of the operators to improve and expand the service. In other words, PAM Jaya and its operators are currently facing a vicious circle. IF: What are your development priorities? PF: As per its Cooperation Agreement, the operators in Jakarta


Most important lesson in business Patience, or ‘sabar’ in Bahasa Indonesian is very important and definitively a key factor of success while dealing with water utility and public authorities long term. An ability to listen and understand needs from the various stakeholders is also very important. should cover the entire population by the terms of the contract (2023). In order to achieve that goal, the operators would need two critical means: ■

more investment to be able to cope with expansion (one third of the population still don’t have access to piped water); ■ more water resources to be able to match the ever growing water demand.

water & waste interview

As explained above, the ‘full cost recovery principle’, which constitutes the foundation of our cooperation with the city of Jakarta for the last 12 years, is no longer sustainable as investment needs cannot clearly be fully supported by tariffs, undermining operators’ ability to improve and expand drinking water supply. To illustrate this statement, we can quote two examples showing that, with the current financing structure, PALYJA is impeded to fulfil what it is asked to do: ■

Matching the water demand from the key accounts (hotels, malls, condominiums, banks, governmental offices, industry), which are presently using groundwater and moving gradually towards piped water following a Jakarta regulation enforced by BPHLD (Jakarta Environmental Board) since 2009; ■ Keep increasing the access of the service to domestic middle class customers and low-income families to improve their welfare, secure good quality water and reduce the cost for those households relying today on alternative, unsafe and expensive water supplies. If not resolved on a timely and efficient manner, both issues raised above would lead to further subsidence of the city because of the over-exploitation of the deep aquifer, and United Nations MDG goals, endorsed by the Republic of Indonesia, would not be met in terms of access to safe water.

IF: Floods carried mud into the West Tarum Canal, West Java, contaminating and disrupting much of Jakarta’s tap water supply recently. Can you tell us more about the vulnerability of Jakarta’s tap water supply to events like these? PF: PALYJA secures about 62 per cent of its water resources from the Jatiluhur dam through the West Tarum Canal. The city of Jakarta as a whole gets about 80 per cent of its water from that dam. Although the operation of that open channel has been improved over the last few years, any problems arising along the canal related to flooding, bank stability issues, blockage, siltation, pumping station downtime and so on, directly affects the ability of the operators to maintain the production of treated water and stability in distribution. Over the last 15 years, there has not been any development of additional water resources for the city of Jakarta and we reckon that today about 20 per cent of the water demand remains unmet. The central government along with the city of Jakarta is currently planning a major project to build a treatment plant nearby the Jatiluhur dam and bring the bulk treated water through 70 km of pipes to the city. IF: In 2010 PALYJA completed the first phase of the GPOBA programme. Under the programme 5,000 low-income customers in northwest and north Jakarta received access 209

water & waste interview

to piped water. Can you please tell us more about this programme, and how it is funded? PF: PALYJA entered in this program in 2007. The GPOBA programme is managed by the World Bank and will eventually connect about 7,000 low-income families (of which 5,000 has been already done) funded with a grant of US$2.5 million

Jakarta, through its public private partnership scheme, is running its municipal water supply based upon ‘full cost recovery’, that is to say that water is paid by water users and there is no public subsidy to subsidise the tertiary network and house connections development (CAPEX). This is a very successful programme and there has been an opportunity to inaugurate some projects in the presence of the governor of the city of Jakarta. We believe that it is important to keep connecting the under-privileged population as there is a high demand and not providing them with the service cannot be a sustainable solution. Today, the low-income families not having access to piped water end up paying between 25 and 50 times what they would pay if they were connected to the system (they rely then on water vendors charging high rates and providing a poor service with push kart), which is deeply unfair.


IF: How do you see PPP developing in Indonesia? PF: There are about 320 public water utilities (PDAMs) in Indonesia and the global service coverage remains fairly low. Generally speaking, the profile of those water companies should be raised, their financial situation ought to be improved (tariffs are often too low to allow for reasonable investments and improvements of the operation performance and about half are those public operators are facing financial difficulties and solvency issues) and the quality of the service provided to the population will need to be enhanced. Some PDAMs are operationally and commercially performing very well. However, better water supply and wastewater management should become a top priority for the Republic of Indonesia. A World

Water management, along with road, harbour and electricity infrastructure, is a potential bottleneck to the economical development and the prosperity of the nation Bank survey carried out in 2005 indicated that the lack of access to safe water and sanitation was costing about 2.3 per cent of GDP growth to the country. Water management, along with road, harbour and electricity infrastructure, beyond the social issues it obviously raises, is also a potential bottleneck to the economical development and the prosperity of the nation.

sector name indonesia 2010

Water and sustainability Scott Younger, chairman of Glendale Partners, looks at the problems in the water sector and the plans in place to deal with them

Without water there is no animal life, which is why our space scientists are drawn to see what other planets with water exist in the greater universe. While the life of our planet is still predicted to last a very long time yet, well beyond the relative blink of an eye we humans have been around and evolved, we are part of the cosmos and open to the unexpected risks of devastating meteoric strikes and so on. Our life is dependent on our source of energy, the Sun, so what happens there affects what we can do here. Now back to Earth! Without pure water the average human being would die in a week. With the impressive expansion in human

Java’s key water basins are badly distressed, with demand usage significantly exceeding supply population over the past 60 years, more than three times the number that existed then, the demand on water availability has increased, commensurately and more. There are huge anomalies, unacceptable in many ways, between the large daily use of peoples living in developed societies and those in the povertystricken areas of Africa and Asia. Some of the problems relate to contrasting development but others relate to water availability. The non-sea water on the planet, whether in lakes, as ice or in groundwater, is a fraction of the total. Its distribution is uneven, always has been and always will be, and has changed in varying long periods of time, over millions of years, manifesting itself in permanently ongoing changes in climate over different parts of the globe. There are, of course, changes in water availability that have been brought about by its misuse, which have seen the end of past civilisations, as well as the often positive impact of impressive water storage constructions.

However, to create sustainability for today’s societies we have to think in much shorter time spans, say from our own time towards the future 50-100 years, and take into account changes that are manmade – usually the main problem – and of a local climatological nature. We have to address issues of steady, sometimes rapid, urbanisation – over six billion in urban environments by midcentury – changing demography, ageing population even in mid-development countries, alleviating poverty and desperate hunger. Then how we deal with water, its supply, its application to agriculture and in sanitation, and its re-use, for example, is fundamental to sustainable development and the future stability of the cities of the 21st century. Most water issues concern decisions that affect local ecosystems and the use of water in them. The global crisis is the sum of hundreds of thousands of local crises, caused by umpteen local choices within local power structures, by people with interests incompatible with that of the people who should be benefited. If the Millennium Development Goals in water and sanitation are to be successful then local communities must be encouraged to take leadership. After all none of the work is rocket science! Indonesia Indonesia is well blessed in surface water sources, with an annual precipitation of over 3,000 cubic metres; albeit not evenly distributed across the archipelago and with significantly less

Investment required for water and sanitation over the next seven years should be in the order of US$20 billion than one per cent of the potential resource harnessed for use. While there is a good number of isolated areas off Java that have water supply problems, these could generally be resolved with careful water management and engagement of the communities 211

water & waste perspective

affected; the East Bali Poverty Project being one example of successful community involvement through empowerment.

of commitment by offtakers, the key issue for bulk supply schemes of this type.

However, Java, a small island that is home to some 130 million people, presents problems of a quite different magnitude. These have been creeping up insidiously over the years, because generally people have managed to find means of satisfying shortterm needs. However, its key water basins are badly distressed, demand usage significantly exceeding supply, with upstream deforestation having considerably reduced resource retention. The issue is compounded by rapid urbanisation hand in hand with expanding industrialisation.

The government recognises the need to build a number of water storage reservoirs in key locations, many in Java, to meet the needs of future demand. A vital linkage for West Java is the key but heavily polluted Citarum basin; vital to both the major

Altogether there has been a lack of investment in the water sector over many years, in the order of US$1 billion over two decades, which compares dismally with that in telecommunications in the same period (about US$18 billion) or energy (over US$14 billion). The lack is well recognised by government; it is estimated that

Ten important bulk supply projects have been earmarked for progressing under public private partnership arrangements the amount of investment required for water and sanitation over the next seven years should be in the order of US$20 billion, with half from government budgets, over 30 per cent from private sector sources and the balance through multi/bilateral funding. Past attempts at securing private sector involvement have been mostly unsuccessful, but with improvements being pushed in the regulatory environment there is a measure of cautious optimism that projects will start to go ahead. Ten important bulk supply projects have been earmarked for progressing under public private partnership (PPP) arrangements, including the Umbilan scheme which has been “on the books” since the late 1980s and was seriously looked into by Northwest Water in the mid 1990s. This failed to proceed because of lack


Legislative understanding of water’s importance to the future has some way to go conurbations of Jakarta and Bandung, as well as significant communities in between. Altogether the basin currently serves over 25 million people; this is due to increase by a further 1015 million in 15 years time, along with expanding industrial development. Both cities are going to have to address soon the need to recycle water and the appalling lack of modern sanitation treatment for most areas. Solutions should be built into enlightened planning as to how these cities – and others across the archipelago – should perform in the years ahead. There are some interesting examples already elsewhere that could and should be adapted for the urban development of Indonesia; especially Java, where most of the rice production takes place, but land for which is being taken over for urban and industrial expansion. Conclusion Several distinguished commentators at world events have commented that the looming crisis for the century relates to how we deal with water. This is especially so since there will be a further three billion people to look after by mid-century and we are still struggling with today’s imbalance and consequent water shortages in many areas, with over a billion without access to clean water. Indonesia does have the supply to deal with its problems but, as in many other places, the legislative understanding of water’s importance to the future has some way to go.


construction overview

Indonesia’s construction market is one to watch Construction is a key contributor to the economy, with an impressive growth rate potential

Construction is one of the key socio-economic activities in Indonesia. The contribution of the construction industry to Indonesia’s GDP is likely to be maintained at between 7-9 per cent in the next three years due to the improved statutory framework, continuous development prioritisation and strengthening confidence of investors. The majority of construction will be in road and building projects.

Annual growth rates of between 10 and 15 per cent are anticipated from 2010 to 2015

Frost & Sullivan, a business research and consulting company based in Jakarta, segment the construction market in Indonesia into the following three broad categories: heavy engineering construction, building construction and residential construction. In 2009, the total construction market revenue in Indonesia was valued at approximately US$17.8 billion, of which US$10.85 billion, or 60.9 per cent, was accounted for by building and residential construction. Building construction contributed US$8.06 billion in revenues, while revenues for residential construction amounted to US$2.79 billion in 2009. While the 2009 economic downturn has resulted in negative growth in market revenues, construction activities are expected to gain momentum in 2010, or 2011 the latest. Nonetheless, the construction market will be continuously driven by the rising demand for new residential buildings in major cities as well as rural areas. In addition, the country’s commitment to socioeconomic growth is likely to spur new construction of commercial buildings, industrial zones and other infrastructure such as roads and utility plants. 215

construction overview

One of the most pertinent progressions in Indonesia’s construction market is the formation of the Green Building Council of Indonesia (GBCI), which currently certifies and rates environmentally friendly housing and workplaces. Attainment of the certificates for both contractors and developers are now voluntary, and certificates for each building construction will be awarded based on merit. However, upon the formulation of regulations regarding green building designs, certifications will most likely become mandatory in the near future.

Superblocks will be the impetus for continuous urbanisation and will provide the pillars for socio-economic activities Indonesia’s quick economic recovery and government support on development are the main catalysts for positive annual growth rates of its construction market, which are expected to hit between 10 to 15 per cent from 2010 to 2015. The Government of Indonesia has established the Construction Services Development Board (CSDB), to conduct research, provide skills training and regulate licensing in the construction market. CSDB also facilitates the protection of construction workers in the market, including foreign firms. Together with the government’s mission to accelerate economic growth, all stakeholders aim to speed up infrastructure development while increasing the ratio of GDP investment from an average of 19 per cent to at least 28 per cent, reduce unemployment and reduce the poverty rate from 8.2 per cent to 5.1 per cent.


The building construction segment remains the strongest segment in terms of growth as demand for office buildings remains strong and resilient during the economic downturn, especially in Jakarta. Moreover, with an improved economic situation, this segment is expected to experience better growth in the forthcoming years as multinational companies and new investors look for new office spaces for business expansion and presence. While the residential construction segment went through a turbulent time in 2008 and 2009, this segment is expected to enjoy good market growth. Landed residential projects will also yield high demand in the construction market, as urban areas become more crowded. Specifically, the construction of superblock projects will be more in demand, as these types of projects Construction market segments in Indonesia Segments Remarks Heavy engineering Construction of heavy engineering construction and industrial projects, such as road and highways, bridges, irrigation, pipelines and other infrastructure works Building Building constructions of offices, construction shopping malls, hotels, institutions, hospitals and industrial plants among others Residential Building constructions of single construction family houses, apartments and condominiums Source: Frost & Sullivan

construction overview

combine office space, entertainment venues and residential projects in one establishment. A superblock is a complex of residences, offices and entertainment centres on more than 10 hectares of land, in which each building has its own

As the market is gearing towards betterment, the future of the construction industry is likely to witness more participation from foreign firms function. Several contractors and developers have already tapped into this type of project, including Bakrieland Development, Agung Podomoro Group, Lippo Group and Pakuwon Group. The existence of superblocks will be the impetus for continuous urbanisation and will provide the pillars for socio-economic activities.

skilled personnel also drives investment in the construction market. Currently there are about 5.5 million people involved in construction activities and Frost & Sullivan estimates that the figure could reach 7 million by 2015. Further growth in the construction market will be attributed to the policy reforms implemented by government. These include tax and customs, utilisation of treasury bills and improvement of capital market supervision. One of the most common challenges faced by market participants is the rise or unstable prices of raw materials for construction. Prices are generally on the rise for almost all essential materials, such as sand, cement, steel bars and wood, across all sectors from residential and building construction to public works on irrigation, roads and utilities. However, this trend is true for most other construction markets across Asia Pacific, where market participants recognise material price as one of the main hurdles to profitability.

Indonesia’s heavy engineering construction works are comparable to the country’s building and residential construction activities.

As the market is gearing towards betterment, the future of the construction industry is likely to witness more participation from foreign construction firms. Currently, Japanese firms outnumber other foreign construction companies from the US, China, South Korea and Europe.

Significant emphasis in the form of project approvals and expenditures is given to road and bridge works, irrigation and drainage, electrical installation and network expansion, as well as construction or retrofitting of transportation systems such as airports, harbours and stations. This is in line with the government’s aim to improve the country’s infrastructure and public facilities. Its strong workforce of both skilled and semi-

Loan agreement policies and international competitive bidding further support participation of these international contractors. Besides building and residential construction, prominent construction activities to be focused on include construction in the oil and gas sector, power plant projects and infrastructure projects (roads, transportation and others) under loan or grant agreements. 217

construction overview


construction interview

Sudarto Chairman


indonesian contractors association (ica)

Sudarto: I began working in the construction field in 1978 as an engineer in the real estate and housing sectors. From 1981-1985 I worked as a government official on the building of processing plants, such as cassava processing plant, a coffee processing plant and the construction of warehouses in several provinces. During the years 1986-1992 I was the President of Kiani Indonesia holding company, owned by the foundation of Suharto, the second President of Indonesia. From 1993 to the present I have been owner and chief executive officer of the Findo Holding Company. I have also been active in several other sectors, such as consultancy, and I have sometimes lectured in construction management at certain universities in Jakarta. Going further back, I was born in 1951 in Bandung, Indonesia. I earned a doctorate degree at the University of Indonesia majoring in civil engineering. I am currently the chairman of the Indonesia Contractors Association and Permanent Committee of Construction in the Indonesian Chambers of Commerce. I am also the chairman of the Associaton of South East Asian Nations (ASEAN) Constructor Federation and the second vice president at the International Federation of Asia and Western Pacific Construction Association. Besides all this, I also own and lead Findo Consulting Group, which is a construction and design consultant group. I am also a member of the special advisory staff for the Riau province governor in providing feedback for the province’s plans and developments. IF: Can you tell us a little about the Indonesian Contractors Association? Sudarto: The Indonesian Contractors Association (ICA) was established in 1973. It has become one of Indonesia’s most prestigious professional associations and represents the very best in construction services. The ICA helps its member companies in pursuing new market opportunities at home and abroad, drawing up contracts and completing projects. It also arranges and facilitates cooperation between the Indonesian construction industry and its overseas counterparts.

The organisation now has 125 company members that have the ability to dominate the construction market in Indonesia. Although the number of firms is not large, in terms of capabilities these companies are generally large state-owned companies, which operate not only in Indonesia, but also in the Middle East and North Africa. In fact, I would characterise the ICA as the vessel for large contractors in Indonesia. Although the ICA is not the only contractors’ association in Indonesia – there are several others – I believe it is the case that the organisation’s members have been able to capture 70 per cent of the national construction market. The ICA is therefore the most significant organisation of

As an association, the ICA will strongly support the government’s positive efforts in improving the infrastructure sector in Indonesia its type in the country. The national construction industry has been growing strongly recently. Throughout the years 2005-2009 it posted an average growth of 21.9 per cent year. In the future, it will particularly grow in the infrastructure sector and real estate, supported by the new rules imposed, meaning foreigners can legally own flats. championing construction IF: What are the organisation’s vision and values? Sudarto: Our vision is to promote the construction industry, and to encourage the whole sector to become a highly reliable, independent, productive, accountable and competitive industry, both nationally and internationally. We see our mission as follows: to initiate codes of ethics amongst national contractors; to forge bonds and partnerships and to promote cooperation among members; to encourage and support the professional 219

construction interview

competencies of ICA members and their business partners; to make a great effort for collective advance by providing shelter for its members in order to strengthen the organisation. IF: What is your view of the government’s proposal for an investment of US$140 billion in the sector in the near term? Sudarto: As an association, the ICA will strongly support the government’s positive efforts in improving the infrastructure sector in Indonesia, as long as it is essentially pro investor. For example, in the infrastructure sector in Indonesia, ICA company

Our vision is to promote the construction industry, and to encourage the whole sector to become a highly reliable, independent, productive, accountable and competitive industry both nationally and internationally members invested Rp80 billion last year, especially in road and electricity projects (for example PT Bangun Cipta and PT Wijaya Karya), and that does not include any overseas projects carried out by our members. IF: What sort of partnership do you have with the government? Sudarto: Our partnership with government is indirect because every government project is conducted through a tender/bidding process. However, the ICA has been participating in examining the government’s policy with regards to developing the infrastructure sector in Indonesia. IF: How do think the construction sector in Indonesia has been affected by the economic downturn?

Career defining moment When I established my own company in 1997 in order to become an independent entrepreneur, after having worked for a few government institutions and private foundations previously. It was a big challenge. Motivation My main motivation is to make as significant a contribution to the country’s economic development as I can, and also to try and benefit other societies in a similar way if at all possible. Biggest challenge faced The economic crisis in 1998 made me realise that the company’s external factors may affect the company’s internal factors. I also came to the belief that the company’s internal regulations had to be reformed to maintain the company’s performance, so as to be ready to face any economic conditions that may occur in the future. Most important lesson in business Never to give up on any situation and always try to create healthy competition with other companies in the sector. All successful businesses must have a spirit of oneness and teamwork among the various people who work for them. I believe success occurs when opportunity meets readiness. memorandum of understanding (MOU) between the ICA and CHINCA (China International Contractors Association). Within the MOU, one of the articles will be to stipulate that if either country

The PPP schemes certainly give me enormous hope about the future of infrastructure development

Sudarto: The economic downturn certainly had an impact on the construction sector in Indonesia; growth was negatively affected. In fact, given that construction work was contributing seven per cent of Indonesian GDP, this, we believe, increased the unemployment levels in the country. The ICA will respond to this situation by pump-priming infrastructure development through implementing certain strategic plans in the near future.

carries out an infrastructure project in the other’s country, one should co-operate with the country’s contractor companies that are members of both associations in Indonesia and China.

IF: What are the biggest obstacles that the construction sector faces in Indonesia and can you outline some necessary reforms to improve the outlook for the sector?

Sudarto: I think this is a good thing for the national construction industry. At the very least it will provide the necessary information regarding the infrastructure development in Indonesia. The PPP schemes certainly give me enormous hope about the future of infrastructure development. One significant potential problem, particularly in the road development programme, is land acquisition. Nevertheless, what needs special attention is the general infrastructure development policy; specifically on the municipal water works projects in the provinces, which require policies that are more investor-friendly to avoid policy overlapping between central and local government bodies.

Sudarto: I think that the biggest obstacle is the limited market supply, especially because of the very small-scale of government funding in the infrastructure sector. On the other hand, we are also facing the implementation of the China-ASEAN Free Trade Agreement (CAFTA), where the investor (especially Chinese investors) could work with Chinese infrastructure contractors. Facing up to this challenge, the ICA is going to draw an


private investment in construction IF: Can you give us your opinion on the future of public private partnership (PPP) schemes in Indonesia?

construction interview

Ray Hodgson President Director


leighton contractors indonesia

Ray Hodgson: I’m a civil engineer, who graduated from Sheffield University in the UK in 1972. I went overseas after two years of working in the UK and I’ve been overseas ever since – nearly 40 years. I’ve spent about 15 years in the Middle East and the balance of the time, another 20 or so, in Asia. In Asia, I started in Malaysia on a very large infrastructure project which was the rural water supply scheme funded by the British government in a company called Antah Biwater. That was a total of 132 rural water supply schemes. From there I went to Singapore and then back to Jordan and eventually came here in 1996, as president director of what was then PT John Holland’s Constructions Indonesia. I’ve been here ever since. IF: Tell us a bit more about Leighton in Indonesia. How would you best describe the business today? You have been here for some time, so a snapshot of the history would also be useful. RH: Leighton Holdings is a holding company for several significant sized construction and mining engineering companies in their own

Everybody recognises, from the tea boy to the President, that infrastructure is needed in Indonesia right. One of those subsidiaries is Leighton Asia and we’ve been here since 1974. As I say, we were John Holland’s in those days. Indonesia was the first country they came to and the business was gradually built up here pretty much continuously until today. Initially it was building and civil engineering works, and historically in different countries we do different things depending on the demands of the market. At the back end of the 1980s we started doing mining work as well – coal mining – in Kalimantan, so that became part of the portfolio.

Since the early 2000s our business has been predominantly contract mining. That’s not to say it’s exclusive, because there have been the occasional civil projects that have gone ahead and we’ve won the tenders. This included the Cikampek-Cirebon railway in West Java that we did a few years ago in a joint venture with Itochu and the state owned construction company Adhi Karya. That was a very successful project, built on time and to high quality. We also picked up a fair bit of work at the LNG development in Tangguh, West Papua, a BP project. Our focus now is on being at the front end, developing with the government and all the stakeholders a process whereby private public partnerships (PPPs) can actually take off. We’re still growing fast. When I arrived here in the 1990s our turnover was US$30 million. This year it will be US$500 million. Mining IF: Let’s look more at the mining activity because that seems to be one of your core areas at the moment. We noticed that in June 2010, Leighton Asia was awarded approximately an AU$1 billion contract to expand the PT Mahakam Sumber Jaya Mine. RH: This was a six-year contract extension that will expand operations to more than eight million tons of coal per annum. This particular client is part of the Tanito/Harum Energy Group, a well respected family company that has been at the forefront of developing mining in Indonesia. We have grown with them and have an excellent working relationship. The background is that clients are trying to maximise the output that they can get from their mines, whereas once upon a time a lot of mines would be one or two or three million tons of coal a year. Obviously this kind of contract extension requires a lot of 221

construction interview

capital equipment. We are the contract miner and provide the equipment. The big investment from our side is equipment. IF: Please tell us a bit more about the resumption of your AU$125 million contract for the provision of mining services to PT Meares Soputan Mining (MSM) and PT Tambang Tondano Nusajaya’s gold and copper mine, and more generally about precious metal mining in Indonesia? RH: There haven’t been any new gold mines opened up for many years. Exploration had stalled a bit for a number of reasons. After some initial problems, we’re now back on site at MSM’s Toka Tindung mine and starting work. Indonesia is famous for its precious metals. Freeport McMoRan and Newmont are here and there is a lot of nickel as well. We fully expect to see new nickel mines coming on line soon. Hard infrastructure projects IF: Let’s move on to the area that you said hadn’t got a huge amount of traction, but hopefully will in future, which is civil, rail and building projects. How do you see the market evolving in the true, hard infrastructure sector? What has been happening and what is in store? RH: The first thing everybody recognises, from the tea boy to the president, is that infrastructure is needed in Indonesia. There’s been under-investment in the sector for many years. Obviously the country is growing and continues to grow at a fairly rapid pace. The seven or eight per cent GDP growth targeted will not happen without provision of good infrastructure. The most urgent infrastructure needed is transport, which is road and rail and, to some extent, sea. There’s a lot of transport by sea but road and rail are the main ones for industry and businesses to grow; and obviously more power is also need for industry and the domestic market. There

The country is growing and continues to grow at a fairly rapid pace. The seven or eight per cent GDP growth targeted will not happen without provision of good infrastructure were issues and difficulties that, over the first five years of President Susilo Bambang Yudhoyono’s term (2004-2009), were not overcome, which is understandable for such a complex issue. Projects did come out for tender. Many were awarded, but some were not awarded. Also, a lot of the ones that were awarded haven’t been built yet, slowed by land issues or the ability to put in place the right type of debt finance. When the President won his new term the push for infrastructure really began. Certainly, for me, at the top levels of government there’s no question of the desire and intent to improve things as


Career defining moment It’s easy really. The biggest single event would be when I was promoted from chief engineer to project manager on a job in Jordan when I was only 33 years old. It was a container and RoRo port, a big one, in the port of Aqaba in the southern part of Jordan. Being a project manager was quite a shock but pretty exciting and challenging at the same time. It was the day I suddenly realised, “I’m responsible for all this”. You’re responsible for where people eat, where they get their water, for sourcing the raw materials. It’s not just going down the road and ordering, so it was a big moment. Motivation The business we’re in is never mundane. In construction, mining, infrastructure, engineering, something new always comes along. There’s always the desire for continuous improvement, and the emphasis shifts at different times, whether it is environmental management or community relations. There’s always that higher level to aim for. That’s what gets you out of bed in the morning. There’s a lot of stuff to do. Most interesting project The most interesting project would be the Arab Potash project on the Dead Sea. This was on the Jordanian side and we were in the southern basin of the Dead Sea. Natural evaporation takes place and potash settles to the bottom; then a dredger pumps it up and it goes on to a refinery to become fertiliser. That was a massive project on the lowest point on Earth. The work area was right across from the Israeli border so we were surveying in what was still technically a war zone. Most important lesson in business You’ve got to have stamina to keep going and never give up, especially in overseas work. Also, there’s always a lot of parties involved in any venture or project, so always try to think of the other person’s perspective. rapidly as possible. The ministers and the technocrats know what is impeding infrastructure progress and there’s a lot of effort being put in to overcome these impediments, including a whole list of laws but not all of them have worked yet. However, we see these laws on the verge of actually coming into reality, but with probably a two to three-year horizon. The next one to two years will be building the foundations, resolving the issues properly, not quick fixes. Issues need to be resolved properly to enable us to go full steam ahead on vital investment. Not only domestic investment, but also international investment is essential to get PPP projects underway. The first impediment is, without doubt, land acquisition. There isn’t the compulsory purchase legislation in place that enables

construction interview

government to go and quickly acquire land without a big argument. There’s a plan now, as I understand, which is moving along nicely, to actually get a law out by December this year. The big issue is, and toll roads are a perfect example, it might be a 50km toll road, and there are often thousands of parcels of land, with complicated ownerships and arguments about who owns what. Brothers and sisters fighting with each other, everyone arguing about the price, and the government has its hands tied because at the moment it’s supposed to use a certain price that’s dictated by the taxable value, generally called the NJOP. However, the laws and processes are changing. IF: So going into 2011 there should be a much neater environment for companies to come in and deliver toll road projects? RH: Correct, and the new laws should benefit existing projects as well. Some have been awarded a number of years ago that haven’t got off the ground because the “ground” hasn’t been bought yet. So the new law will assist not only new projects that are in the book, but also existing projects that have stalled. The second thing they are getting fixed is the concession contract terms. Concession agreements in the past had tended to lump too much of the risk on the private sector. So much so, the banks wouldn’t lend projects the money. The word is, the government needs to make projects bankable. This is not just a wish list from investors wanting to get excessive returns but a very real requirement in the context of debt financing of large projects. Leighton as a project investor IF: What about Leighton as an equity investor? Are you? Do you see opportunities within the evolving marketplace where Leighton would be an equity investor in one of the PPP-type projects going forward? RH: We could but we’re not currently. Our core business is construction, engineering and mining. Our core business is not investing in projects but we have done so in the past; and we will continue in the future to look at participating, if required, and if it’s advantageous to take a small equity position in a PPP. That’s what’s happened in Australia; it’s happened in India and we could do it here as well. The reasons for that are that it further cements the relationship between the members of the concession team. We wouldn’t be just a straight contractor. We would be a member of the concession as well as the EPC contractor. However, in Indonesia there are actually laws and regulations that could potentially stymie such arrangements. It is UUJ-Law on Constructions Service No 18/1999 and its implementing regulation, PP No 29/2000, that hamstrings the concession member from doing the construction (without another tender). This, in theory,

calls for all projects, including components of PPP projects (such as design, construction, surveys, operations and maintenance) to have to go out to public tender, even though the concession group may want to do the work itself, or with preferred partners. This

The government needs to make projects bankable. This is not just a wish list from investors wanting to get excessive returns but a very real requirement would mean that consortiums couldn’t just go ahead and build and operate these large projects themselves, even though they are providing the finance and taking the design and construction risk. These laws and regulations really need to be fixed, as they cause uncertainty. IF: Finally, what needs to be done to get PPPs to work? RH: The biggest challenge is to put all the components together and then get the right type of bureaucracy to follow the same course to implement them. At the high level there is an intellectual understanding about the benefits of PPP and the need for a proper consultation process to get things moving. In Indonesia projects generally work if they have someone high up who is able to drive the bureaucracy, below him, keeping things on track. An example is Head of Presidential Work Unit UKP4, Kuntoro Mangkosubroto, and BKPM run by Minister Gita Wirjawan. We need people like them, who can get things done, so we can have some early winners. Then other projects will come. 223

construction interview

Colin J. Davies President Director


pt laing orourke indonesia

Colin Davies: I was born in the UK and I am a geologist by education. I started my career in South Africa many years ago with Anglo American, but in 1986 I first came to Indonesia with BP on the mineral side of their business. My early work was all about the discovery phase and the exploration for gold, diamonds and base metals, but now it is all about coal and its extraction rather than its discovery. I have been associated with the resources industry all my working life and most of it has been while based in Indonesia, where I have aggregated more than 22 years and loved every minute.

The bulk of the current coal mines is in Kalimantan, although that will ultimately shift to Sumatra in the next 20 years as the resources are depleted in Kalimantan

IF: How would you best describe your business in Indonesia? CD: Laing O’Rourke is a private UK construction and project development group, but locally we report to the Australian hub. The target market for us in Indonesia is the mining sector. That traditionally means coal, which would probably be 90 per cent of our focus, but there are good opportunities in gold and nickel in the foreseeable future. The bulk of the current coal mines is located in Kalimantan, although that will ultimately shift to Sumatra in the next 20 years as the resources are depleted in Kalimantan. Our early works have been involved in mine expansions to increase production capacity; the Bontang works (owned by Banpu) is a good example. Going forward mine infrastructure is a definite focus for Laing O’Rourke, as that is the key to Indonesia’s export growth in the coal market. We also provide rail solutions and port infrastructure for company mine sites. In the past nine months, we have been very


involved in bidding the railway and port solution for MEC Coal in East Kalimantan. The project is about US$1 billion of combined infrastructure, but it has yet to be awarded. supporting the mining sector IF: Can you tell us about the recent joint-venture partnership with Petrosea? CD: The joint venture with Petrosea involved the upgrading of the coal port facility at Bontang from 10.5 million tonnes to 18.5 million tonnes capacity. The Bontang facility belongs to PT Indominco Mandiri, which is part of the Banpu Group out of Thailand. The expansion was required to assist Banpu in exporting

construction interview

Career defining moment Well it just happened. In November 2009 I joined Laing O’Rourke after having spent 10 years in business development roles with various groups in Indonesia. When you take the position of President Director in a local company, that’s the ultimate step. Motivation Anything that is in my way; it doesn’t matter if it’s a legal hurdle, if it’s a physical object or something philosophical that you need to get beyond. So overcoming those things, I would say is my motivation and Indonesia certainly provides that challenge. Keeping up business momentum is also important to me. Anything that is standing still isn’t worth getting out of bed for.

coal from its new mines coming on stream, and the successful completion of this work positions Banpu well for their future coal production targets in East Kalimantan. One of the key elements of the job was the installation of a continuous barge un-loader. This was a 600-tonne machine assembled at a yard in Batam Island from components supplied by ThyssenKrupp, sourced from Europe and China, prior to it sailing 1,100 nautical miles on a barge for installation at site. The project was completed in early 2010 and has been performing well ever since.

Indonesia is blessed which huge reserves of geothermal energy and this will be a key energy source for the future. I don’t think we are likely to be builders of coal-fired power stations; it doesn’t really fit with our corporate philosophy, and it is very difficult to compete with low-cost Chinese solutions IF: Is this the type of technology that is being replicated in the different port facilities around Indonesia? CD: Yes, PT Kaltim Prima Coal (KPC) is going through a similar (but a much larger) process right now, and they are offering contracts for the duplication of their existing services at Tanjung Bara and more conveyor expansions and other related work for Melawan. The same could be said for PT Arutmin and PT

Biggest challenge faced Leaving Indonesia was my biggest challenge. It sounds a bit strange, but Indonesia has been very good to me so why go anywhere else you ask? Yet I did leave twice to see what else was out there in the big wide world. I went for a couple of years to South America, and I spent a couple of years in Canada. I was confident enough to go to other parts of the world to get some different work experience, but it turned out to be no better at the end of the day. A case of the grass appearing greener on the other side of the fence, so I came back home and today Indonesia is definitely my home. Most interesting project Being intimately involved in the start-up of Pearl Energy, an oil and gas company, which was born out of nothing really, but it turned out to be my most interesting project experience and probably one of my biggest headaches at the same time! Three ex-Gulf Indonesia guys came to see me where I worked at the time and wanted to start a business, which we thought probably wasn’t going to work at the time but they believed in their concept. It required an initial investment of about US$25 million, but three years later it was floated in Singapore and less than one year later was sold for US$250 million. Most Important Lesson in Business Relationships are everything in Indonesia; well anywhere in Asia for that matter. If you don’t have relationships with the people and clients that you are working with, you have nothing. I have been involved in jobs in my time, in different companies, where it has been purely commercial, and it simply hasn’t worked. Adaro, as all the major producers seek to increase their current capacity to meet demand. IF: Which sectors in Indonesia do you believe have the most potential for your company? CD: For us it has to be coal, but we are already positioning ourselves in the power sector as well. Indonesia is blessed which huge reserves of geothermal energy and this will be a key energy source for the future. I don’t think we are likely to be builders of coal-fired 225

construction interview

power stations; it doesn’t really fit with our corporate philosophy, and it is very difficult to compete with low-cost Chinese solutions. However, in five years time we would like to be in a position to build geothermal power stations on an engineering, procurement and construction (EPC) basis and not just as a pure constructor. the challenges for infrastructure development IF: How do you see your involvement as an equity investor in infrastructure developing, if at all? How do you see the state of infrastructure development in this country? CD: We are unlikely to be an equity investor; it is a conflict of interest for us and besides I am a firm believer that infrastructure assets in Indonesia should be owned by Indonesian providers. As we discussed earlier, I would like to be involved in building one or two such elements that would be a good start. It’s a huge challenge to get infrastructure across the line in this country, so it doesn’t matter where we start. However, I do wonder where the first step is going to be. Maybe it should be in roads because the country is crying out for roads. The volume of people and traffic – motorcycles for instance – is growing every year, with no real new roads being built. Other groups are looking at alternative solutions for infrastructure, like the much-talkedabout MRT (mass rapid transportation) system, the monorail and various other things that have started and stopped, but these are all Jakarta-centric. The simplest approach is to build more roads, and the sooner the better. They are the cheapest forms of transport infrastructure, and technically the least difficult to implement, even with the challenges of land acquisition.


In other cities in the world, where the land wasn’t easily available – and Tokyo is a good example – they just build roads on top of the existing roads, to create elevated highway systems which I must admit are not particularly attractive; but they do serve the objective of one road going in and one road going out of major business districts, which is probably what we should be looking at right now in Jakarta. Will we be there in all this building activity, if it comes about? I would like to think so. However, from my experience over the five years I’ve spent in the Indonesian contracting business, foreign contractors are looked upon as being too expensive.

The simplest approach is to build more roads, and the sooner the better. They are the cheapest forms of transport infrastructure, and technically the least difficult to implement, even with the challenges of land acquisition We may provide the best technical solutions and the smartest designs, but it does not come cheap and Indonesia has yet to see the benefit of quality over pure cost. When that day comes, Indonesia’s infrastructure problems will be solved.

construction interview

Daniel Lavalle President Director



Daniel Lavalle: I am Belgian, and graduated from the Faculté Polytechnique de Mons, one of the country’s oldest engineering universities, in 1973, the same year that I got married. A few months after graduation, I started working for a Belgian cement company as a project engineer, plant engineer and finally plant director. I had my first taste of an overseas project with them. It was a three-year stint in Algeria. After Algeria, I moved back to Belgium to work as the company’s product manager, and then as CEO of the Belgian cement operation in the early 1980s until we were acquired by HeidelbergCement Group. I went on in that same role with them for a few years until HeidelbergCement sent me to Indonesia. In 2005, I took over our Bangladesh and Brunei operations as well. Then we bought out Hanson in Malaysia, and I took over the Malaysian portfolio too. I have been in the cement business forever! IF: How would you best describe Indocement’s Indonesian business today? DL: Indocement is the second largest cement manufacturer in Indonesia, a publicly listed company, and a star on the stock exchange. We have integrated cement operations with a total production capacity of 18.6 million tonnes, and our main market is Java. We have two out of three plants there because Java consumption is 55 per cent of our national production. We are controlled by HeidelbergCement, which is one of the largest cement outfits worldwide. HeidelbergCement has a 51 per cent stake. The second biggest shareholder is PT Mekar Perkasa, which was the previous owner of the company, and the rest is publicly traded. We are leaders in cement here. We were the first company in Indonesia to complete a clean development mechanism (CDM) project, and we have slightly over 5,900 employees today.

We have a cement business, and we are also vertically integrated. We manage companies dealing with ready-mix, we have aggregate companies, and we are in transportation, because logistics are a huge challenge here. After a decade, we are in a very strong financial condition. When I arrived we were US$1 billion in debt but we have repaid that. The tendency is to increase domestic sales. We are reducing our exports, and are really concentrating on the domestic market. We have three production locations. We have the Citeureup Factory, Bogor, about 40 kilometres south of Jakarta. There are

The tendency is to increase domestic sales. We are reducing our exports, and are really concentrating on the domestic market nine production lines there, and it is one of the biggest cement plants in the world. It has a capacity of 11.9 million tonnes a year. There is the Palimanan Factory, Cirebon, which is close to Semarang in Java. That plant churns out 4.1 million tonnes. Also, we have a third factory in Tarjun, South Kalimantan, which has a capacity of 2.6 million tonnes. We are also going to build cement mills at the Citeureup Factory, which will give us another 2.5 million tonnes. For distribution, we have terminals in Surabaya, Tanjung Priok, Semarang and Lombok. An expanding market IF: There is a lot of mining exploration happening in South and East Kalimantan. Do you envisage Kalimantan will 227

construction interview

become a bigger piece of your operational puzzle?

IF: How are you looking to expand capacity in the future?

Career defining moment When I went to Algeria. It was the first time I gave a much bigger weight to my professional life. I was successful in what I was doing before, but the company felt I was not prioritising work, which was true to some extent. It was a decisive moment for my career because it convinced the group’s hierarchy that they could give me much greater responsibilities.

DL: This year we have about US$75-80 million for that. A big part of that will be used on the cement mill at Palimanan, and then two new cement mills in Citeureup. We are building where we have the plants and where we are reducing clinker content. We used to export the clinker, but the domestic market is growing, so we will keep it for here.

Motivation When I first started out, I wanted to build huge projects but I ended up producing cement for the guys who do build them. The motivation is to see the achievements that great architects and great engineers make with this product. I am very proud to be a part of that.

The second thing we will do is develop our ready mix operation. We have a plan to install a few new plants, buy new loaders, and 50 mixer trucks. As Jakarta is a very different market from the rest of Indonesia we have large bulk sell, with a lot of ready mix operations. Also, we are expecting some infrastructure projects such as roads and highways. For these you need to concrete a lot of surface in a short period of time. There is some really big stuff being built here in Jakarta.

Biggest challenge faced In Belgium, I was put in charge of white cement production. We had a white cement plant, and we weren’t doing well financially. The group’s business strategists at that time were saying we should close it down or sell it. I was not of that opinion. I was able to revert to a profitable operation and soon we got back into black figures. The plant is still running some 25 years later. I was also at the turning point of a policy change in the fuels we were using, a shift from fossil fuels to waste-based fuels, which is something that took place in the 1980s and 1990s in Europe. I was very proud of that as well.

DL: The plant there has a small local market. It was one of the last plants to come online, so it was already served by Tonasa, which has a great distribution network there. Right now we are looking to improve our own distribution network so we can compete with them.

We are also investing in our logistics, because to go from one island to another you need ships, and to distribute you need warehousing. We expect the market to grow by 5 per cent a year. We plan to build new kilns and currently we are studying where we are going to put them. If you have GDP and population growth, you also get increased demand for cement. Infrastructure and decentralisation IF: Is infrastructure the major bottleneck for your operations? DL: Yes, for sure. Sometimes we get complaints that we are not distributing cement. The real situation is that the harbours are congested. It is a massive problem. Electricity is another major issue; if you want to build a new kiln line you cannot get electricity from PLN because it will offer a stratospheric price, because they don’t have the capacity. The infrastructure is really limiting the expansion of the country. IF: This brings us on to decentralisation. How is it affecting your business? DL: Sales of cement since we came here in 2001 have changed. Java sales have gone from 62.8 per cent of sales in 2001, when the decentralisation law was passed, to 55 per cent in 2009. It is not only decentralisation but also an increase in mining and oil activities in places like Sumatra and Kalimantan. So less money is spent centrally, and more is spent in other regions. Obviously something has changed since the decentralisation law was introduced. I do not really believe the trend will go that much further. Where


Most interesting project I would say the one we are working on now in Indonesia. We are in an expansion phase, and there are so many things we have to get done. We have problems like a lack of electricity. So it really is exciting making something new here. Most important lesson in business Things never go as badly as the pessimists say they will. The opposite is true, too – things never go as well as the optimists say. That’s what I have learned. is the consumption going, where do we build the plants? The most important economic activity is still concentrated in Java. Our group believes that the big centres are going to develop more than the rural regions. More generally though, I think the country would be much better off if it was spending on developing infrastructure. There is a huge need for that, and as soon as they do this, the guys here are entrepreneurial enough to develop everything else. A big issue in Indonesia is electricity. We have to produce 65 per cent of our own electricity at the Citeureup Factory. The Cirebon Factory was completely dependant on the grid, but we had to create our own facilities because of a lack of a reliable supply. We have to rent generators. In some areas, such as Tarjun for example, there is no other choice but to build a power plant, because there is no electricity at all. This situation should change.

Banking & Financial Services

banking & financial services overview

Opportunities in banking and financial services are abundant A sector poised for stellar growth, as markets and underlying factors are robust and look very positive

Strong growth and economic resilience prompted both Moody’s and S&P to raise Indonesia’s sovereign ratings

The first decade of the 21st century has seen Indonesia’s economy experiencing strong growth that is expected to continue over the next three to five years. In tandem with this GDP growth, Indonesia has witnessed significant increases in foreign direct investment (FDI), growth in equity capital markets and gains in the Indonesian currency. This leaves a banking and financial services (BFS) sector with the potential to achieve strong expansionary growth during this period; a view that is also held by the Jakarta-based business research and consulting company, Frost & Sullivan. So let us first review these points before outlining the current trends and expectations for BFS in Indonesia. Indonesia has a GDP that is primarily driven by domestic consumption. At more than 70 per cent of GDP, strong growth in domestic consumption driven by the rising middle class in the country helped propel the GDP at a Compound Annual Growth Rate (CAGR) of nearly 18 per cent from 2001 to 2008. This feature helped Indonesia weather the recent financial crisis in 2008/2009 and showcased its resilience. This strong growth and demonstrated resilience prompted both the key rating agencies ‑ Moody’s and S&P – to raise Indonesia’s sovereign ratings to BA2 and BB respectively in 2010. Of late, there is an emerging trend of gross capital formation sharing an increasingly larger portion of GDP by percentage, which reflects the increased activity in infrastructure development. Such development is promoted aggressively by the government through a comprehensive private public partnership (PPP) framework that has included the involvement of land funds for land 231

banking & financial services overview

acquisition, government guarantee funds for cost recovery in event of political risk, and capital markets and private lenders to the construction process of core infrastructure development - roads, telecommunications facilities and energy grids, among others. From 2004 to 2008, FDI in Indonesia recorded an impressive CAGR of over 40 per cent. The large surge in FDI not only helped Indonesia achieve investment grade rating (providing a stable source of long term investment and low borrowing costs), but also provided new technology, management skills, and inroads into global markets and supply chains. As compared with major indices such as SSE (China), STI (Singapore) and KLSE (Malaysia), the Indonesian equity markets had made the strongest rebound from the trough seen in the last quarter of 2008. Such outstanding equity market performance reflected positive market sentiments and the resilience of the underlying economy. On the flipside, with a PE ratio of more than 30, the JKSE index risks developing a bubble with the influx of foreign “hot money”. The Indonesian rupiah has also performed well by achieving nearly 30 per cent appreciation in less than two years. The strong performance is partly driven by a large FDI influx during the same period. Being a net importer of crude oil by 2005, Indonesia succeeded in limiting inflation through its Trends in GDP and respective components (2001-2008) Net exports of goods and services (US$ bn) General government final consumption expenditure (US$ bn) Gross capital formation (US$ bn) Final consumption expenditure (US$ bn) Nominal GDP (US$ bn) 600

strengthening currency. The central bank expects inflation to remain at 4-6 per cent in 2010 and the strength of the rupiah indirectly helped the central bank to maintain the benchmark interest rates at 6.5 per cent – thus giving the central bank more freedom to focus on economic growth in this low interest rates environment. Together, the joint impact of growth of GDP, inward FDI, gains in equity capital markets and currency are making BFS a strong growth engine behind the economy. The BFS market From 2001 to 2008, Indonesia’s domestic credit has grown more than 11 per cent annually. However, the total domestic credit, as a percentage of GDP, has been decreasing from nearly 60 per cent in 2001 to about 30 per cent in 2008. As compared with the United States’ Debt to GDP ratio of over 90 per cent, Indonesia’s is considered extremely low. The failure of many banks during the Asian crisis (1997-98) due to over-investment has created a conservative mindset with lenders. Commercial banks are now keener to invest in bonds and central bank bills rather than lending. As a result, the banking sector in Indonesia is still considered small with low debt penetration. However, it is emerging as a sweet spot for local and foreign players due to a high net interest margin and strong growing demand for multi-finance. The net interest margin – which is the ratio of difference between the amounts paid to depositors Foreign direct investment, net inflows (US$ m) 12000 10000


8000 6000








-2000 -4000

0 2001


2008 Source: World Bank










Source: World Bank

banking & financial services overview

While high net interest margins – as a result of high lending rates at approximately 12 per cent – are limiting commercial lending growth, especially on working capital and investment loans, consumer loans growth tends to be inelastic to interest rates, demonstrated by its relatively strong rebound in 2009. At present, commercial lending has been stagnating due to a declining demand for credit from industries as a consequence of high lending rates, threatening de-industrialisation. In order to encourage lending, Bank Indonesia (BI) increased Indonesian banks’ statutory reserve requirements on loan-to-deposit ratios (LDR) to above 75 per cent-80 per cent in April 2010 and cut rates by 300 basis points from late 2008 to August 2009.

Banks (80%) Insurance (6%) Pension funds (4%) Finance companies (5%) Securities firms (1%) Mutual funds (2%) Pawnshops, venture capital (2%)

Source: BAPEBAM and World Bank

Performance of the Indonesian rupiah against the US dollar 13000 12500 12000 11500 11000 10500 10000 9500 9000 8500 8000 01/07/2010

Currently, banks represent 80 per cent of the overall financial sector in terms of assets and are still the major source of financing for most borrowers. Equity and debt capital markets occupy less than 10 per cent, insurance is at approximately 6 per cent with almost no venture capital.

Trends in loan growth

At present, Indonesian banks are considered oligopolistic and dominate the financial sector. The credit concentration ratio for the 14 largest banks in Indonesia in 2009 was 71 per cent, indicating the industry is a medium concentration oligopoly. The top 10 banks control nearly two thirds of total deposits, with the remainder shared by over 100 others. These top banks heavily control prices and set rates and norms for the Indonesian banking sector. Such industry concentration is in line with regional trends, with Malaysia and Thailand having nearly 50 per cent concentration ratio for the four largest banks in these countries.


The boom in consumer lending in the form of multi-finance has attracted much participation by local and foreign players


and the amounts clients are charged to total interest earning assets – is 6 per cent on average in Indonesia, which is high when compared with around 2-4 per cent in the developed economies in North America and Europe. Multi-finance, which largely consists of leasing, consumer finance such as unsecured personal loans and unsecured credit card loans, is surging with the rising disposable income of the Indonesian population.

In July 2005, Bank Indonesia issued a regulation on minimum capital requirements that called for all commercial banks to have minimum tier 1 capital of Rp100 billion by the end of 2010. Banks failing to comply will be subjected to possible revocation of licences. Such a stance by the central bank indirectly drives banks to merge and consolidate to strengthen their capital base. Looking forward, such industry consolidation will continue to pare the number of market players to reduce excess capacity, which is in line with a worldwide trend in banking consolidation.


Source: Yahoofinance














500 29/07/08





















DJIA (RHS axis)

In contrast, the boom in consumer lending in the form of multi-finance has attracted much participation by local and foreign players. Unsecured credit card loans are aggressively marketed over the phone, via SMS and corporate partnerships with malls, cinemas, airlines and even electrical companies. (Some unsecured personal loans of up to US$25,000 are offered by SMS.) Consumer finance on white goods such as TV and washing machines, as well as cars and motorcycles, is mushrooming with motorcycle finance emerging as a bright spot. Leasing, which includes heavy equipment financing for tractors and loaders, is also growing well alongside growth in the infrastructure sector.


SSE (RHS axis)

STI (LHS axis)


KLSE (LHS axis)


JKSE (LHS axis)


Equity market performance compared to other major regional indices

Source: 233

banking & financial services overview

accounting for more than 50 per cent of assets in each respective industry segment.

Current status of BFS Domestic credit provided by banking sector (US$ bn) Domestic credit provided by banking sector (% of GDP)

In 2008, Bapepam-LK, the Indonesian capital market and non-bank financial institution regulator, imposed new rules requiring minimum equity for insurance companies to be raised to Rp100 billion by 2014. Such a stance, similar to that in the banking sector, is likely to drive industry consolidation, which is in line with worldwide trends.









Source: World Bank

The Indonesian Government currently remains the largest shareholder of the banking industry, controlling approximately 25 per cent of the system assets. A large number of state-owned banks were created through government bailouts during the 1998 financial crisis. Of late, the government has been relatively successful in privatising banks after completing the recapitalisation exercise. Privatisation of banks not only creates a more competitive banking landscape, but also promotes governance, transfers of technology and enhances risk management capabilities. Apart from the banking sector, the non-banking finance sector, which includes capital markets and insurance businesses, is also set to undergo significant transformation in the future. Currently, with equity market capitalisation less than 40 per cent of GDP and a debt market with total bonds outstanding against GDP of less than 15 per cent, Indonesia has the smallest capital market in the region. As such, the Indonesian Government seeks to promote growth and sustainability in the capital markets – partly through technical assistance from the Asian Development Bank – by enhancing market supervision, and improving regulatory resources and capacity.

In the insurance sector, more than 50 life insurance companies and 100 general insurance companies made up the highly fragmented industry, with the top five general and life insurance companies


This will amount to US$9.5 billion a year, totalling at US$47 billion to form 31 per cent of total infrastructure investment needs in the country. As part of the PPP framework, the remaining 69 per cent will come from private participation at around US$20 billion a year to total US$103 billion by 2014. Private participation can come from both banking and market financing sources. Banking finance sources include intermediaries like banks, private equity funds and syndicated finance, such as Shariah compliant debt based Murabahah, Istisna and Ijarah finance. Market financing sources could come in the form of Sukuks, which are project-based bonds compliant with Islamic law, to raise non-interest bearing funds from the market. Investment opportunities within infrastructure development could come in the form of power plants in energy sectors, trans-Java and Sumatra toll roads in the transport sector, fibre optic networks in the telecom sector and water supplies from the public sector. Emerging growth opportunities in BFS A resilient economy, robust domestic consumption

Market share by institution type within the financial sector (% AUM) Lending rate (RHS) Investment loan growth (LHS) Working capital loan growth (LHS) Consumer loan growth (LHS) 50


















As a result, the number of corporate bond IPOs have seen tremendous growth of over 150 per cent CAGR from 2006 to 2009. However, stock IPOs and right issues are currently still limited. The equity market is still burdened with frequent delisting of companies due to operating losses, failure of financial report submission and misreporting by public companies, with the Bakrie Group being the latest case in July 2010, undermining investor confidence.

In the infrastructure sector, with the government’s commitment to transform the economy from a consumption-driven one to an investment-driven model over the next five years, infrastructure budgets are expected to increase from 2011 to 2014 and stabilise at about 24 per cent of national budget.

Percent YOY

200 180 160 140 120 100 80 60 40 20 0


Source: World Bank, Bank of Indonesia

Indonesian BFS present a sweet spot for investors willing to take the risk to secure a piece of this fast growing pie

banking & financial services overview

Debt versus equity market issuance (2005-2009) Right issue (LHS) # of right issues (RHS)

Stock IPO (LHS) # of stock IPOs (RHS)

Corp bond IPO (LHS) # of bond IPOs (RHS)

Opportunity for private sector as percentage of total investment

Projected contributions of government and the private sector to investment requirement

Energy (37%) Public works (29%) Transport (26%) Telecom (8%)








IDR tr

Government budget (US$ bn)

Private participation (US$ bn)

0 0










Source: BAPEBAM and World Bank

and improvement in sovereign ratings will post growth opportunities for businesses in Indonesia, especially in BFS. The consumer financing segment is set to surge as a result of strong consumption needs of a rising Indonesian middle class. A low debt to GDP ratio, high net interest margin and strong loan demand coupled with low interest rates (driven by low inflation) is a potent recipe for strong multifinance loan growth moving forward. Furthermore, with lower borrowing costs driven by an upgrading of sovereign rating, the scale of infrastructure development is set to sustain when funds for project financing are more readily available than before. The influx of funds through PPP to meet demand for infrastructure development needs has presented vast opportunities for BFS, especially in areas such as land revolving funds, infrastructure funds and private placements.

Source: Five year National development plan 2010-2014, National Development Planning Agency (Bappenas)

Source: BAPEBAM and World Bank

activities such as trading, private placements and private equity. The increase in activities by both buy and sell sides shall in turn drive demand for non-banking financial services such as brokerages, underwriters, fund management, wealth management and consulting. In conclusion, Indonesian BFS holds much promise for both foreign and domestic banking and finance sector players, and presents a sweet spot for the investor who is willing to take the risk to secure a piece of this fast growing pie – regardless of whether it is in consumer financing, commercial loans, capital markets or insurance.

The robust FDI records and potential positive impact on the economy may present foreign banks with rare opportunities to make inroads into this market and in addition provide local banks golden opportunities to expand to other cities within Indonesia. For example, one of the leading regional foreign banks, CIMB from Malaysia, has made successful inroads in segments such as deal making, and expects Indonesia to contribute a substantial portion of their group earnings in three to five years. Current strong equity performance, in addition to providing investors with capital gains, has also presented commercial companies ample alternative financing sources other than turning to banks for loans. Taking advantage of a strong equity market, they can raise funds through market operations such as IPOs, second share placements or rights issues. As for institutional and retail investors, such strong market performance and a good market outlook will set the stage for more intensity in market-based 235

banking & financial services interview

Rakesh Bhatia Chief Executive Officer


hsbc indonesia

Rakesh Bhatia: I started with HSBC about 23 years ago working as an executive of HSBC India, and then in 1996 I was offered the opportunity to become an international manager.

IF: On the infrastructure side, most of your experience is in telecoms and energy. Expand more on your activities and how you see telecoms and energy sectors developing.

After taking the job, I have travelled the world. London, Hong Kong, Singapore, Jakarta, back to Hong Kong and then back to Jakarta with a wide array of positions and responsibilities. From corporate finance and advisory to loans indications and relationships management, there has been a lot of variety.

RB: PLN from the energy sector and Indosat in telecoms are two companies we have worked with. We have also worked with Krakatau Steel. Wherever we think we can add value, we are working in those sectors. We will probably keep expanding like this.

IF: How would you describe HSBC’s business in Indonesia?

If you look at Pertamina for instance, which is the largest oil company, we have done a few financing deals for them; they are very public deals. These have been some of the largest deals out of Indonesia. They have been in the range of a billion dollars each. It is no secret that that is where the most investment is coming in right now – into energy and power.

RB: We do corporate banking, with large international companies; we do commercial banking, which is from SMEs to large size companies; and we also cover retail and sell propositions. We have trade cash management, custody services and a very strong global market business, which services project finance, corporate finance and debt financing. It’s a very balanced business.

The power sector is liberalising. The tariffs have been increased from July. I think that will lead more to private investment and I think increasingly we are seeing clients who are in the private sector power and transmission generation business, looking for financing transactions. There have been quite a few public deals that we have done recently.

Economy, infrastructure and telecoms IF: What would you say are the main dangers to Indonesia’s economy over the short to medium term?

Telecoms is one area people are looking at as well. So it is a focus area for most banks and we are seeing a lot of financing activity built around that.

RB: The strongest point about Indonesia’s economy is that monetary policies have been sensible and stable for the past five to seven years. So they have kept it reasonably liquid, and at the same time they have managed a very tight fiscal ship. I think that has created a lot of strength and is why you don’t see “yo-yo” effects.

Some of the problems are in areas such as roads, bridges and ports, where the legal aspects need to get clarified. Once these are resolved, there will be more stakeholder involvement. Once you know with whom you are dealing, you know how you can support them and how the project can be completed.

The dangers I see are in the young democracy. I think that is definitely a big issue, in terms of how the political pressures are resolved along with developing the economic growth potential the country has; and how they can make laws which are conducive to long-term infrastructure investment, such as land acquisition law.

IF: What would you need to iron out some of the discrepancies of fragmentation in the decision and policy process?

Recently in Jakarta I was deputy CEO and I am now CEO. I was also a professor in the bank’s college. So it’s been very different in terms of geography and very different in terms of the roles.


RB: I think that is where the government has got its work cut out. We met some senior people in government recently, and they

banking & financial services interview

were saying they are working hard to get some clarity in terms of land acquisition. Until you do that you can’t really have toll roads. These principles need to be clarified. Although you have to appreciate that there is a legal system that is challenging in itself, then there are laws that are ambiguous, and now there is defused authority between Jakarta and the provinces. So if you have got these four levels of uncertainty, you have got to establish clarity on some or most of them. I think there are people in the government trying very hard to resolve these issues. However, Indonesia is not alone; most project financing can be very challenging, because it is long term and you need certainty in terms of legal rights. Project financing IF: Do you think it is hard to incentivise the banking sector to take bigger steps into infrastructure or the project finance market? RB: Even before the crisis, the thinking has been very short-term. If you want to do long-term project financing, well that’s really difficult. We need the ability to raise long-term funds. That is one of the bigger challenges of banking here. IF: There is a big, profitable consumer sector. Is it difficult to wean banks off this and onto longer term financing? RB: I have seen two successful Retail Sukuk bonds. They are fiveyear instruments and were hugely successful. If you are willing to pay the yield which the people are expecting, of course there is a little bit of crowding out, but you can raise money for the right kind of investment. IF: Over the past six to 12 months the government has set up the Guarantee Fund and the Infrastructure Fund. Indonesia can do five and a half per cent GDP growth just by treading water. The real bottleneck is infrastructure. Do you sense a change in the mentality to really get something done on the regulatory side? RB: They are definitely very interested. There is no question about that. What I will want to see is whether that is a commitment by all concerned, or whether is it just a commitment by the government. That is why politics will also influence how the economy will grow. I think there is definite commitment from all the people I have met to try and build something. However, they also realise there is a road map. Maybe the actual infrastructure financing is still some distance away.

Career defining moment I would say that becoming an international manager was the biggest fork in the road. When you are an international resource, truly the world is your oyster; you can go anywhere, into any kind of job and that makes a big difference to the way you get oriented. Motivation Whatever you do to get more profits and market share. Anywhere we can go and grow our business profitably is motivating. However, often the things that you do today will take time to be translated to market share later. So that’s a challenge in terms of doing things that are important and critical long term, rather than necessarily what will get you excited today. Biggest challenge faced I think the Bank Ekonomi acquisition was the biggest challenge. We have branches in five major cities, and Bank Ekonomi has 27 city-based branches. So the acquisition gave us significantly increased coverage. We cater to upper and niche segments, whereas Bank Ekonomi caters to the core SME segments, real small and medium-sized businesses, and we wanted exposure to the SME segment. It was a very good complement in terms of our business model. Those were the two primary objectives for the acquisition, plus they have got qualified banking staff that are very well trained; it’s a very conservatively run bank. The quality of their book was also good and it was a bank where we could get substantial ownership. We got almost 89 per cent, which is not easy. A listed bank with 89 per cent ownership, a good governance record and a good business model was difficult to say “no” too. Most important lesson in business I think the most important lesson is trust. If your customers learn to trust you and you learn to trust them. It is the same thing with your colleagues. Customers are not too bothered about the relatively commoditised product set. However, if you can draw up trust in the relationship you can really have whatever you want from the customer and the customer can have whatever they want from you.

IF: How do you see the landscape that your sectors are involved in changing down the line, particularly in relation to infrastructure development here?

I think HSBC excels in that; all along we have had just to pick up the phone and say this is what we need, rather than have the need a formal presentation. It is the most important lesson.

RB: We are expanding rapidly. On project financing, we will continue to be involved in those segments. Second is corporate, which has got the capacity both financially and operationally to go into bigger projects. We will be supporting them, whether through international financing, domestic financing or direct lending.

Whichever segment we have competency in, we will serve, and deploy more capital and more resources. Wherever we can support the government, we will do it. I hope we can bring a lot of value to the country. 237

banking & financial services interview

Tom Aaker Chief Executive Officer


standard chartered bank indonesia

Tom Aaker: I joined Standard Chartered 17 years ago and I have worked in six different regions of the world. I was working in investment banking in Hong Kong in the 1990s and then went to the London head office and worked for four years as Group Corporate Treasurer. From there I went to Zambia as the CEO for nearly four years; then on to Qatar as the CEO.

growing fast, and performing very well. Our second business is our consumer bank, which offers retail products and services to individuals and SMEs.

I spent the last few years in Qatar, which is one of the richest countries in the world. That was interesting after coming from Zambia, which is one of the poorest.

TA: We are extremely optimistic about the future here. GDP growth will continue to be high. We forecast it at 6.2 per cent this year. It is a big economy, with diversification, political stability, democracy, a stable currency and low inflation. It stacks up as a very positive picture right now.

I was thrilled to accept the CEO role in Indonesia because it is such a high growth, high priority country for Standard Chartered, along with India, China and South Korea. The opportunity for me

We are extremely optimistic about the future here. GDP growth will continue to be high to come here was too good to pass up. It has a booming economy with lots of potential and our Group is investing here at an impressive rate. IF: How would you describe Standard Chartered’s business in Indonesia? TA: We have been here for 147 years, so our franchise in this country goes back a long time. Today, our operation is made up of two businesses. There is the wholesale bank, which is the bigger business. Our wholesale bank serves large local companies, multinationals and financial institutions. We bring products and service levels into Indonesia that our competitors do not offer, such as project finance, structured finance and corporate finance advisory. Our wholesale bank is


IF: Could you describe Indonesia’s economy today and what you perceive to be the biggest challenges to it down the line?

Probably the biggest limiter is the lack of infrastructure. Whether it is roads and traffic, the lack of ports and the cost of transport, the lack of adequate infrastructure is likely to limit Indonesia’s growth. For example, I believe that Indonesia has more seafront than any other country in the world, but it only has two major ports. Then you look at Vietnam, which is in the process of building several new ports. The comparison just does not make sense. Indonesia should have dozens of new ports, toll roads and airports. The fact that it does not means that transporting people and goods from one end of the country to the other is very expensive and inefficient. However, let’s look at that as Indonesia’s great untapped opportunity - toll-roads, ports, whatever infrastructure that can facilitate movement of people or products. To date, that has not developed as quickly as it could have done, because of all the land usage issues involved. IF: How big a deal is the land acquisition issue? TA: If it was ever lifted, fixed or cleared, I have no doubt the improvement to infrastructure will have a big impact.

banking & financial services interview

Standard Chartered Bank is eager to get involved and to share our expertise in financing and completing the many potential infrastructure projects. IF: How do you see PPP growing in Indonesia for the banking sector? TA: PPPs are big opportunities for banks, especially international banks like ours which have experience in these types of projects in other countries in Asia. One advantage that Indonesia has compared

Indonesia should have dozens of new ports, toll roads and airports. The fact that it does not means that transporting people and goods is very expensive and inefficient with other countries is that it has a strong and stable currency – with much of this type of financing currency is a big issue. By implementing PPP, Indonesia will have a stronger ability to mobilise additional investment funds and at the same time improve operational efficiencies and create employment. IF: Over the past six months the government has set up the Infrastructure Guarantee Fund. How do you think it will affect investment stability? TA: Twelve years ago, this country was in revolution, it was coming out of a dictatorship model and embracing democracy. The economy was in a shambles. However, 12 years later

One advantage that Indonesia has compared with other countries is that it has a strong and stable currency, and with much of infrastructure financing currency is a big issue Indonesia is one of the brightest spots in the world in terms of economic opportunities. It is a member of G20. This progress is really remarkable – to move that far in that period of time. When people say the process is slow and there is not enough getting through this channel, relatively speaking it is far improved from where it was just a short time ago. IF: What are some of the bright spots for infrastructure development and investment here? TA: A real plus point now is political stability. The President was re-elected for a second term last year, which is good for

Career-defining moment It was in 2004 when I was asked to go to Zambia as country CEO. I had expressed interest to senior management earlier in my career that I wanted to be a country CEO. I did not really know much about Africa in general, or Zambia in particular. I was pretty comfortable in London, and to go off to run a business in a real emerging market was a defining moment for me. Motivation The people I work with. The culture in our bank is pretty special. There is a very consistent set of values that run through all our people. I look forward to coming in each morning because I get to represent a bank that I am proud of, in a market with a lot of opportunity, working side-byside with some really great people. Biggest challenge faced That was when my wife and I left the US to go to Hong Kong 17 years ago. We had never lived overseas; we were typical Americans who were quite local-focused. I had a good career with another organisation when Standard Chartered approached me through a search firm and said they wanted to hire me to go to Hong Kong. That too was a real defining moment, and it set me up for some exciting opportunities during the years that followed. Most interesting project The Three Gorges Dam in China in 1996. We were arranging the financing of turbines and generators. It was a massive project. I went to the dam site in Yichang, China a couple of times to negotiate with the Chinese on the terms of the financing, and it was right at the site of the dam. So to see the excavation of what they were doing, and to negotiate the purchase of what was going in there, in a China that was still emerging, was fascinating. Most important business lesson To be respectful and to adapt to the culture you are in. I have seen so many foreign professionals who go to a country and try to impose their way of doing business on the local community, and that just does not work. You need to adapt to the local way of doing things. You need to be respectful of their culture and the way in which they operate, and it is much easier to get things done when you mould yourself to the local scene, rather than rigidly expecting everyone to act like you. infrastructure development, which always has a long lead time. Another bright spot is the appetite among investors here and abroad to finance infrastructure development in Indonesia. In many countries, it is financing which is the biggest challenge to building out the infrastructure. In Indonesia, the financing is available, and will be even more so when Indonesia achieves investment-grade status in the next year or two. 239

banking & financial services interview

Arviyan Arifin President Director


bank muamalat

Arviyan Arifin: I’m an engineer. After graduating from university, I hooked up with Astra, an automotive company. Then I left them for Bank Duta, which at that time was one of the biggest private banks in Indonesia. It was owned by ex-President Soeharto but has obviously been liquidated since then. From there I moved to Bank Muamalat in 1991.

IF: Are you seeing more investors coming into Indonesia at the moment?

At that time nobody knew very much about Islamic banking, so I was sent to Kuala Lumpur and the Middle East for training. At the start it was very difficult to get a foothold in Islamic banking because people didn’t know how a bank would operate without

Our foreign investors always ask about political stability and regulations within our sector. I think political stability and regulations are important for any kind of business, and once they are improved more investment will follow.

We have financed more than three trillion rupiah (US$336 million) in power plants, including contractors, vendors and suppliers. The second biggest area we work in is telecommunications

AA: I think for foreign investors, political stability is their most pressing concern. The second would be regulation. The third is law enforcement. All of these need to be strengthened here.

IF: About half of your financing portfolio is in infrastructure. Can you give us a better description of the financing the bank is involved in? In Islamic banking we call it financing, in conventional banks they call it lending. We had set up some target business along infrastructure lines, and today our portfolio is more than 50 per cent infrastructure based. We focus on infrastructure because Indonesia has such a great need for it.

“interest”. However, we set up and developed a system, and won a licence from government to open a banking division. In 1999, I was promoted to business director. From 2009 on, I have been president director.

As an investment, it is very safe, and very steady. The majority of our clients are power plants. We have financed more than three trillion rupiah (US$336 million) in power plants, including contractors, vendors and suppliers.

IF: What challenges is Islamic banking facing in Indonesia today?

The second biggest area we work in is telecommunications. This is a huge industry going forward for Indonesia. It is a big country and the systems are terrible, so the opportunities are good.

AA: The central bank is working hard but we have a scattered population set across thousands of islands. We also need capital, because banking is obviously equity driven. If we want to grow, we must increase capital. We are fortunate that we are 72 per cent backed by investors from the Middle East, but the other banks struggle to drum up the capital needed to compete in infrastructure financing.


islamic banking products IF: Tell us more about the use of Sukuks in infrastructure finance? AA: Infrastructure needs long-term financing. You can finance it through Islamic products or bonds. Our sources are generally shortterm. However, we have the opportunity to get long-term funding

banking & financial services interview

through the Sukuk. Basically, regulations on Sukuk were passed only two years ago. If Indonesian companies or banks issued Sukuks before they couldn’t sell them, as there weren’t any regulations on the taxes for them. However, after the House of Representatives approved Sukuk regulations it has become a very big market. Many companies offer subscriptions because the transactions comply with Islamic financing.

Infrastructure needs long-term financing. Our sources are generally short-term. However, we have the opportunity to get long-term funding through the Sukuk IF: Out of the entire infrastructure sector, which sector will receive the most growth? AA: I think energy, IT and telecommunication infrastructure will grow quickest, followed by oil and gas. We have oil, gas, coal, mining and gold. We basically have everything, but it was never well managed. I think the government now knows how to manage the country’s resources in a more positive way. IF: Do you see a big future for the bank in issuing Sukuks internationally? AA: Yes. We have two reasons for this. First, the cost is cheaper than the domestic market. The interest rate or pricing of Sukuk in the domestic market is ten per cent, but in the international market, it’s maybe just three to five per cent. We also need US dollars to finance export companies.

Career-defining moment Definitely, developing Islamic banking in Indonesia. We were very careful in its development because it is based on our religion, and we wanted to do it right. Still, it was difficult to convince people of the benefits of it even though the majority of Indonesians are Muslim. However, over the past decade we have seen rapid growth of the sector. Today, we have ten fully-fledged Islamic banks and more than 25 Islamic windows in the constitutional bank. It is my proudest contribution to the industry. I was handed the opportunity to develop it and convince the public, government and the regulators that it was a good idea. In 20 years the growth will be amazing. However, I’m still not happy because our market share is only 2.6 per cent. However, the government is more supportive of the regulations and their commitment to developing it is far more aggressive than it was. Motivation My father told me that working in conventional finance was in conflict with our beliefs. At that time I worked in Bank Duta and my father had already reminded me of my work as a commissioner. Being able to do something in finance that is also in line with my religion is highly motivating. Most important lesson in business If I finance a project, I am extremely happy if it finished and done and dusted. If it is financed and the debt is repaid, then it shows you have done something civic-minded while still engaging in business. So the most important lesson would be getting that balance between profit and integrity.

IF: Where do you see Bank Muamalat in five to 10 years? AA: Islamic banking accounts for two and a half per cent of the banking market. We have the biggest market share out of Islamic bankers here. Our target market within five years is to be the biggest Islamic bank in the region. We have targeted our assets to be US$80 billion.

PPPs are very important right now. The government is limited in its capacity to finance all the projects we need. They need these partnerships with private companies banks and PPPs IF: The government is very keen on developing PPPs. How do you see the private sector helping to develop them? What could that mean for the banks? AA: PPPs are very important right now. The government is limited in its capacity to finance all the projects we need. They need these

partnerships with private companies. For example, they need private investors in power plants and also in public transport. IF: What are your thoughts on Indonesia down the line and the opportunities for infrastructure development here? AA: Indonesia has lots of potential for foreign investors in infrastructure, because it is in such bad shape, particularly power plants, public transport and telecommunications. I think with this new democratic era, it is much safer for them to come onboard. The banks are very supportive in financing these projects, not only to local investors but foreign ones as well. 241

banking & financial services interview

Harry Naysmith Country Executive


the royal bank of scotland

Harry Naysmith: I was born in Singapore and grew up in Malaysia, then went to school and university in Scotland. I trained as a chartered accountant. My first job after qualifying was with Peat Marwick in Hong Kong. After that I joined Wardley, which was HSBC’s merchant banking arm, and worked in Hong Kong for a number of years. I was transferred to Indonesia in 1991 and lived in the country for about four years, running HSBC’s investment banking businesses, including project finance, before relocating to Singapore. I left HSBC in 2005 to join ABN AMRO, which was subsequently acquired by RBS, as the Bank’s CEO in Malaysia. I came back to Indonesia nearly a year ago to take the helm at RBS Indonesia’s business. IF: Could you describe RBS’s business in Indonesia and how it is structured? How does it work? HN: We have a very targeted strategy in Indonesia. We want to do business only in areas where we excel or have a leading and competitive position. We also have a clearly defined client base, as we want to ensure that we allocate our resources and balance sheet in Indonesia to our target customers. We recently sold our retail and small and medium-scale enterprises (SMEs) businesses to ANZ, so we can now reallocate the capital that was going to be used in those businesses to our target clients in investment and wholesale banking, under our Global Banking & Markets (GBM) division. We do not have a scattergun approach to business. Like everyone, we are opportunistic but, at the same time, we are very, very focused with our core businesses. We provide advice and execution to a range of very sophisticated, high-end corporate companies, government entities and financial institutions in terms of managing their debt, investments and various market and price risks. We also provide Global Transaction Services in Indonesia, which is the financing of trade and cash management. Much of this relates to our extensive manufacturing client base that we have here, which is largely European. RBS is very strong in Europe and particularly in the UK.


Globally, we have on the ground presence in 40 countries across five continents, which makes us a truly international bank. There is no point having a network unless you use it, so we are also looking to position ourselves as the intermediary in terms of capital and trade flows between Asia, Indonesia and the United States and Europe. Financial intermediary IF: How would you describe your business with respect to the infrastructure market? HN: We see ourselves as a financial intermediary. This may be the re-packaging of Indonesian risk, which we then sell to offshore investors, or acting as an intermediary for instruments such as local bonds in Indonesia. We are also particularly strong in the export credit agency (ECA) space, where we act as an arranger for loans and financing. For example, we were the arranger for Telkomsel’s US$317 million loan from the European Credit Agency. To date, we are probably one of the largest providers or financiers of telecommunications equipment into Indonesia. Our business though is not just restricted to the telecoms sector. It could be a new cement plant, where the equipment is actually being sourced from Europe and we facilitate that transaction by getting involved in securing and arranging an ECA loan and providing risk advisory services. We are very strong in helping our clients understand the issues they may face when coming into Indonesia. As an organisation, we have had a presence here for 180 years through ABN AMRO, so we know the business and regulatory landscape very well. There is significant knowledge within the group and the local team here, in terms of how people can hedge their risks when they are coming into Indonesia. This is an invaluable service that we can offer our clients who want to tap into Indonesia’s vast opportunities. We still have a project finance business but we are focusing mainly on project advisory, for instance, as an arranger we help

banking & financial services interview

to get the best financing for sponsors to projects. We also offer tailored risk mitigation solutions on mismatches in currency or interest rates, for example. Local banks IF: Do you see the bank becoming more involved as an increasing number of infrastructure projects come online? HN: It is definitely on the agenda and it is something we are looking at carefully, but more so from the advisory side. Going forward, the local banks will play a far more significant part in infrastructure funding than they have done historically. In addition to loans, the rupiah bond market is also becoming an important avenue for funding. Foreign banks like RBS will be more involved as a arranger for ECA loans, in bringing equipment into the country and what I have mentioned before, providing advisory on market and price risks. IF: Do they need to be incentivised in some way to take a bigger stake in lending to the infrastructure market? HN: There may be a need for this. Historically, if you look at funding the power sector, for example, it was all take-or-pay arrangements, where PLN, the state electricity company, agreed to buy electricity from the project at a certain rate. If you are building a new power plant, you want a take-or-pay arrangement in place and, previously, that would have been with PLN. However, during the Asian crisis in the late 1990s, PLN and other companies faced funding issues. Investors then turned to the Government to support new projects. Indonesia has a huge requirement for electricity and what’s known as “Fasttrack 1” for 10,000 MW is guaranteed by the Ministry of Finance. “Fastrack 2” is likely to revert to the independent power producer (IPP) model, where risk is taken directly on the off-taker. Trends in infrastructure IF: How do you see the telecommunications sector developing in the short to medium term? Where are the most exciting opportunities? HN: There is a lot going on in the telecommunications sector right now. There is the possible consolidation of, let’s say, base tower space – that is, more and more companies are sharing cell phone towers, called base transceiver stations, and this market is becoming more consolidated. On the service provider side, competition is very high among mobile phone operators and I believe we will see some form of consolidation taking place there soon. IF: What do you think are the biggest challenges for infrastructure development in Indonesia? HN: The biggest challenge with many projects here is land - the title to land and the ability to invoke compulsory acquisition orders, whether it is for toll roads or other projects that are taking place. This has resulted in delays in transport links that have an effect on the economy. This year, Indonesia will come in with five or six per cent GDP growth, but it should be up at eight

Career defining moment I guess my career path was mapped out early. I went straight from Edinburgh and school to my first job in Hong Kong, and I’ve been in Asia ever since. Motivation I like winning; I like being successful in business. I like to build teams who are successful. It is all about the transfer of knowledge between the teams, from them to me and me to them. Certainly in banking, teamwork is very important. Biggest challenge faced Managing a bank, both in Malaysia and Indonesia, especially in the past couple of years when we had to reshape the business as a result of the global financial crisis. I had to ensure that the bank I was running was sound and liquid, and that my team remained motivated in a very difficult and stressful business landscape. Most interesting project There have been numerous projects, actually, but in terms of Indonesia it was probably PT Semen Cibinong. I advised Holcim, which is a global Swiss cement company, on the US$1.6 billion debt restructuring and acquisition of PT Semen Cibinong. Since then, there have also been transactions such as the US$11.7 billion privatisation of Maxis in Malaysia, which was a groundbreaking transaction in many ways. Most important lesson in business Knowing the value of integrity. Not just in banking but everywhere. Without trust, there is nothing to build on. or nine per cent. It is still one of the cheapest places in Asia to make things in a factory but, as soon as you put the product in a lorry to take it to the port, the costs escalate significantly. IF: What do you think about the decentralisation of power which has been going on for the past decade? HN: This is certainly something that was in the air when I was around in the early 1990s, and it is good. If you look at Jakarta, it could end up being the largest car park in Asia in a few years, if it does not get to grips with the road system. The outlying provinces are providing alternatives. If you look at somewhere like Surabaya, the infrastructure there is pretty good; and similarly with Medan, which has an issue still with power, or a lack of it, but these are viable alternatives to Jakarta. Decentralisation is something that will certainly increase as we go forward. At the end of the day, Indonesia has done a fantastic job in moving towards a more democratic society. It has huge wealth in natural resources, a young population, a strong domestic economy and is expected to become investment grade in the next year. The latter is reflective of the stable political and economic climate that we are operating under. A crucial element of continued growth is how the current infrastructure issues are addressed and how quickly this happens. 243

banking & financial services interview

Suresh Narang


Chief Country Officer and Head of Global Markets deutsche bank indonesia

Suresh Narang: I started my banking career in 1977 in India, joining the State Bank of India as a trainee officer. They had a great training program and I stayed there for nine years. Although, obviously there are limitations on how far you can go in a state organisation. In 1986 I got a chance to join Deutsche Bank in Bombay at a time when the bank had just established a foothold in various countries in Asia. I thought it was a good opportunity for me to join a firm that was going to grow. I joined as a fixed income trader and although trading was comparatively unsophisticated back then we still developed a lot of products during that time. In 1989-90 I was made head of the trading desk in Bombay. I worked there till 1994 before being transferred to Jakarta to set up a local trading desk from scratch. By the time the process was complete the 1997 crisis occurred. I was running the local markets business, and naturally ended up sorting out derivative exposures with clients. In 2001, I took over as country head as well as being head of markets. IF: How would you best describe Deutsche Bank’s business in Indonesia? SN: Basically we are corporate bank, providing capital markets, corporate finance, trading and sales, transaction banking and a little bit of an onshore person-to-person management business. The economy IF: What do you think are the biggest challenges that the Indonesian economy may face in the near future? SN: The Indonesian economy faces just one major challenge. There might be a thousand reasons for that, but the challenge is just one – attracting greater investment into fixed assets. The economy is expected to grow about five and a half per cent officially this year, perhaps more. Two components of growth – domestic consumption and exports – are really driving Indonesia.


The last crisis did not even touch Indonesia because the country is more domestically focused rather than external-demand focused. Domestic consumption is providing a pillar for economic growth, with exports coming in second. Most of these are primary products and they make up about 20 per cent of GDP. The third essential pillar for sustainable economic growth is fixedasset investment, which is still dominant in China, and is becoming so in India. However, in Indonesia such investment is miniscule compared to what is required. So this is the challenge. If they can sort this one out, Indonesia can easily grow by up to seven or seven adn a half per cent. Overall, I think attracting foreign investment will boost growth rates by two percentage points. IF: So infrastructure is a key part of this asset investment. Could you tell us a little bit more of Deutsche Bank’s activities in financing the infrastructure space? SN: Outside of Japan, most commercial investment banks like us are not into traditional project financing, with the exception being Australia, where we have done a fair bit of project financing, or at least arranging project financing. We are certainly helping a lot of firms in the resource sector raise money for expansion. Apart from helping companies raise money through bonds, we are involved in leveraged financing where we take a company’s cash flows into account rather than use traditional debt-equity ratios. By using cash flows as a predicate, debt to equity ratios can be improved to as much as 1:8. We have been working with many natural resource companies – oil, gas and coal mining companies – to raise money via bonds or loans. We have also done a lot of work with developers using parallel financing techniques. We are involved in convertible debt, initial public offerings and equity-linked issues. Some of our biggest clients are a consumer company, a real estate company, a steel company and many natural resource companies, so our client base is very diverse.

banking & financial services interview

IF: Apart from energy or natural resources companies, if we look at transport or toll roads, does Deutsche Bank intend to work on financing these projects? SN: We are always game to arrange financing because we are not the kind of bank who will put 100 per cent of the financing on the balance sheet. However, the project has to be viable. When it comes to greenfield projects, especially toll roads, the biggest question mark is usually around land clearance. How fast can you clear land if there are squatters, residential housing or even industries on it? Is the compensation offered enough for them to leave? Do stakeholders trust the process? And what can you do to enforce the clearance? They have succeeded doing this in India, when before they had problems. The New Delhi Metro, an underground-overground rail link, was a model project and it was executed on time, on budget. This is the sort of catalyst you require in Indonesia for infrastructure investment to come in. You need to have one project that provides the “demonstration effect” that things work and are possible. Indonesia is in an excellent position for this to occur. Its budget deficit is only 1.8 per cent of GDP. The central government can champion leading projects itself – it doesn’t have to wait for public private partnerships to take shape. It could just bring in contractors and fund it off its own equity, as it can afford a deficit of three or four per cent. I should add that development projects add to the economy: these are not just subsidies, they are catalysts. If you need two toll roads, just build them. If you have more seaports it will add multiples to the economy. Can PPP work? IF: What about the participation of private sectors in infrastructure, and PPPs in particular. Do you have a view how PPPs could evolve in Indonesia going forward? Can problems with risk be solved? SN: I think they can be solved. In the Netherlands there are development agencies called FMOs that underwrite the risks of a commercial bank, if it agrees to finance projects that are of social relevance. It could be slum clearance for instance, such as a housing development for the poor. Such a scheme happened in Mumbai and it was a success. There is no reason that with the right support it couldn’t happen here. Also, water and sanitation is an area where these sorts of projects can evolve. IF: Let’s touch on the banking sector in Indonesia. Do you see local banks playing a greater role in infrastructure financing? SN: They will need to be incentivised. Some banks may not necessarily have the skill sets to finance an infrastructure project like toll roads. If they don’t have the skills, to stay confident banks will generally ask for the moon – 100 per cent risk guarantee from the government, which the government won’t give. So things don’t happen. However, I think the big state banks – Bank Mandiri, BNI and possibly BCA – will take the lead. These banks have a strong

Career defining moment Absolutely the 1997-1998 Asian financial crisis. The crisis allowed me to achieve something in an area that was not my specialisation. In 1997, I was a markets guy, focused largely on trading and sales. However, at that time I was confronted with the challenge of going and talking to distressed clients who had derivatives contracts with Deutsche Bank, which had become kinds of non-performing loans (NPLs) or bad debts. I found this to be an incredibly enriching learning experience, both in terms of negotiation skills and coming to know big counterparties in Indonesia, with whom I still have good relationships. By co-operating with our clients we ultimately settled all outstanding contracts while strengthening the relationships that we continue to build on to this day. Motivation The key for me is pride in the organisation I work for. Deutsche Bank is one the top three firms globally in our sector and we are probably number one or two in emerging markets. Knowing that gives you motivation. Most challenging project Again, this was linked to the Asian financial crisis. Deutsche Bank was committed to remaining active in Indonesia and supporting the recapitalisation of the local banking sector along with the then fledgling local government bond market. Unfortunately, given the difficult market environment, some of our colleagues had to leave the bank at this time. However, we worked very hard to ensure people were well looked-after, beyond what was legally required. This process lasted for six months and was a very challenging time. It did however enable us to maintain our presence in Indonesia throughout the crisis and as a result, our business has grown substantially since. Most important lesson in business The most important lesson you can ever learn is finding out you don’t have credibility in front of a client. If you don’t get a call from a client in distress, then you know there is a big gap between the way you perceive a client and the way he perceives you. The word is credibility. capital base, large public shareholding and good relationships with government. I wouldn’t be surprised if they get involved first. IF: In closing, please tell what Deutsche Bank’s view of Indonesia is today? SN: Indonesia remains an important part of our Asia Pacific franchise. There is great recognition within Deutsche Bank of Indonesia’s economic achievements during the recent financial crisis and our risk appetite for the country is steadily increasing. That said, we are primarily focused on bringing in investors when arranging finance, something we are very good at doing given our broad global distribution platform. The story however still has to be good. Whether it is a power project, water, a derivative or leveraged financing, if it is viable we will be happy to put some of it on our balance sheet. 245

banking & financial services interview

Eko Yuliantoro President Director


bahana Securities

Eko Yuliantoro: I am actually a civil engineer. I graduated from ITB (Bandung Institute of Technology) in 1988. I took my masters degree in management in 2004. But I only worked for two years in civil engineering. The first time I moved into finance was when I joined Bank Niaga in 1990. My last position there was as marketing officer in Bank Niaga’s Los Angeles branch. In 1996 I joined the Bahana Group where I worked in the Merchant Banking Division. At that time, we provided advisory services for project financing and syndication. Then when new management came to Bahana, the management grouped Merchant Banking with Bahana Securities. This was around 2001. I then worked for Bahana Securities in investment banking. I was made the head of investment banking in around 2004 or 2005. In 2009 I became the president director of Bahana Securities. What I find interesting is that my commercial banker’s background helped in working with the capital markets. It helped negotiate between capital market and commercial banking products.

My commercial banker’s background helped in working with the capital markets. It helped negotiate between capital market and commercial banking products Personally I think creativity is important in structuring any deal. When I was in Bank Niaga, the Los Angeles branch concentrated on trade finance, so all in all I would say I have quite a range of experience working in this field. IF: Tell us a bit about Bahana Securities. How would you best describe the business? EY: Bahana Securities is a subsidiary of Bahana Pembina Husada. Our lines of businesses include investment banking, brokerage and


portfolio management and treasury. Investment banking is what we do best. We have capital market and non-capital market products. So we combine investment banking into these two. In the capital market Bahana does initial public offering (IPO) issues and so on – any products that have to go through Bapepam (Indonesia Capital Market and Financial Institution Supervisory agency) are considered one engine. The second engine is non-capital market advisory. We provide advice on restructures and project financing, and we are now also trying to set up our other investment portfolio, equity investment, which is still under investment banking. So when we find a good project, we try to obtain financing. In brokerages we have equity and fixed income; the latter is about government bonds and state-owned company bonds, since corporate bonds are not very liquid here. In treasury, we are just maintaining our capital market investment. We also have research and other operations going on in Bahana. IF: Can you tell us a bit about the IPO work of Garuda and Krakatau Steel? And how investors view Indonesia in general? EY: The Krakatau Steel IPO is currently underway, and Bahana is involved here. I think the window for Krakatau Steel is open right now, but here I am talking about under normal market conditions – it really depends. Still, right now we are confident this IPO will be completed this year. I think what Krakatau Steel is trying to do is to offer 20 per cent of their market. They have a good growth story, they are market leaders locally, and I think they have done a great job in overcoming the previous crisis. So I think Krakatau Steel is ready. We did some non-deal roadshows in Singapore and Hong Kong, and we brought Garuda, Krakatau Steel and some state-owned companies to that event. I think the demand and the interest are there. There are some issues that need to be addressed by the management, but I think we got some very good feedback from the roadshows. My view is that people respect Indonesia as a potential place for investment. Based on our conversations

banking & financial services interview

with the Ministry of Finance, I know they have a program to bring up the investment rating of Indonesia by the end of 2011. I think this opens up opportunities for investors. There are a lot of factors here that have affected sentiment. During the 2008 crisis, Indonesia still managed to grow positively, and I think investors see the potential for Indonesia to recover relatively quickly, from the capital market index point of view. Government sell-offs IF: How do you view the recent sales of stakes in state-owned enterprises? Where is this heading? EY: I think this is part of the programme by the finance ministry. Stake sale by the government is only one of the actions currently underway. What the ministry is now doing is reducing the number of state-owned enterprises. They want to combine them into a kind of holding company. So after this, when the size is acceptable to the market, they will move to IPOs. I think this year we know Krakatau Steel and Garuda will go public. It will probably be followed by plantation companies. Plantation companies are currently forming some sort of sub-holding company right now. The discussion is still going on whether this sub-holding company should move into an IPO, or should each of the individual plantation companies hold their own IPOs.

Motivation I love numbers and looking at financial statements, and I like to meet people. I also like to work on deals that appear different to other types of deals I have worked on before. I am not the kind of person who likes everything to be standardised. Three years ago, Bahana was asked by the Ministry of State Owned Enterprises to assist the state airline company Garuda, which was in a bit of financial trouble at the time. We helped them prepare a good business plan, and now when you look at Garuda, they are doing very well. That gives me some satisfaction.

IF: How about the rest of the international market outside Asia? There is a lot of portfolio money out there.

Biggest challenge faced It is related with the infrastructure sector today. What we need to do is work out how to really connect this sector to the financial sector. The financial sector lives in its own world, which is rather different from the private sector, and I want to create something that will bring those two worlds closer. It is about how we bring projects to any company, how to grow together as companies, create value, and possibly for the company to go public in the end. I think that is the challenge. But then again, the financial sector has limitations. We know there is enough liquidity, but sometimes it is not easy to bring this liquidity to certain projects. Banks have legal limits, pension funds have limitations – but they have all the money. So how do you connect all of this together?

EY: I think what I can say is that we realise, especially for Europe, they have their own problems right now to deal with. The US is also still restructuring itself. But we do know that the money is there, and when Europe and the US reach their new “equilibrium level”, the money will flow. We went to Singapore and Hong Kong for the roadshows, but next month we will also go to the US and Europe. In the fourth quarter of this year we plan to invite investors to come to Jakarta, perhaps have an “Investor Day”.

Most interesting project In 1997 Bahana did a syndication project for one of the toll roads in Indonesia; this was before the Asian monetary crisis. It was the largest syndication in Indonesia ­ – the project was worth about Rp2.3 trillion (back then this was around US$1 billion). We syndicated 35 banks and six securities houses. We combined the capital market sector and bank financing successfully.

We did some non-deal roadshows in Singapore and Hong Kong, and we brought Garuda, Krakatau Steel and some state-owned companies to that event. I think the demand and the interest are there infrastructure investment needs IF: The government has stated that it needs about US$150 billion for infrastructure investment in Indonesia, 65 per cent of which should come from the private sector. What do you think about this estimation? EY: I think this is going to be a challenge for everyone. We have just had a meeting to discuss this. We are trying to set up a state-owned fund. Some state-owned companies have a lot of money in their pockets, just sitting there, and probably

Most important lesson in business In the capital market, we have to have integrity. In our line of business, we don’t work with machines or equipment; we offer our services. So what we need to have is top-level integrity, so much so that when I say I work for Bahana, people who deal with me have to know the level of integrity that I possess. invested in deposits. We also have pension funds from insurance companies. We are now trying to utilise some of this money to finance some infrastructure projects. The difference between these funds and funds from banks is that we won’t have an intermediary. So we are trying to structure it and create some projects. Once the money can be mobilised through this fund, we will invite the investors. There are also some banks involved, probably to be combined into this. I think it is going to be a nucleus to attract investment. We have some projects in the pipeline. The funds we create here will be under Bapepam rules, which is different to private equity funds. Normally, when we handle the funds, they will go 247

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to certain projects. Right now we are working on probably four projects, worth about US$100 million. We are trying to create value for state-owned companies. Some state-owned companies have money, but many of them need more money. So we are trying to help those that are in financial trouble; sometimes we spin off one of their businesses and invest money there, and hopefully the company can grow fast and thrive. These are infrastructure projects - the project that we are directly investing in is an infrastructure project in Balikpapan. IF: What other sectors within infrastructure do you think may be good for Bahana to invest in, or to play a part as co-investors? EY: I think when we are talking about investment, we need to see the growth pattern of the business. If we are talking about power plants, for instance, the pattern is relatively flat. These can be

We also have pension funds from insurance companies. We are now trying to utilise some of this money to finance some infrastructure projects financed by funds, but not really for the construction of them; the funds may come after the cash flow is formulated, a bit like securitisation. Developers can use bank loans for construction. If we are talking about independent power plants, but the revenue of PLN is in Indonesian rupiah, there’s a big risk in long-term financing. Perhaps it is possible to build power plants using US dollars, and after a certain period it can be financed locally.


If we are talking about toll roads, almost 100 per cent of construction is financed in the local currency, in Rupiah. The problem with toll roads is land acquisition, which is a problem for the government. The regulations are there, but implementation takes time, and some authorities do not want to make a decision on this. Right now there are 28 toll roads that have not yet been constructed due to these issues. The government has set up a BIP, a fund that can be used to finance land acquisitions, but it doesn’t really work. I think the government has good intentions here; they have this investment centre, which is not a company, but a unit under the Ministry of Finance. Although again, it is not working very well. We have been talking about an Mass Rapid Transport (MRT) system in Jakarta for a long time, but it is not yet here. So I think if we want to grab foreign investors, there is still a large challenge that needs to be overcome. IF: What do you think of the public private partnership scheme in Indonesia? EY: Two years ago Bahana initiated some kind of PPP. With regards to sugar factories in Java, we have 53 of them under state-owned companies. The history of this goes back maybe 70 to 100 years. So anyway, these sugar companies needed revitalisation, and we offered them a good structure. We had private investors. We wanted to make a partnership. We would take one of the sugar factories, modernise it, upgrade it, increase its production capacity and manage it for about 20-25 years, then give it back to the state-owned companies. By doing this, hopefully sugar production would increase overall. But the reluctance from the companies was very high, and so the project failed. I think we have all the resources, but willingness is a problem, and coordination is still a big challenge.

Consultancy & Advisory Services

consultancy & advisory services interview

Jusuf Wibisana Chairman


pricewaterhousecoopers indonesia

Jusuf Wibisana: I graduated initially in accounting from Gadjah Mada University and then went on to Macquarie University, New South Wales, Australia, where I completed my masters in accounting and finance. I was offered a job at IBM when I graduated but I declined it. Instead I chose to teach at the university. After that I ran my own accounting firm in East Java. I moved to Jakarta in 1997 and joined Coopers & Lybrand. Then I became a partner at KPMG and then moved to the government’s own enterprise insurance company across the road, the largest general insurance company in Indonesia. I joined PwC in 2004. IF: How do you think the government is dealing with the challenges of infrastructure development?

JW: Indonesia is a young democracy and it’s going through growing pains, as we all know, and that’s led to a lot of challenges. Land acquisition is a big challenge in terms of getting the space we need for the projects the country needs. However, having to deal with provincial and regional governments is tough. Take the oil and gas sector. Previously it was controlled by the central government but now, with regional autonomy a new political initiative, central government has had to let regional governments get involved. That has slowed down projects, so that’s one of the challenges that investors are dealing with at the moment. I also think the new electricity law is interesting. As you know the state electricity company (PLN) has a monopoly on electricity generation in Indonesia, but the new law will allow for public-private investment. Although at the same time, PLN will have the right of first refusal. In other words if you’re an investor and you want to go to a regional government which needs power, and you say you want to invest and help build a project, PLN will have the right to come in there and pre-empt you and do it itself. That obviously discourages investors from going out there and kicking the tyres and trying to come up with


these projects. They won’t want to invest and spend money up front for new ventures if the state monopoly can come in and take the good opportunities for itself. Those types of challenges are inhibiting investment in the power sector. There are big challenges in Indonesia because it’s such a big country. You have 240 million people scattered around the islands. It’s not like one big island like the United States, where you can draw and connect one highway to the other. I do believe

Indonesia is on a ring of fire, so geothermal energy is a natural form of power generation to be thinking about that, all in all, the government is aware of all these challenges and has an idea of how to mitigate them. We haven’t really seen a big project that has been successfully completed yet, but at least some of the framework required has been put in place. land acquisition issues IF: Can you tell us something about the problems surrounding land acquisition in particular? JW: This is a very young democracy you know, and that often means that everyone wants to speak out. It can be difficult for the government to have a grip on people so as to get its policies through. They are often scared to lose votes in the next election if they push too hard on the land issue. Although land acquisition needs the government to step in and ease things so investors can acquire the land they need, but this is too often not the case in Indonesia. The issue is complex but the potential for infrastructure development is huge in Indonesia. This issue will impede it to a certain extent. It needs to be resolved.

consultancy & advisory services interview

Career defining moment The one that sticks out for me, for being very amusing as opposed to strictly defining, is when one magazine in Jakarta, with a very good circulation, wrote that I was one of the highest paid CFOs in the country and I didn’t even realise it.

IF: A figure of US$150 billion in infrastructure projects has been mentioned a lot recently. Is that achievable? JW: I think so, but it cannot only come with the help of the private sector. The government has a role in initiating much of it, that’s true, but the private sector has an extremely important part to play. For a start, it needs certainty of return on any investment it makes; that’s one big thing. There are still some wider challenges to be addressed as well. For example, land acquisition for the toll roads and the railways we have planned, not to mention water projects – what will happen with that? Then of course regional governments can take a different view because they control water projects. All those challenges are there to be resolved. If they are taken care of one by one, I’m sure US$150 billion will look very reasonable given the size of this country. IF: What is your opinion of the idea that the government needs to set up a “one-stop-shop” arrangement for private companies which are interested in PPP projects? JW: Clearly we need certainty on regulations across the whole of government, and certainty on the process and procedures involved in putting the investment in place. If too many bodies have a say on policies it will then confuse the investors. Again, regarding regional autonomy, something I mentioned before, it is not always easy for central government to impose its will on regional authorities. It is difficult to get certain regulations accepted by local governments. Sometimes local governments insist on making their own regulations, which can conflict with central government regulations. What is needed are good and talented people who can go around Indonesia and deal with the local governments easily and smoothly.

Indonesia is a young democracy and it’s going through growing pains as we all know, and that’s led to a lot of challenges renewables and other energy IF: What are your views on geothermal power generation? JW: We have a little over 1,000 megawatts produced geothermally at the moment, so it is just a small fraction of the total power

Motivation The thing that motivates me most is to work well and positively together with my partners and staff. Working in a team has always really motivated me. I also feel I have accomplished something if the clients express their satisfaction when the projects are finished. At PricewaterhouseCoopers (PwC) we make a point of questioning clients about whether we delivered what we promised and how we can exceed their expectations in the future. Biggest challenge faced My biggest challenge is actually to have a happy family but also a happy working environment. Most important lesson in business Do your best in whatever you are engaged in and do not think of money as your ultimate objective. requirement of the country. But the country sits on a ring of fire – 17 per cent of the world’s volcanoes are in Indonesia – so it’s a natural form of power generation to be thinking about. You always hear about Indonesia becoming the net importer for oil but the country is in fact resource rich. It’s just a matter of getting the resources to market and exploiting them correctly. There is a lot of stranded gas for instance, a lot of coal and geothermal energy there, so yes there’s a lot of opportunity. One of the challenges is being able to pay a market rate. As you know the PLN rates are currently subsidised, which doesn’t allow them to pay market rates for the gas or the fuel. IF: Is that the main challenge for the energy sector? To try and resolve this tariff issue? JW: It is one of the main challenges, yes. There is a “domestic market obligation” and means the government is, more or less, forcing investors and producers to sell at a subsidised price. A lot of investors believe the economics don’t work. If we can get transparent and economic prices, market prices in other words, there’s a lot of gas that can be brought on stream. IF: Can you tell us a little about one or two areas you think are of particular interest today in terms of specific infrastructure projects? JW: First, I would say the development of toll roads. In Indonesia there are only 700km of them, in comparison with, say, Malaysia that has over 1,000km, many of which they built over 10 years ago. There’s also a challenge of connecting all the different cities to one another within Indonesia; but of course in that there is a challenge because Java itself is isolated from the other islands. I 251

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don’t know if you know the new bridge that has been completed connecting Java to Madura? Now the plan is to connect Java with Sumatra. That is the sort of thing that will need to happen. Certainly, 700km of toll roads for Indonesia is a very small total, and of that 700km only 500km is owned by Jasa Marga, the stateowned toll roads company. So if Jasa Marga itself can do 500km and if a foreign investor has no issue with all the challenges involved, a rapid development of toll roads looks likely.

If we can get transparent and economic prices, market prices, there’s a lot of gas that can be brought on stream Second, railways. The key challenge for Indonesia is how to build this sort of infrastructure, because clearly the population is growing and businesses are expanding; but in terms of infrastructure the railway and toll roads are congested. Why can’t we build a railway for Indonesia? That’s logical even for coal production and a good example of designing infrastructure on top of a good asset (coal). The airlines business is now booming in Indonesia, yet the government owns only 15 per cent; the rest is in private ownership. If the airline business can be lucrative and profitable with majority private ownership, then why not toll roads and railways? IF: How do you see the public private partnership (PPP) market developing over the next few years? JW: As I mentioned earlier, just 30 per cent of the US$150 billion required for infrastructure projects will be funded by government, so surely PPP is the only logical model to be successful in Indonesia. If you look at all the regulations and


all the focus the government is putting on it, it is clearly going to be an important model. Of course, the whole thing is still in the infancy stage. The government now has to focus on what structure it puts in place, and how they balance the risks and rewards. The investors will come, there’s no doubt in my mind, it’s just getting the right framework. Overall, we need a strong political will from the government. It needs to be strong and firm and to believe that building a sound infrastructure is not just about earning income from that infrastructure, but about growing the economy as a whole. That mindset is very important. The best way to look at the development of the infrastructure of the country is not just to look at the profitability of that infrastructure itself, but to focus on how wider benefits to the economy will grow alongside its development. To put it in a PwC context, we benefit from having connections all over the world. We have the right model, we have seen the best PPP structures and we have seen the best

If a foreign investor has no issue with all the challenges involved, a rapid development of toll roads looks likely infrastructure advised by our colleagues in different countries. Surely we can bring all that knowledge back to Indonesia. However, until the regulatory framework is resolved, there’s only so much we can do. To me it’s frustrating. You always hear about China and India, and how quickly they are developing. Indonesia should be in that same category, but until the political will is in place, and the right regulatory framework, it won’t happen. That’s the challenge we face today.

consultancy & advisory services interview

Eugene van de Weerd


Country Director frost & sullivan indonesia

Eugene van de Weerd: I was born and raised in Holland but my mother is from Indonesia. I attended the Nyenrode Business University in Holland and then did an MBA in 2000. During parts of my undergraduate degree, I would make trips back here. My experience in Indonesia has been in a direct line, business research and then competitive intelligence, and later on I did policy research. I worked with international researcher firms like DHV in Holland, Asian Market Intelligence in Hong Kong and Synovate. I also worked for the Ministry of Industry and Trade, and for Bappenas for a while on an industry cluster research project. At one point, I spent about four years in Bali, establishing the first strawberry farm in Southeast Indonesia. I was monitoring research and I noticed that Indonesia was importing strawberries all year round, from Australia and other parts of the world. There were no strawberries at all in Southeast Asia. So we started our very first strawberry farm. We imported all the trickler systems, and the seedlings. So I took a nice little “break” for four years in Bali, but then it was back to the research. Decentralisation IF: What are you thoughts on decentralisation and how it is changing the landscape here? EW: What is happening is every body is claiming a new regency based on their culture and their tribe. There are over 300 regencies, where everybody wants to become a king in his own backyard. You have the central government with a set of policies for investors, that is the top layer. Then you have the second layer, which are the provinces. They have got their own regional and provincial policies, and below that are the regencies and municipalities. What you get is a duplicate of policies, too many policies to handle. There have been cases for example in coal mining and exploration, where they get a central government permit and go off to Kalimantan or somewhere, but they can’t do anything because they don’t have the license from the province

or regency. So they have to start all over again. So there is sometimes this scepticism towards the government, to solve the problems, make plans, make policies, set frameworks and coordinate. When I was advising Bappenas eight years ago, I was talking about the same things. It is very interesting that the Indonesian Investment Coordinating Board (BKPM) is trying to make investment a ‘one stop shop’.

We help the private sector to accelerate the growth of their business, through strategic plans, implementation support, blueprints and road maps Presently there are still many licenses and steps to go through, at least six government agencies and then it still takes three months. BKPM wants to get it all done in a few days. If you go to the BKPM head office in Jakarta or the regional offices, the process will be the same. What other BKPM chairmen have not been able to accomplish is getting departments to surrender their authority in issuing licenses related to investment to BKPM. BKPM can only approve licenses based on the technical guidelines. So let’s say you want to invest in an energy project, the Ministry of Energy and Natural Resources sets the technical conditions and guidelines. The only issue is BKPM and Bappenas and a few more of these departments are government agencies. They are not ministries. Even though they report directly to the president, they are considered lower in hierarchy than a ministry. So in certain instances it may be hard for the chairman to get something like surrendering authority from a minister. The minister may try to ignore it, if they are not interested. 253

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IF: Could you tell us about Frost & Sullivan? How would you best describe its business in Indonesia? EW: We are in 36 countries on six continents, and have 2000 consultants worldwide. We mainly serve leading private sector firms, like the global 1000, and government agencies, but we also serve medium-sized companies. We help the private sector to accelerate the growth of their business, through strategic plans, implementation support, blueprints and road maps. That is our main business. Basically our philosophy is we are helping the CEO and their team to grow. When we do the research, we look at the markets, at the industries, at the competitors, at the regulatory environment, the financial impact, we look at the capability of the company, then we look at the core competencies, do you need to acquire partners, do you need to add core competencies to make it happen? So it’s a 360-degree approach. Infrastructural priorities and policy IF: Do you see infrastructure needs choking the numbers of foreign investors coming to Indonesia? EW: If you don’t fix infrastructure, the country won’t grow. The way I look at it, there are three main areas to work on. One, we have problems with the ports, roads and capacity. North Java is in dire need of improvement of hard infrastructure. Indonesia has always

We have extra policy demands in the provinces and regencies, but they need to be clear. Legal certainty is extremely important struggled with logistics. On average, Southeast Asian countries, especially the advanced economies push through logistics at about four to five per cent of the cost price. However, in Indonesia it is 14 to 15 per cent, or about 10 per cent more than competing countries. Then you have utility infrastructure like clean water and energy. We all know that energy is a huge issue at the moment. Then there are supply issues. For example, there have been cases whereby companies build factories, only to find out that they cannot have enough power supply to operate it. Factories remained under utilised for up to a year. Things like that have happened. The third is soft infrastructure: education, science and technology and financing, which is between eight to 15 per cent, which is very high. Financing costs in other countries are six to seven per cent. You put all these together and we lack connectivity in Indonesia. IF: What sorts of core challenges are there for international companies in Indonesia and how can the government do a better job of facilitating the process? EW: It is about having a clear policy. Now we have these extra policy demands in the provinces and regencies, but they need to be clear. Legal certainty is extremely important. Take the


Career defining moment The biggest step was when I started in policy research. I used to do market research, competitive intelligence and there were a lot of policies, from Bappenas, from the Ministry of Trade, from the Ministry of Industry, that gave me a real extra insight from the concerned departments, from officials, and the systems in the ministries. Previously I was on the outside, trying to analyze them, and all of a sudden, I see them at the end of the table. It gave me a lot of opportunities to connect the dots. Motivation What I like to do is dig, to find out facts and to create researchbased analysis. That is what is driving me in this industry. Biggest challenge faced We did a project for the Indonesian Industry Ministry where we recommended that policies should change based on the concept of industry clusters. We recommended this to the ministry and a year later a complete concept was approved and adopted by the House of Representatives. Basically our research led to fundamental change in industrial policy. Most important lesson in business For me the key for business in Indonesia is relationship building. Without it you are getting nowhere, no matter how good your Indonesian is. A lot of foreigners miss this point. They come to Indonesia with a Western business attitude, or Chinese business attitude, they think they have a great product, a great service. Once you connect well, they are comfortable with you. Then you start to talk about business. Before that, a typical conversation may go on for 45 minutes with five minutes left for business. Indonesians treat business like a dessert. If you just meet someone and you start talking about business, it will not work. In Singapore or Hong Kong it may be different. Even if you don’t like me, or I don’t like you, we can still do the deal. Not in Indonesia, you have to show them respect; you have to show them that there has been a personal effort on your part. power sector where many power generation projects planned by the private sector have not been developed so far. The reason investors don’t get enough return from an investment is that the government is not offering a decent price for the electricity in relation to costs. So hardly anybody has come in as a power generator. They need guarantees to make it work. IF: How do you see the PPP market developing here? EW: It’s all based on policy: before they had PPP programmes but they failed. It was because the private sector was not comfortable with the format, with the guarantees and facilities, and with the private sector involvement restrictions. They have reformatted it and revised the regulations, making it more liberal for the private sector. It was launched last month. Now the question is, how will they implement it? I think the ball is in the government’s court. The private sector is fine with it. It is just a matter of implementation.

consultancy & advisory services interview

james harris


Head of Infrastructure and Project Finance hogan lovells

James Harris: I qualified as a lawyer in Australia about 22 years ago and left to further my career in the UK, staying there for six years. While there, I started doing more finance-related work, focusing on big-ticket privatisations and infrastructure projects. After six years, I went back to Australia to Victoria, spending five years doing similar deals. I moved to Singapore about 10 years ago and, together with my team, have built up the infrastructure practice for Hogan Lovells over the past 10 years, principally focusing on infrastructure in its broadest forms: the whole project life – covering energy, oil and gas resources, transport, water and waste, petrochemicals just about everything. IF: How would you describe your business here in Indonesia? JH: Hogan Lovells is a relatively new beast in a sense, because we are the merger of Lovells and Hogan & Hartson. That happened on May 1, 2010. The Hogan side had a presence in North Asia but not in Southeast Asia, so this entity is pretty much a legacy of the Lovells operation. Our focus in Indonesia is very much on project finance, structured finance, public private partnership (PPP)-style transactions, with some corporate mergers and acquisitions and arbitration-related activities as well.

As you probably know, technically international law firms are not allowed to have their own offices here, so we tend to try to partner with local firms according to their expertise and client preferences/requirements. Indonesia versus Asia IF: Why do you feel that Indonesia is such an important market? JH: First, you look at the size of the opportunity and you can say that Indonesia is certainly up there in Asia as an enormous market. It may not be as big as China, nor as big as India but it’s in the top three. Everywhere you go there is opportunity. Then you need to look at the historical track record, how Indonesia fares when compared to other markets in Southeast Asia. Compared to many of its competitors, Indonesia has a much longer, stronger record, particularly in energy projects.

Compared to many of its competitors, Indonesia has a much longer, stronger record, particularly in energy projects

Our industry focus is probably oil, gas and energy, water, transport, plus financial services. Our office has grown quite a lot in the past few years. We are now 30 lawyers; we were six only six years ago. Our focus in Indonesia is very much related to oil and gas resources, coal mining, PPP transactions and general mergers and acquisitions.

You then have to look at the supporting legal and regulatory framework, and ask is that sufficiently developed? The answer for Indonesia is no, but they know that and they are addressing the problems, which is good.

From our regional base in Singapore, we have four partners, one of whom is in Jakarta four and a half days a week, while two others are here almost as often - from two or three days a week to once every couple of weeks. From Singapore, Indonesia is our most important market.

It is taking a while and is still slow by everybody’s expectations but things are progressing; and there are currently enabling regulations and presidential regulations that should remove some of the legal and regulatory obstacles preventing major infrastructure projects from taking place. 255

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Obviously transparency is also a big issue in Indonesia. Again, so long as you stay on the right side of the line, this is achievable for most investors. Therefore, Indonesia stands out as having, all things considered for us, the most likely, most-needed critical success factors in place. IF: Let us look at the attitude, perhaps, of some of the members of the International Project Finance Association for Asia, which you chair. In what ways do you see the attitudes of international companies changing toward Indonesia? JH: Let me give you a positive and then a negative answer. On the positive side, there is increasing activity; there are opportunities in infrastructure that are starting to emerge outside of mainstream power projects and resources-based projects to do with transportation, water, road and rail, as well as air and sea. There are a lot of markets opening up in new parts of the country, and there are many investors finding reasons to build their businesses in Indonesia versus, perhaps, somewhere else in Southeast Asia. The negative side is that, if you look at the rest of Southeast Asia, apart from one or two bright spots that are pretty isolated and sector focused, there is not a lot that is attractive. Therefore, some investors, developers and funders are also asking, “Do we look at Southeast Asia and just focus on Indonesia, Singapore and Vietnam, or do we just forget the whole region and look at Africa instead?”

There are currently enabling regulations and presidential regulations that should remove some of the legal and regulatory obstacles preventing major infrastructure projects from taking place Investment appetite and challenges IF: There has been some talk about private equity funds becoming interested in infrastructure funding here. Has this been your experience?

Career defining moment No one has asked me that before: but early in my career I tried to get out of law. In Australia, most people do a dual degree, so I also did an accounting and commerce degree as well as law. I spent a year taking my commerce background for a walk, working in the finance division of Robert Maxwell’s magazine companies. At the end of that year, I realised I really liked being a lawyer; that this was what I was best at and it has shaped my career ever since. Motivation This may sound corny but what motivates me is the ability to make a difference. As an infrastructure specialist, you are able to bring water to a region that has not had constant, regular, clean, potable water, or you are able to improve infrastructure in transport or help to provide electricity and it makes a huge difference. You can also make a bigger difference in emerging markets, obviously, than sitting at your desk in say, Sydney, New York or London. Most interesting project There is one I worked on for 18 months advising a bidder for an airport project. Ultimately, they were the best-priced tender but, sadly, they came in second. However, I enjoyed that because of the team with whom I worked; not only my own team but also the client’s team and all the other people who came together and worked so hard. Most important lesson in business The biggest challenge I think you face regularly when you take a role advising the public sector is keeping the faith, because it can become quite frustrating when projects become thwarted by politics, delays or funding problems. We just closed a large PPP infrastructure project which had a gestation period of six years. Despite the trials and tribulations along the way, it was an awesome feeling of accomplishment when that closed. Another important lesson is don’t deliberately annoy people and be short-sighted. You might feel that you get some temporary satisfaction out of it but it’s a small market, even globally, so it doesn’t pay. Chickens will always come home to roost.

JH: There are the earliest green shoots of interest coming from private equity. Some of that private equity is Asian-based. Risk appetite, country appetite for the Blackstones and others is growing, and I do not think it will be long before we start to see more and more interest turning into investment opportunities. We have specifically brought out a partner from our London office to focus just on these clients about a year ago, and she was with me earlier this week in Jakarta meeting people and gauging the market size.

They have so much strength behind them in terms of capability and financial support that, once they start to flex their muscles, it will be interesting.

What is difficult for someone like me to predict is how the Chinese will enter the market and to what extent. If they wanted to, they could approach it in many different ways: as direct investors, part of the overall approach that most other offshore parties use.

JH: That’s an interesting question for a lawyer. I believe decentralisation has been both good and not so good. On the good side, it opens up things sooner and faster for investors, and it gives people more than one entry point. The downside is


IF: Let us look more inwardly. Is decentralisation working in Indonesia?

consultancy & advisory services interview

that it creates more uncertainty because people are not sure if the decentralisation has diluted the overall viability of some of these opportunities, the overall government support. Obviously decentralisation causes transparency issues to multiply as well. From a practical perspective, if you do not have a native Indonesian speaker in your group, you will find it harder when you go out to the provinces. IF: Moving on towards some of the challenges domestically. Problems with land acquisition are on the tips of most investors’ lips. As a lawyer, what is your view about this situation? JH: As I understand it, it is hoped the land issue will be resolved through legislation in the early part of 2011. It is certainly

It is hoped the land issue will be resolved through legislation in the early part of 2011 an important issue; it is a deal breaker for so many of these infrastructure opportunities. There is also the issue of overall credit support, credit worthiness, government guarantees and, again, legislative as well as structural solutions (such as the IIGF) are being looked at that should surface before the year’s end. Those are probably the two biggest challenges. IF: Back to the government and targets, and the widely publicised figure of a US$140 billion requirement for infrastructure between now and 2014. A 60 per cent or so chunk of which is needed to come from the private sector. Are these targets achievable? JH: These sorts of statistics are trotted out a lot, not only in relation to Indonesia but also Vietnam, the Philippines, Cambodia, Thailand, India and Sri Lanka, for example. If you look at the size of what is required across Asia, it is mindblowing. Then you add into the mix the fact that two thirds of the world’s population live in Asia, the fact that 60 per cent of the world’s trade has an Asian element to it – you come up

with something that you think is wonderful in that there is so much opportunity and, even if we just scratch the surface, that is still enough to keep people busy. The reality feels a long way short I’m afraid.

It is time to stop creating great lists and just get on with it. It is the most obvious, practical way to move ahead IF: What we tend to forget is that this is such a young democracy; it is only 10 years old and despite all the politicking that is still apparent, they have been able to do a huge amount in a short time. JH: We should not take a too isolated or too Western a view on this though. There will be solutions that come from within Asia that will have a totally different approach to risk, particularly from China, so it is still very much open as to how the US$140 billion funding question will be addressed. ‘Lights, camera, action!’ IF: Let us finish off on PPP structures. What is your view on how PPP will and should evolve within Indonesia? JH: It is time to stop creating great lists and just get on with it. At the time of Infrastructure Asia, I made that comment to a few people, not really out of frustration but more because it is the most obvious, practical way to move ahead. We need to start putting in the rungs of the ladder. Start with something simple. Not a high-speed airport rail link! Do something that does not require a huge amount of land. Do something that does not require a huge amount of electricity. What does that leave you? Things like water treatment facilities; relatively modest but, if you bring a few of these together in a particular region, it will have an enormous impact. They can be used as the cookie-cutters to create an overall market in terms of risk profiling, funding, transactional implementation and legal documentation – just start it simple. I keep saying just do the basic few projects, then try something a little harder and, eventually, you can look at an enormous, multibillion dollar, multi-faceted project. 257

consultancy & advisory services interview

Scott Younger Chairman


glendale partners

Scott Younger: After early civil engineering training in hydro and thermal power, I had an extensive spell as an academic, specialising in geotechnical engineering, plus a few years in site investigation before becoming involved in British politics through the Conservative Party in the 1970s. Changes in my work profile and the untimely death of my parliamentary ‘godmother’, a deputy speaker of the House of Commons, led to a crossroads decision and I somewhat reluctantly gave up my political ambitions. Then a challenging job in my main area of expertise came up in Bangkok, which I took, and led to a complete life change for my family and me. After that I went to Hong Kong, which was a more developed environment; my main input there concerned foundation work for the China Bank Tower, but from Hong Kong I was also undertaking aid and development work in Nepal and Sarawak. Overall I was doing a lot of road development work with the Asian Development Bank and the World Bank from the late 1970s and well into the 1980s. It was a World Bank road betterment project that brought me to Indonesia in 1985, ostensibly for 18 months!

To solve Indonesia’s power problems overall, there is no question that coal has to be a major part of the solution. Also, clean coal can be a reality In the past 32 years I have been focusing on Asia. I have spent most of the time in Indonesia and I like to think that I have learnt many things that make this country move and have found myself involved in both political and economic discussions. Over the past decade I have focused more and more on infrastructure, increasingly a key to Indonesia’s sustainable growth.


IF: Moving on to business matters, could you give us an overview of Glendale Partners? SY: It has been six years since Glendale was established and we are trying to be a market leader in terms of project developments here. We have competence in both financing issues and technical expertise, increasingly so in the latter. In 2006 we were engaged in the acquisition of RWE Thames Water for Jakarta’s water supply concession with a local bidder (Recapital Advisors), and that was a great success. However, 2008 was the start of the global financial crisis and in 2009 development really slowed down; decision-makers were waiting to see how Indonesia would be affected. As it turned out Indonesia’s economy showed only a minor blip, and things have now really started to pick up strongly, but agonisingly slowly in infrastructure. IF: So would you describe Glendale as a private investment advisory firm for infrastructure? SY: We certainly can advise investors in depth on the development side, and we can help find the finance because our partners have been here for a long time and know the Indonesian market extremely well. Glendale is focused on three main areas: infrastructure for power, water and transportation. We are also looking at ports a lot more than perhaps we might have done two years ago. Energy and power IF: Please give us a quick review of Glendale’s activities in energy and power. SY: We are going through a number of small- to medium-sized hydroelectric projects, examining what else is required to make them feasible. These are extremely important to localities

consultancy & advisory services interview

outside of the main island of Java, although the government is also talking about a couple of big hydro plants in Java. In the many more remote areas, where electricity is not being supplied, hydro is one excellent solution in several cases, but realistic incentives have to be offered. East Indonesia, where it is quite sunny, is a good place to start looking more deeply at solar power – even if it is on an individual basis or as a significant partial solution in one particular district to take out existing loss-making diesel dependency. Geothermal energy is also a very big possibility. There are six major projects that are out in the market to bid on, but the risks still remain large.

Career-defining moment After university and indentured training in my profession, I became an academic for a few years in the United Kingdom and then got involved in politics. Suddenly I was offered a job in Bangkok in the 1970s, which was tailor-made for my experience. This was a provincial highway construction project in Thailand, which encompassed the building of 350 kilometres of road in four different areas. With my engineering qualifications at Glasgow and the University of California and academic experience I was well trained for the work. I was in my mid to late thirties and I loved the challenge.

Recently a major new investor has been awarded a 320MW geothermal in North Sumatra and awards for two other big projects are expected in the fairly near future. Glendale has a role in support elements of the North Sumatra project. Also, there are some other large investors drawn in by Indonesia’s natural gas reserves and we have been trying to interest them in hydropower and thermal energy as well.

I realised when I was working on the project in Thailand, while responsible for all the engineering aspects, I found myself involved in everything. It was certainly a maturing experience! I was also engaged part-time as an associate professor at the Asian Institute of Technology to teach courses and supervise theses in my area; a good precursor to what was to follow a few years later in Indonesia.

In addition, we are looking at a landfill site in East Nusa Tenggara, where they have now built a geo-membrane to convert the landfill to gas. My colleagues and I have been trying to get some international funding to supplement the budget for this. It is exciting, because this is not expensive to do, and it’s really

Motivation I am a keen political observer, and increasingly interested in the politics of development, the role and power of the players and interests involved. I’m interested in the wellbeing of Indonesia, where every day’s experience is different, sometimes awful, other times stimulating! There remain things I still want to do.

Water is still the Cinderella of all infrastructure development. There is a lot of water in Indonesia but we only use less than one per cent of it cleaning up the local environment as well as being able to generate one or two megawatts (MW) of power, providing a local solution to a nearby problem. However, to solve Indonesia’s power problems overall, there is no question that coal has to be a major part of the solution in the years ahead. People can say that it’s not clean, but we say the technology is available to reduce the impact of carbon emissions. Clean coal can be a reality. It’s a little bit expensive, but can be done and, where appropriate, I believe will be. New coal-fired power stations are now underway in Indonesia – the first phase of the 10,000 MW Fast Track power project is slowly coming online and there are some big projects in this sector. The second 10,000 MW programme includes a high percentage of geothermal, which I have referred to.

Biggest challenge faced There was a road in Bangladesh built on modern plant-mixed surfacing, the first in the country, that failed after a few months in service. I was pulled in to use my expertise to analyse what went wrong and put it right. It was a big challenge. It, however, stimulated me towards undertaking a PhD. Most interesting project Definitely the development of the Masters Program in Highways and Transportation at the Bandung Institute of Technology on the UK model, a full-time involvement for six years. That probably was the happiest time of my life. The project won the IBM sustainable development award of 1991, after which I became more involved regionally so moved to Jakarta. I still bump into former students of mine, who are now working in senior positions in Jakarta and other parts of Indonesia, and this is a real pleasure. Most Important Lesson That one is constantly learning and that you will not always be right.

Transport IF: Looking at the other sectors, can you tell us about your activities in water and transport?

than one per cent of it – most is just flushed back into rivers and the sea.

SY: Water is still the Cinderella of all infrastructure development. There is a lot of water in Indonesia but we only use less

Something like 75 per cent of the 131 rivers here are technically termed as distressed. We are not harnessing water properly. We 259

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are going to look at recycling for the major cities, but we haven’t even got a proper sanitary system working in Jakarta yet; even neighbouring Bandung is more developed! I am quite aware that in terms of meeting the sanitation rules of the Millennium Development Goals (MDGs), Indonesia is still well behind but they will have to do something soon. Provincial governments know they can’t afford to wait and I expect to see developments coming out of necessity. Water is key not only to food security but also for public health. (I would refer also to the website of the East Bali Poverty Project where a recent sanitation initiative was driven by local communities – exciting stuff.) Regarding transport, we have such a dearth of road infrastructure in the country. The last Investment Coordinating Board chairman said the country required a million kilometres of new road network in Indonesia but we only actually need an initial 50,000 kilometres to make a big difference; followed by a programme to double the under-capacity of 440,000 kilometres across the

The last Investment Coordinating Board chairman said Indonesia required a million kilometres of new road network. We only actually need an initial 50,000km of new roads to make a big difference nation. Not toll roads, but national and regional highways because too many small roads are not connecting up, which means rural producers are not able to get to their markets. Linked to this are the costs of transporting materials in Indonesia, which are the highest in Asia; and the overloading of trucks, causing major damage to the roads currently in operation. When the government solves key impediments to development like these and, of course, land acquisition, investment in these areas is likely to pick up. Law and regulatory changes are in the pipeline; some are now in place. Land acquisition remains a major hurdle, even though there is a revolving fund in place to assist. Wearing my hat as Chairman of Nusantara Infrastructure, we are currently looking at some major toll road projects and aim to add to our portfolio in the year ahead. Decentralisation IF: Tell us about local governments. Is decentralisation working? SY: When I think of Indonesia, they have done a fantastic job politically. The system here is way advanced beyond Malaysia and Singapore, in terms of actually giving people decision-making power. You have to get the people out there to directly develop their own areas. You can’t run things sitting in Jakarta. People are now realising that infrastructure is vitally important and local governments are getting bigger budgets from central government to do something about it. A number of these administrations


are becoming aware that they have the power, for example, to fix vital waste treatment infrastructure in their areas, but

Infrastructure is vitally important and local governments are getting bigger budgets from central government to do something about it implementation still takes a long time. Some are beginning to realise the possibilities of making a difference and contributing to MDGs. This is not happening everywhere but we have identified one or two regional champions and this is very encouraging. Of course, the quality of the understanding varies greatly between different regions – people in East Kalimantan and North Sumatra are culturally distinct and you have to talk to them differently. IF: So which regions really do understand about the need for infrastructure and how to tackle these types of projects? SY: They are all over the place. For instance, in Lombok the governor there realises that he has a job to do. There is an excellent mayor in Cimahi, a district in West Java a few hours from Jakarta. There is also a “champion” in the district of Kupang, East Nusa Tenggara. He is really switched on. And there are many others. IF: So things are now finally becoming less centrally driven and more provincially or district driven? SY: To a growing extent, yes. To get things done, the central government needs to delegate some decisions to the working areas. I can understand why the Minister of Finance is still nervous about passing out financial responsibilities because of the corruption issues and everything else, such as the lack of skills. In fact that issue is one of the biggest that I haven’t talked about. However, for projects to work the central and regional governments need to take on more of the risks, not just financial risks, operating risks and everything else. I’m not talking about blanket guarantees, but more assurances to investors. As an investor, if I am going to put US$100 million into a project, I need to know it is going to be used properly and I am not going to be abused; I am going to get my returns. The laws and regulations still need a lot of reform, but some progress has been made as they were in a complete shambles until 2006. IF: So how would you summarise your outlook? SY: We haven’t got there yet, there is a lot to be done, but things are generally moving in the right direction.

consultancy & advisory services interview

Windhu Hidranto President Director


ppp indonesia

Windhu Hidranto: I have worked in both the private sector and the public sector. After graduating from my engineering school in Bandung I worked in the private sector as a contractor; we actually built projects with government money. However, as it grew, and there were more demands for public services, the government could not finance them. I had a good opportunity to enter the Indonesian National Development Planning Board (Bappenas), so I became a public servant. I was basically sitting on the other side of the table. From the planning side I could see that there was so much need. I applied for a scholarship, and eventually received a Fulbright Scholarship from the US government. I went to the United States for two years to do my masters in Public Affairs and PPP. After that I returned home. This was around the time of the Asian financial crisis in 1997. I was a member of a team working to reduce the amount of development being done, especially for projects using foreign loans. So I was a party to the economic slowdown! By the end of 1998 nothing was happening here, the economy almost stopped, and no infrastructure was being built. We barely had enough to keep going. So in 1999 I resigned from Bappenas. I had an opportunity to go overseas and work as an international consultant, and I said to my bosses, “There is no PPP here for me. Let me learn a little bit more about it overseas.” IF: Can you give us an overview of PPP Indonesia, and how it is structured? WH: Basically, we want PPP Indonesia to be a forum where anyone interested in public private partnerships in Indonesia can contact us and get whatever information and service they need. We work all the way through from the very beginning, from identification of projects, to the kind of rules and regulations that apply to certain projects in certain sectors; and consultancy, to providing pre-feasibility studies and feasibility studies, and then assisting in the design of a project if it’s required. We can also help the investor and the project owner work out the transaction. We see this as an important part in the cycle of PPP projects, that these PPP projects should come to

financial closure, so that they are actually implemented. Otherwise, they are purely planning. That is a good thing for consultants, but it doesn’t have any impact on the economy. IF: What is the background story for PPP Indonesia? WH: The company was established in 2004. We have been quite busy. Since we established the company, we have mostly been helping the national government through Bappenas. We have done a lot of training programmes, because we are trying to get the idea across that infrastructure should not only be built by government and we should be trying to get the private sector more involved. So far, that effort to educate has been quite successful. Bappenas now has a PPP centre, which is very strategic. I am happy to say I made a small contribution to the establishment of this new centre.

I think foreign banks should come in. They have access to lower interest rates, cheaper money and can then maybe mix it with local financing At the moment we have placed a focus on helping local government. I assisted the Jakarta government previously and now we are working with Bekasi, which is just outside of Jakarta. It is a much smaller local government, but it is home to a big market because of its close proximity to the capital. They have a very lucrative business infrastructure market, and not only in the major projects; we go into small and medium-sized infrastructure projects as well. IF: Do you think that attitudes within central and local government are evolving? WH: Bappenas is doing a lot to cover Indonesia, but this is a very large country. Now it’s time to go into the detail: the devil is in 261

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the detail. I think there is a change in attitudes already. The fact that regional governments are asking for training and trying to focus more on these projects is a very good sign. They are trying very hard, but I think options like our business will help because we cannot just leave it to government; the private sector needs to come in. It needs to get more involved – the planning, the consultants, and most importantly, the banks. Foreign and local lenders IF: How do you see the banks becoming involved? Should the Indonesian banks be given incentives to finance infrastructure? WH: There is no project financing in Indonesia. When a small player comes in with a good project, he may not get financing, only because he doesn’t have collateral. For infrastructure projects, because of the large values, what kind of collateral is there? No one could be that rich. If somebody was that rich, he wouldn’t be in the infrastructure business. Right now the Indonesian banks are offering rates that are too high. You cannot do an infrastructure with rates at 12 to 14 per cent. You cannot get a return of 14 per cent from a toll road. So local banks have to bring their interest rates down. This is of

I think there is a change in attitudes already. The fact that regional governments are asking for training and trying to focus more on these projects is a very good sign course a very big issue and it involves everybody. It is a national problem. I think foreign banks should come in. They have access to lower interest rates, cheaper money and can then maybe mix it with local financing. IF: Do you think the foreign banks would accept a mixture of capital in these types of projects? WH: I think it should work, because foreign banks should look at the involvement of the local banks as more of a guarantee. It is a long-term guarantee. These local banks are not going anywhere and are going to be here probably forever. However, the fact that their capital is so expensive is not totally their fault; that is where they need help and cheaper money. Local government IF: Local government needs to be able to understand what it can do, and what it can achieve with the finance that it has. Can you give an example of a project that PPP Indonesia has worked on, which illustrates some of the services and products that you mentioned earlier on? WH: One I’m currently working on, which is almost towards closure, is parking facilities for Bekasi. We were involved from the first workshop, where we presented the idea of PPP, and then


Motivation I just want to see development happening. More development in Indonesia across the board would be my motivation. I want to help with nation building, because I think, at my age (I’m a grandfather) I want to know what kind of future Indonesia will be facing. Biggest challenge faced Professionally it’s getting the parties together - we have problems on the government side and the private side. So, getting the public and private to work together is always the biggest challenge in Indonesia. Most interesting project I don’t have a particular public private partnership project. They are all interesting, in a lot of different ways. Most important lesson in business In my case it is trying to get more people involved. You cannot do it alone. Sometimes we try to enter into a partnership, and we have a bad experience. Let’s say that not all partnerships are good partnerships. Sometimes you get into a bad one, and the first response will be, okay, I’ll do everything my way. Although then you realise that you can’t do that. There are many good partners out there; you just have to find the right one. we got local government to propose their ideas. Then we helped them identify that parking is a potential PPP project and helped find the investor. We also put it on a state-run enterprise level, so that means it is basically a business-to-business arrangement. This gives them more flexibility to get financing. However, this project is currently “on hold”, due to some internal/ technical issues. Hopefully, it will resume in 2011, because the city of Bekasi has so much potential for growth, especially if it applies PPP schemes to develop its infrastructure. PPP Indonesia plans to assist the operations of its PPP Node/Unit, to support this idea. IF: With PPP being in its infancy, what other challenges do you see for this market? WH: The basic requirement for PPP is project identification. That is one of the weakest aspects of the Indonesian industry. When you are in Jakarta, people know what they want, and they can show you what they have done. Once you step into the regions, they know what they want, but no one has done anything about it; they just say, we want to build an industrial estate there. It is all in the mind, very basic ideas. So that’s where regional governments and local governments need the most assistance. To this end, PPP Indonesia hopes to assist in designing and implementing PPP training programs, which will allow local government staff to both understand and practice all the phases of the PPP life cycle. It is the applied aspects of PPP project planning and implementation at a local level that will probably be most required in the next three to five years.

consultancy & advisory services interview

Achmad Noerzaman


President Director arkonin

Achmad Noerzaman: I am an architect. I graduated from the University of Indonesia in 1987. I have been in this business for over 20 years. I also received a Masters of Management degree about eight years ago. I absolutely love designing. I design a lot. We have participated in almost every design competition of note in our area at one stage or another. In architecture, we believe that the environment can make design well and not the other way around. We believe in an appreciation of good design and good quality of living. So that’s why I am interested very small to huge projects. We are concerned about the environment and how to stave off energy and water crises. With good design, we give people better quality of living and innovation, without which life would be boring. We are respectful of Indonesia’s almost 300 different ethnicities and we have an obligation to all of these different cultures.

Indonesia has an ongoing energy crisis because of rapid growth and energy production not keeping up IF: How would you describe your business in Indonesia? AN: Our office deals in consultancy and the core business of contracting. We have also initiated some new infrastructure projects. For instance, we intend to build six ring roads in Jakarta, and hope to be participating in Jakarta’s MRT (mass rapid transportation network). We provide services in architectural, structural, electrical, mechanical and urban planning, infrastructure, construction management, project management and landscaping. The company, which was established in 1961, has designed the Tarumanegara University in Jakarta, Bank Permata in Bintaro, the Jakarta Stock Exchange, a university in central Jakarta, a

trade centre in Kemayoran, the FX Residence and the Busway (Jakarta’s dedicated bus line, a public transport project).

The Ministry of Public Works has created a programme to educate people in rural areas on how to manage their waste and convert it to bio-energy We also designed Terminal 3 of Jakarta’s Sokearno-Hatta Airport, the residence in Taman Rasuna, Kuningan, Jakarta, and the public area in Makassar. IF: It’s a complete portfolio with residential and commercial facilities along with public facilities. Is it a consultancy firm, design firm or both? AN: Our vision is to make Arkonin the best consultancy company in Indonesia. Environmental issues are becoming a big issue. So we have to contribute our work, and design to save the planet. That’s why we have striven and emphasised the use of green building concepts. We have even won some competitions with these concepts. We have expertise not only in architectural design, but we also have engineers in the electrical, structural and mechanical divisions who can help develop the designs. In the future, environmental planning will save operational costs. Maybe the initial costs have to be increased by 10 per cent to make better equipment incorporating green design. However, for the operational designs we will be able to cut that back significantly within 20 years or so. So the energy efficiency of these buildings and the designs are of paramount importance. It’s about putting components in place together quickly and investing in energy-efficient designs, which 263

consultancy & advisory services interview

may cost more now but in terms of ongoing operational costs will eventually become cost-effective. Water and waste: waste to energy IF: Can you tell us a little about water efficiency? AN: We have lots of water and plenty of sunlight in Indonesia but its uses have not been explored properly. This might be due to the constraints of our technology. In the future we will be able to engage these resources. I think environmental engineering will become a big business for this consultancy. In Jakarta, we designed a waste management project five years ago. We are also developing that in West Java. The Jakarta government joined with the West Java government in a joint venture project to manage the waste together. This was a good opportunity because not only do we know how to collect the waste, but also how to turn it into energy. As you know, Indonesia has an ongoing energy crisis because of rapid growth and energy production not keeping up. Our other concern lies in educating people in rural areas on how to manage their waste.

We need to make the Jakarta Ring Road project a reality because if not, traffic is expected to reach total gridlock in the next two or three years IF: How do you think the educational aspects are making a difference? AN: The Ministry of Public Works has created a programme to educate people in rural areas on how to manage their waste and convert it to bio-energy. In Indonesia, infrastructure hasn’t reached people in mountainous and remote areas because they are sparsely populated and often not connected with roads. So we also volunteer to educate people and develop technology in these areas. IF: You mentioned that you advised the Ministry of Public Works. Who is your main governmental client? AN: We have worked for the Ministry of Public Works: its directorate of water resources and the engineering divisions of the ministry. Outside of this country, we recently participated in an education tender in Uzbekistan. That was interesting because Uzbekistan wants to learn about the development of irrigation here. We have had a lot of success stories with irrigation. Hopefully we’ll win the tender. IF: Apart from Uzbekistan, do you work abroad a lot? AN: Our work is mostly in Indonesia, but we have some designs in Brunei and Vietnam. We are now prospecting in Saudi Arabia to create Hajj pilgrimage villages. A huge number of Hajj pilgrims


Most interesting project The most interesting were in Jakarta and Brunei. The Sunenja redevelopment, which was a slum transformed into a commercial area, housing public transport like buses and trains. We also did a project to desalinate sea water (reverse osmosis) to potable water, which is now being distributed to at least 10,000 homes. Most important lesson in business This has to be how to run a business with integrity, fairness and the motivation to improve business. Discipline and consistency in business are also important. Great networking always helps too. come from Indonesia, as the world’s largest Muslim country. These would house around 22,000 people. IF: Have you seen an increase in interest in your own consultancy services, especially over the past 12 months? AN: Funnily enough, we were blessed by the global financial crisis. Before this, most of our projects were in the private sector and only 25 per cent came from government. Infrastructure engineering mostly came from the government, but last year we shifted our marketing strategy to governmental projects. We ended up growing by 50 per cent as the government’s stimulus package kicked in. The biggest stimulus for economic growth will be infrastructure but the government says it needs more money than it has, if Indonesia is going to progress and become a developed country. IF: Are private public partnerships (PPPs) going to be important to your business as the Government tries to get more privates involved in developing infrastructure? AN: Both PPPs and private projects provide opportunities. We have always done government projects in Jakarta. During the mid-1970s we generally did government projects, but the private sector grew and created good conditions for business, so we shifted our business to the private sector until two years ago.

Environmental engineering will become a big business I think it’s a great idea to participate in PPPs. For instance, we helped initiate the toll roads in Jakarta. They were 100 per cent investments from the private sector. However, because of the constraints in land acquisition, we ended up joining up with the government. The toll roads must be built mostly on government properties. The existing public roads, railways and riverbanks are still owned by the government. We need to make the Jakarta Ring Road project a reality because if not, traffic is expected to reach total gridlock in the next two or three years.

Project Data

project data indonesia 2011

Project ready to offer The project outlined below from the PPP Book published by the National Development Planning Agency (BAPPENAS) already has tender documentation, a market sounding report and PPP procurement schedule


anah Ampo Cruise Terminal, Karangasem

contracting agency

Port Authority/Administrator Pelabuhan Benoa person in charge

Capt. Baptis Soegiharjo Position: Port Administrator Benoa Address: Jln. Raya Pelabuhan Benoa, Bali, Indonesia Phone: +62 361 72 0226 Fax: Email Address: project location

Karangasem Regency, Bali Province Scope of work

Development of a cruise terminal to accommodate up two cruise ships at the same time. A breakdown of the scope of works is as follows: Construction of passenger terminal and associated facilities, with a total area of 9,000m2. Expansion of the jetty to a length of 350m and 24m width to accommodate a large cruise ship. Operation and maintenance of the whole cruise terminal and its associated facilities. Estimated Project Cost

US$ 36 million.

Financial Overview

Land acquisition: US$0.3 million (provided by local government). Construction: US$35.7 million (US$8 million to be provided by the Government through direct investment). The following information applicable only for the private investment portion:

Consultant fees, Engineering Design, Maintenance and Construction (Estimated): US$0.32 million Financial Structure:

Equity: US$8.31 million Loan: US$19.39 million Economic Feasibility: ENPV: US$42 million EIRR: 31.06%

Work Plan

Pre-qualifications: Q2 2010 Bid Conference: Q3 2010 Proposal Submission: Q4 2010 Proposal Evaluation: Q4 2010 Negotiations: Q4 2010 Contract Signing: Q4 2010 Financial Closed Obsolete: Q4 2011 Land Acquisitions: Acquired 2007 Constructions of Jetty: Q1 to Q4 2011 Seaside completed end of 2011 Construction of expansion facilities (350m of jetty and Passengers Terminal): Q1 to Q4 2012. To achieve international standard l Operations first stage based on facilities provided by government: Q4 2011 l Full scale Operations of Cruise Terminal: Q4 2012 l l l l l l l l l l l

Disbursement Plan

l Consultant Fees: 1.33% 2010 Private

portion Financial Feasibility: FNPV: US$7 million FIRR: 24.68 % Payback Period: 6 years type of government support

Provided in the form of: l Land (already acquired in 2007). l Access road (land already acquired, construction planned for 2010). l Causeway (50m x 8m) and jetty (154m x 12m). l Part of supporting facilities (such as government authorities office buildings).


l Land Acquisitions: 1.25% 2010

Provide by Government l Constructions of Jetty and supporting

facilities: 33.28% 2011 Remaining Government portion, commissioning expected by end of 2010 l Expansion of Jetty, Passengers Terminal and other facilities: 64.14% 2012 Private Investment l Commissioning Expected by end of 2010 Other Information

Tender process awaiting government approval on the status of the Tanah Ampo Cruise Terminal as an international port.

project data indonesia 2011

priority projects These projects taken from BAPPENAS’ PPP Book are ranked by estimated project value. In this category pre-feasibility studies, PPP modality and risk analysis data are available for potential investors


unter-rawa buayabatu ceper toll road, dki jakarta 1

project description

Currently, the transport in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required. The construction of toll road between Sunter-Rawa Buaya-Batu Ceper will be developed with expectations to reduce traffic volume in the existing road, particularly during working days.

F: +62 21 7246487 E: project location

DKI Jakarta Province

l l l l

Tender: 2012 Contract signing: 2012 Construction: 2013-2014 Operation: 2014


project feasibility indicator

unter-pulo gebangtambelang toll road, dki jakarta 2

Toll Road 22.92km

project description

technical overview project scope

technical specification

Currently, the transport system in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required.


Length: 22.92km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum)

contracting agency

financial overview

Minister of Public Works

Estimated project value: US$976.07 million Land acquisition: N/A Construction: N/A Economic feasibility: EIRR: 32.47% Financial feasibility: FIRR: 19.05% Payback period: N/A Initial tariff: N/A

ppp modality

type of government support

l Mr Harris H. Batubara

Government support can be made available.

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373

ppp modality

BOT (Build - Operate - Transfer) type of project proposal

persons in charge l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789

Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2012

The construction of a toll road between Sunter-Pulo Gebang-Tambelang will be developed with expectations to reduce traffic volume in the existing road, particularly during working days. BOT (Build - Operate - Transfer) type of project proposal

Solicited contracting agency

Minister of Public Works persons in charge 267

project data indonesia 2011

l Mr Yusid Toyib

Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

DKI Jakarta Province project feasibility indicator Technical Overview Project Scope

Toll Road 25.73km technical specification

Length: 25.73km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum) financial overview

Estimated project value: US$ 737.8 million Land acquisition: N/A Construction: N/A Economic feasibility: EIRR: 24.75% Financial feasibility: FIRR: 19.06% Payback period: N/A Initial tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2012 Tender: 2012 Contract signing: 2012 Construction: 2013-2014 Operation: 2014

l l l l


emayoran-kampung melayu toll road, dki jakarta 3

serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required. The construction of toll road between Kemayoran-Kampung Melayu will be developed with expectations to reduce traffic volume in the existing road, particularly during working days.

Construction: N/A Economic feasibility: EIRR: 30.63% Financial feasibility: FIRR: 19.07% Payback period: N/A Initial tariff: N/A

ppp modality

BOT (Build - Operate - Transfer)

Government support can be made available.

type of project proposal

Expected Time of Project Development


l Project preparation (including land

contracting agency

l l l l

Minister of Public Works persons in charge l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

DKI Jakarta Province project feasibility indicator technical overview Project Scope

Toll Road 9.65km technical specification

Length: 9.65km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum)

project description

financial overview

Currently, the transport system in Jakarta as the capital city of Indonesia is facing

Estimated Project Value: US$ 695.36 million Land Acquisition: N/A


type of government support

acquisition): 2011-2012 Tender: 2012 Contract signing: 2012 Construction: 2013-2014 Operation: 2014


erusan pasteur-ujung berung-cileunyigedebage toll road, west java 4 project description

Currently, due to rapid traffic growth in Bandung as the capital city, West Java province is facing serious traffic problems. In order to reduce this issue, it is important and urgent to construct an inner city toll road from Terusan Pasteur to Cileunyi and Gedebage through Ujung Berung. The road will be funded through the Government budget or from external assistance. One possibility of external assistance that has been discussed is from the Government of Japan. Construction of this toll road will be provided by the Government of Indonesia, while operation and maintenance will be offered to private parties through a bidding mechanism. ppp modality

BOT (Build – Operate – Transfer) Part of the construction and land acquisition will be carried out by government. type of project proposal

Solicited contracting agency

Minister of Public Works

project data indonesia 2011

persons in charge l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

West Java province project feasibility indicator Technical Overview Demand Forecast

45,000 vehicles/day in 2011

Length: 11.3km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum)


uri pulo-kampung melayu toll road, dki jakarta 5

project description

financial overview

Currently, the transport system in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required.

Estimated project value: US$596.01 million Land acquisition: N/A Construction: N/A Economic feasibility: EIRR: 23.90% Financial feasibility: FIRR: 19.02% Payback period: N/A Initial tariff: N/A

The construction of a toll road between Duri Pulo-Kampung Melayu will be developed with expectations to reduce traffic volume in the existing road, particularly during working days.

type of government support

Government support can be made available.

ppp modality

BOT (Build - Operate - Transfer)

project scope

type of project proposal

Toll Road 11.38km


technical specification

contracting agency

Length: 11.38km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.50m Median width: m Right of way: 40m (minimum)

Minister of Public Works

Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2012 Tender: 2012 Contract signing: 2012 Construction: 2013-2014 Operation: 2014

l l l l


persons in charge:

asar minggucasablanca toll road, dki jakarta 6

l Mr Harris H. Batubara

Estimated project value: US$691.7 million Land acquisition: US$50.3 million Construction: US$641.4 million (including other costs) Economic feasibility: EIRR: N/A Financial feasibility: FIRR: 4.00% Payback period: N/A Initial tariff: N/A

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E:

type of government support

project location

Government support can be made available.

DKI Jakarta province

Expected Time of Project Development

technical overview project scope

l Project preparation (including land

Toll Road 11.38km

financial overview

technical specification

acquisition): 2011-2012 l Tender: 2012 l Contract signing: 2012 l Construction: 2013-2014 l Operation: 2014

project description

Currently, the transport system in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required. The construction of a toll road between Pasar Minggu-Casablanca will be developed with expectations to reduce traffic volume in the existing road, particularly during working days. ppp modality

BOT (Build - Operate - Transfer)

project feasibility indicator

type of project proposal

Solicited contracting agency

Minister of Public Works 269

project data indonesia 2011

persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

DKI Jakarta province project feasibility indicator technical overview project scope

Toll Road 9.56km technical specification

Length: 9.56km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum)

l Construction: 2013-2014 l Operation: 2014


ileunyi-sumedangdawuan toll road, west java 7

project description

In support of the five-year development plan of West Java province, the Government of the Regency of Sumedang attempts to develop its eastern part of West Java by constructing an alternative toll road which connects Cileunyi and Sumedang up to Dawuan. This toll road will provide a direct access for goods transportation from the areas to the port city of Cirebon. The construction of this toll road is intended to help shift some of the development of the area to the east of the city of Bandung. ppp modality

Part of the construction and land acquisition will be carried out by government. The concession period will be granted for 35 years. type of project proposal

Solicited Contracting Agency

Minister of Public Works

financial overview

Persons in charge:

Estimated project value: US$571.99 million Land acquisition: N/A Construction: N/A Economic feasibility: EIRR: 21.68% Financial feasibility: FIRR: 19.02% Payback period: N/A Initial tariff: N/A

l Mr Harris H. Batubara

type of government support

Government support can be made available. Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2012 l Tender: 2012 l Contract signing: 2012

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: Project Location

West Java province


Project feasibility indicator technical overview demand forecast

13,010 vehicles/day in 2011 Project Scope:

Toll Road 58.5km Technical Specification

Length: 58.5km Design speed: 100km/h Number of lanes: 2 x 3 lanes Lane width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 5.5m Right of way: 4.4m (minimum) financial overview

Estimated project value: US$510.2 million Land acquisition: US$50.48 million Construction: US$459.72 million (including other costs) Economic feasibility: EIRR: 23.32% Financial feasibility: FIRR: 14.12% Payback period: N/A Initial tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2013 Tender: 2013 Contract signing: 2013 Construction: 2014-2015 Operation: 2015

l l l l


lujami-tanah abang toll road, dki jakarta 8

project description

Currently, the transport system in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required. The construction of a toll road between Ulujami-Tanah Abang will be developed with expectations to reduce traffic

project data indonesia 2011

volume in the existing road, particularly during working days.

Payback period: N/A Initial tariff: N/A

ppp modality

type of government support

BOT (Build - Operate - Transfer)

Government support can be made available.

type of project proposal

Solicited contracting agency

Minister of Public Works Persons in charge l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

DKI Jakarta province project feasibility indicator technical overview project scope

Toll Road 8.27km technical specification

Length: 8.27km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: m Right of way: 30m (minimum) financial overview

Estimated project value: US$425.53 million Land Acquisition: N/A Construction: N/A Economic feasibility: EIRR: 34.50% Financial feasibility: FIRR: 19.08%

Expected Time of Project Development

l Project preparation (including land

acquisition): 2011-2012 Tender: 2012 Contract signing: 2012 Construction: 2013-2014 Operation: 2014

l l l l


anjung priok access toll road, dki jakarta 9

project description

T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

DKI Jakarta province project feasibility indicator technical overview project scope

Toll Road 16.67km

Currently, the transport system in Jakarta as the capital city of Indonesia is facing serious traffic congestion problems. In order to reduce that problem, alternative access transportation is required. The construction of a toll road at Tanjung Priok will be developed with expectations to reduce traffic volume in the existing road, particularly for truck containers to and from Tanjung Priok.

Technical Specification

Construction of this toll road will be provided by the Government of Indonesia, while operation and maintenance will be offered to private parties through a bidding mechanism.

Project cost funded by the Government of Indonesia is as follows: Estimated project value: US$390 million Land acquisition: US$29 million Construction: US$361 million Economic feasibility: EIRR: N/A Financial feasibility: FIRR: N/A Payback period: N/A Initial tariff: N/A

ppp modality

Design and construction will be provided by the Government of Indonesia. Operation and maintenance will be offered to private interests through a bidding mechanism. type of project proposal


Length: 16.67km Design speed: km/h Number of lanes: lanes Lane width: m Outer shoulder width: m Inner shoulder width: m Median width: m Right of way: m (minimum) financial overview

type of government support

Government support can be made available.

contracting agency

Expected Time of Project Development

Minister of Public Works

Under construction 2010-2013

persons in charge l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia


iranjang-padalarang toll road, west java 10

project description

The Ciranjang to Padalarang toll road is one of the Government programs to build 271

project data indonesia 2011

toll roads throughout 2005-2009. Building this toll road is an effort to support economic development, particularly West Java province as a national developing area, and to increase people’s prosperity as well as to support equity development. The existence of the toll road will shorten required times in transporting goods, services and also people.

project location

The building of the Ciranjang-Padalarang toll road route is part of the network plan of the Jakarta-Bogor-Ciawi-SukabumiCianjur-Padalarang and Bandung toll roads. There is a projected link to the Ciawi – Sukabumi toll road.

Length: 33 km Design Speed: 80-100km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 9.7-11.5m Right of way: 60m (minimum)

The Sukabumi-Ciranjang and CiranjangPadalarang toll roads are also an alternative solution to overcome the increasing traffic density along the artery road to Puncak and, in addition, as a supporting factor in accelerating national economic growth in the Sukabumi and Cianjur areas. ppp modality

Part of the construction and land acquisition will be carried out by the Government. The concession period will be granted for 35 years. type of project proposal

Solicited contracting agency

Minister of Public Works persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E:


West Java Province project feasibility indicator technical overview project scope:

Toll Road 33 km technical specification

financial overview

Estimated Project Value: US$324.75 million Land Acquisition: US$39 million Construction: US$285.75 million Economic Feasibility: EIRR: N/A Financial Feasibility: FIRR: N/A Payback Period: N/A Initial Tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

l Project Preparation (including land

acquisition): 2011-2013 Tender: 2013 Contract Signing: 2013 Construction: 2014-2015 Operation: 2015

l l l l


egineneng – babatan toll road, lampung 11

project description

Administration intends to develop the toll road system from Bakauheni in the east towards Bandar Lampung and up to Terbanggi Besar in the west, with construction of the Tegineneng-Babatan section in the first stage. Moreover, the Bakauheni-Terbanggi Besar toll road is expected to promote area development around the toll road corridor, so it can give economic benefit particularly to Lampung Province. ppp modality

BOT (Build - Operate - Transfer) type of project proposal

Solicited contracting agency

Minister of Public Works persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

Lampung – South Sumatera Provinces project feasibility indicator

Technical Overview Supply and Demand Analysis

The Tegineneng-Babatan toll road is a part of the Bakauheni-Bandar LampungTerbanggi Besar Toll Road Plan. At present, this corridor is the main route of the road network system in Lampung Province.

Demand Forecast:

In order to reduce traffic flow passing through the inner road network in the city of Bandar Lampung, the Provincial

Length: 50km Design speed: 100km/h Number of lanes: 2 x 3 lanes

12,281 vehicles/day in 2011 Project Scope:

Toll Road 50km Technical Specification

project data indonesia 2011

Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 5.5m Right of way: 40m (minimum)

Type of Project Proposal

type of government support


Government support can be made available.

contracting agency

Minister of Public Works

financial overview

persons in charge:

Estimated Project Value: US$272.68 million Land Acquisition: US$28.00 million Construction: US$244.68 million (including other cost) Economic Feasibility: EIRR: 22.59 % Financial Feasibility: FIRR: 15.48 % Payback Period: N/A Initial Tariff: N/A

l Mr Harris H. Batubara

Type of Government Support

Government support can be made available. Expected Time of Project Development

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E:

l Project Preparation (including land

project location

acquisition): 2011-2013 l Tender: 2013 l Contract Signing: 2013 l Construction: 2014-2015 l Operation: 2015

East Java Province


andaan – malang toll road, east java 12

project description

The Pandaan-Malang toll road network will connect Pandaan and Malang in the Eastern Province of Java. Due to the recent increase in economic activity, regional development, and the accompanying increase in traffic, it has become urgent to realise the toll road network. The Pandaan-Malang toll road route is situated in three administrative areas; those are Pasuruan regency, Malang regency and the City of Malang. The design location for this toll road is in parallel with the existing national road, stating from Pandaan going southward to Purwosari, Purwodadi, Lawang, Singosari, Karangko, and ending at Malang. ppp modality

BOT (Build – Operate – Transfer) The concession period will be granted for 35 years.

project feasibility indicator technical overview demand forecast:

22,220 vehicles/day in 2011 project scope:

Toll Road 37.62km Technical Specification

Expected Time of Project Development

l Project Preparation (including land

acquisition): 2011-2013 Tender: 2013 Contract Signing: 2013 Construction: 2014-2015 Operation: 2015

l l l l


mbulan Water Supply, East Java 13

project description

The development of the Umbulan Water Supply is implemented to accelerate the fulfilment of drinking water service by increasing private sector participation in the development of the Drinking Water Supply System. Public private partnership in the development of the Drinking Water Supply System is an alternative way of financing and management to fulfil drinking water needs. The total requirement of drinking water by 2016 is 4,000 lps at Gresik Regency, Sidoarjo Regency, Surabaya City, Pasuruan City, Pasuruan Regency and PDAM (industrial area), with approximately 320,000 connections.

Length: 37.62km Design speed: 80-120km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 12.7m Right of way: 60m (minimum)

ppp modality

Financial Overview

The Local Government of East Java Province

Estimated Project Value: US$252.76 million Land Acquisition: US$29.32 million Construction: US$223.44 million (including other cost) Economic Feasibility: EIRR: 25.93 % Financial Feasibility: FIRR: 16.09 % Payback Period: N/A Initial Tariff: N/A

BOT (Build – Operate – Transfer) with cooperation during 25 years. Type of Project Proposal

Solicited contracting agency

person in charge:

Mr. A. Budi Susilo Sadiman Position: Head of Spatial Planning and Human Settlement, Agency East Java Province Address: Jl. Gayung Kebonsari No. 169 Surabaya, Indonesia T: +62 31 8287275 F: +62 31 8292270 273

project data indonesia 2011

project location

ppp modality

East Java Province

BOT (Build – Operate – Transfer) for 25 years.

project feasibility indicator technical overview

l Development of intake 4,000 lps. l Provision and Pipe Transmission

installation of raw water AirND 1,0001,800mm, 92km. l Development of two pumping station 4,000 lps and the completeness. l The utilisation for 1.6 million people or 320,000 connections. financial overview

Estimated Project Value: US$204.20 million Land Acquisition: N/A Construction: US$204.20 million (including other cost) Equity: Government Support (Sunk Cost): US$102.10 million Private investment: US$102.10 Equity: US$25.53 million Loan: US$76.57 million Economic Feasibility: ENPV: N/A EIRR: N/A Financial Feasibility: (on project) FNPV: US$14.79 million FIRR: 14.54 % Payback Period: 10 years Expected Time of Project Development

l Tender: 2010 l Development of raw water: 2010 l Development of network transmission:

type of project proposal

Solicited contracting agency

Ministry of Public Work persons in charge: l Mr. Budi Yuwono Prawirosudirdjo

Position: Director General for Human Settlement (Cipta Karya) Address: Jl. Pattimura No. 20 Kebayoran Baru, Jakarta 12110 Indonesia T: +62 21 72796158 F: +62 21 72796155 Email: l Mr. Rachmat Karnadi Position: Head of Water Supply Development Supporting Agency (Badan Pendukung Pengembangan Sistim Penyediaan Air Minum) Address: Jl. Pattimura No. 20 Kebayoran Baru, Jakarta 12110 INDONESIA T: +62 21 72796907 F: +62 21 72796907 project location

DKI Jakarta – Bekasi – Karawang Regency DKI Jakarta and West Java Provinces project feasibility indicator technical overview

l The development of intake 5,000 lps. l The development of IPA 5,000 lps. l The procurement of transmission pipe

ND 1,800mm. Length: 58km.

2011-2013 l Operation: 2013

l The utilisation for 2million inhabitants

ki jakarta – bekasi – karawang water supply, dki jakarta – west java 14

financial overview


project description

Rapid population growth and economic activity, particularly at DKI Jakarta, Bekasi and Karawang, are not yet supported by the availability of drinking water. In order to accelerate the provision of the water supply at DKI Jakarta, Bekasi and Karawang, Jatiluhur Reservoir is utilised optimally with an affordable price.


or 400,000 connections. Estimated Project Value (Constant Price): US$189.30 million Equity: Government Support (Sunk Cost): US$88.82 million (46.9%) Private: Equity: US$56.82 million (30%) Loan: US$43.75 million (23.10%) Economic Feasibility: ENPV: N/A EIRR: N/A Financial Feasibility: (on project) FNPV: US$ 23.87 million FIRR: 17.30 % Payback Period: 17 years

Expected Time of Project Development

l Tender: 2011 l Construction: 2012-2014 l Operation: 2014 Other Information:

l Preparation of transaction is under

way. l Previous capacity is 8,000 lps.


ukabumi – ciranjang toll road, west java 15

project description

The Sukabumi – Ciranjang toll road is one of the Government programs to build toll roads throughout 20052009. Building this toll road is an effort to support economic development, particularly West Java province as a national developing area, and to increase people’s prosperity as well as to support equity development. The existence of the toll road will shorten required times in transporting goods, services and also people. The building of the Sukabumi – Ciranjang toll road route is part of the network plan of the Jakarta-Bogor-Ciawi-SukabumiCianjur-Padalarang and Bandung toll roads. There is a projected link to the Ciawi – Sukabumi toll road. The Sukabumi-Ciranjang and CiranjangPadalarang toll roads are also an alternative solution to overcome the increasing density of traffic along the artery road to Puncak and, in addition, as a supporting factor in accelerating national economic growth in the Sukabumi and Cianjur areas. ppp modality

Part of the construction and land acquisition will be carried out by teh Government. The concession period will be granted for 35 years. type of project proposal

Solicited contracting agency

Minister of Public Works

project data indonesia 2011

persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

West Java Province project feasibility indicator technical overview Demand Forecast:

9,512 vehicles/day in 2011 Project Scope:

Toll Road 28km technical specification

Length: 28km Design speed: 80-100km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 9.7-11.5m Right of way: 60m (minimum) financial overview

Estimated Project Value: US$185.58 million Land Acquisition: US$15.89 million Construction: US$169.9 million (including other cost) Economic Feasibility: EIRR: 19.65 % Financial Feasibility: FIRR: 13.08 % Payback Period: N/A Initial Tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

l Project Preparation (including land

acquisition): 2011-2013 l Tender: 2013 l Contract Signing: 2013 l Construction: 2014-2015 l Operation: 2015


erangan – tanjung benoa toll road, bali

project description

Economic activities in Bali have been showing positive growth, which induces high mobility of people, causing traffic jams in some parts of the national, provinces and regency/towns routes. To overcome this problem, several efforts have been made. One of them is improving road conditions or building new roads.

persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

Bali Province

The development is progressing rapidly in the North Bali area, especially in Kuta; consequently people movement from and to this area is extremely high. Nowadays, South Kuta has grown to be the centre of economic development, education and tourism, which is intensifying traffic flow.

project feasibility indicator

The foot area of Bali Island is only linked by one route that is Jalan Ngurah Rai, linking South Kuta and Denpasar and other towns. In certain hours, traffic jams occur as a result of recent inadequate road capacity.

technical specification

Thus, an alternative road is required in order to improve service to the people and to increase access to South Kuta, so that this area is easier to reach. Besides, this alternative road is expected to reduce traffic volumes in existing roads so that the roads perform better. ppp modality

Construction will be carried out by the Government. O&M Contract after construction completed. The concession period would be granted for 35 years. type of project proposal


technical overview demand forecast:

12,119 vehicles/day in 2011 project scope:

Toll road 7.5km Length: 7.5km design speed: 100km/h number of lanes: 2 x 3 lanes lane of width: 3.6m outer shoulder width: 3m inner shoulder width: 1.5m median width: 5.5m right of way: 40m (minimum) financial overview

Estimated project value: US$148.88 million Land acquisition: US$58.88 million Construction: US$90 million Economic feasibility: EIRR: n/a Financial feasibility: FIRR: 6.93 % Payback period: n/a Initial tariff: n/a type of government support

Government support can be made available.

contracting agency

Expected Time of Project Development

Minister of Public Works

l Under tender preparation 275

project data indonesia 2011

l Land acquisition: 2 years l The design and build period will take

2 years


edan – binjai toll road, north sumatera

project description

Considering the increasing volume of traffic in the city of Medan and its surrounding areas, the North Sumatera Provincial Government plans for the construction of a toll road connecting Medan to the city of Binjai. The construction of this toll road is an attempt to improve economic connections to the east coast of Sumatera and also to spur regional cooperation and assist the national transportation system. The existing national road servicing Medan-Binjai is already very busy with commuters and long distance vehicles heading to Nanggroe Aceh Darussalam. It also serves trucks transporting oil and plantation produce from the vicinity of Binjai. ppp modality

Land acquisition cost and part of construction will be carried out by teh Government. The concession period would be granted for 35 years. type of project proposal

Solicited contracting agency

T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

North Sumatera Province Project Feasibility Indicator

Technical Overview Supply and Demand Analysis Demand Forecast:

14,092 vehicles/day in 2011 Project Scope:

Toll Road: 15.8km technical specification

Length: 15.8km Design speed: 100km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 5.5m Right of way: 4.4m (minimum)

rapidly, particularly in Palembang and Indralaya. The Palembang – Indralaya toll road corridor includes the Ogan Ilir regency area. The use of land surrounding the Palembang – Indralaya route is generally projected for housing, fishery and agriculture activities. The Palembang – Indralaya corridor currently is only connected directly by the existing artery road. There is a road that runs parallel to the existing artery road for a distance of 7–10km on the east side of the existing road which links Palembang (Plaju) – Pemelutan – Kayu Agung with provincial road status. Between Palembang – Indralaya the parallel road and existing artery road are linked by one route in Kampung Pelabuhan Dalam. The condition of this connecting service road is still inadequate.

financial overview

ppp modality

Estimated Project Value: US$129.30 million Land Acquisition: US$25.60 million Construction: US$103.70 million (including other cost) Economic Feasibility: EIRR: 27.97 % Financial Feasibility: FIRR: 15.98% Payback Period: N/A Initial Tariff: N/A

BOT (Build-Operate-Transfer). The concession period would be granted for 35 years.

type of government support

Minister of Public Works

Government support can be made available.

persons in charge: l Mr Harris H. Batubara

Expected Time of Project Development

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia

acquisition): 2011-2013 l Tender: 2013 l Contract Signing: 2013 l Construction: 2014-015 l Operation: 2015


alembang – indralaya toll road, south sumatera

project description:

In the past few years, economic growth in South Sumatera Province has increased


type of project proposal

Solicited contracting agency

Minister of Public Works persons in charge: l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

South Sumatera Province

project data indonesia 2011

project feasibility indicator

technical overview Supply and Demand Analysis Demand Forecast:

13,180 vehicles/day in 2011 Project Scope:

Toll Road 22km technical specification

Length: 22km Design speed: 100km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1m Median width: 10m Right of way: 47.5m (minimum) financial overview

Estimated Project Value: US$105.29 million Land Acquisition: US$6.41 million Construction: US$98.88 million (including other cost) Economic Feasibility: EIRR: 33.04 % Financial Feasibility: FIRR: 15.57 % Payback Period: N/A Initial Tariff: N/A

The economic growth has resulted in an increasing number of vehicles as well as new trade centres and industries of any scale, such as shops, malls, factories, which will lead to the alteration of land use. Therefore, the economic growth has resulted in a new problem in the road network, which is the land transportation facility, where the traffic has become more crowded and traffic jams occur on some routes. The road linking Soreang and Pasirkoja (through Koppo and Soekarno Hatta), which stretches for more than 15km, at the moment is one of the most crowded routes in the Regency and City of Bandung. Long lines of traffic jams happen most of the time along this road. It results in the increase of traffic from Soreang to Bandung and otherwise.

type of government support

Besides, Kopo road is the only route that meets the requirement for heavy vehicles such as buses and trucks from Soreang to Bandung. With current conditions, vehicles can only run at an average speed of 10-20km/h. The consequence is inefficiency of operational cost, which also means national economic loss. To solve this problem, more high-standard roads should be added. One of the alternatives is to build a new road, which is toll road.

Government support can be made available.

ppp modality

Expected Time of Project Development

acquisition): 2011-2013 l Tender: 2013 l Contract Signing: 2013 l Construction: 2014-2015 l Operation: 2015


asir koja soreang toll road, west java

Part of the construction and land acquisition will be carried out by the Government. The concession period will be granted for 35 years. type of project proposal

Solicited contracting agency

Minister of Public Works

project description

persons in charge:

For the past few years, the economic growth in South Bandung area has shown significant development, particularly in the town of Soreang as the capital of Bandung Regency and in several adjacent areas such as District Margahayu, District Ketapang, District Banjaran and District Soreang itself.

l Mr Harris H. Batubara

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373

l Mr Yusid Toyib

Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E: project location

South Bandung Regency, West Java Province project feasibility indicator technical overview Demand Forecast:

17,528 vehicles/day in 2011 Project Scope:

Toll Road 15km technical specification

Length: 15km Design speed: 80km/h Number of lanes: 2 x 3 lanes Lane of width: 3.5m Outer shoulder width: 2m Inner shoulder width: 0.5m Median width: 3m Right of way: 30m (minimum) financial overview

Estimated Project Value: US$102.15 million Land Acquisition: US$24.49 million Construction: US$77.66 million (including other cost) Economic Feasibility: EIRR: 21.12 % Financial Feasibility: FIRR: 11.88 % Payback Period: N/A Initial Tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

l Project Preparation (including land

acquisition): 2011-2013 Tender: 2013 Contract Signing: 2013 Construction: 2014-2015 Operation: 2015

l l l l 277

project data indonesia 2011


project data indonesia 2011


olid waste management improvement bandung municipal, west java

project description

The Solid Waste Management in Bandung City is not efficient. In order to increase solid waste management in Bandung, the Government will endorse the private sector to be involved in solid waste management. The Project is intended to support the solid waste management system in Kota Bandung by developing a Waste to Energy Power Plant, with an operating capacity 500 tons/day. This WTE Power Plant is planned to generate power of around 7 megawatts. ppp modality

Build Operate Transfer (BOT) 20 years. type of project proposal

Unsolicited contracting agency

Bandung Municipal Government person in charge: l Mr. Dada Rosada

Position: Mayor of Bandung Address: Jl. Wastukancana No. 2 Bandung, West Java, Indonesia Other Contact: Mr. Cece H. Iskandar Position: Director of Local Government Enterprises for Solid Waste Address: Jl. Surapati No. 126 Bandung, West Java, Indonesia T: +62 22 7207889 E: project location

Bandung City, West Java Province project feasibility indicator technical overview supply and demand analysis

l Incinerator equipment capacity: 1,000

tons waste/day

l Mr. Setyo Gunadi

l Civil work for building and utility

Position: Head of Settlement and Housing Agency West Java Province Address: Jl. Kawaluyaan Indah no 4, Bandung 40286, West Java, Indonesia T: +62 22 7319782 F: +62 22 7313675

activity l Power transmission to PLN: 6 MW financial overview

Estimate Investment Cost: US$100 million Land Acquisition: US$5 million Construction: US$95 million (including other cost) Economic Feasibility: EIRR: 21.00% Financial Feasibility: (on project) FIRR: 19.30% type of government support

Government support can be made available. Expected Time of Project Development

l l l l l l

Project preparation: 2010 Tender: 2011 Contract Signing: 2011 Land acquisition: 2010-2012 Construction: 2012 Operation: 2013


olid waste final disposal and treatment facility – greater bandung area, west java project description

To operate two sanitary landfill sites which will facilitate the environmentally efficient disposal of household and commercial waste from the greater Bandung metropolitan area in environmentally sound final disposal sites. The final disposal sites should incorporate waste sorting, recycling and/ or composting facilities, and may also incorporate methane capture for flaring or secondary power generation.

l Existing solid waste generation: 7,500

ppp modality

m3/day l Existing volume of transported waste: 4,050m3/day l Projection of solid waste generation in 2020: 8,500m3/day l Projection of solid waste generation in 2030: 10,000m3/day

BOT (Build – Operate - Transfer) for 20 years.

project scope:

Settlement and Housing Agency West Java Province

l Land acquisition: 20 ha

person in charge:

type of project proposal

Solicited contracting agency

project location

West Java Province project feasibility indicator

Technical Overview Supply and Demand Analysis Demand Forecast :

2,500 ton/day of waste in 2011 Project Scope:

2 Final disposal sites. Leuwigajah: 40ha Legok Nangka: 30ha technical specification:

l Waste disposal loading: 2,500 ton/day

2011 Annual increase estimated at 2.2% Sanitary landfill specification Leachate capture and treatment Insect vector and odour control 18 hour/day operation 7 days/week

l l l l l

financial overview

Estimate Investment Cost: US$80 million Land Acquisition: US$12 million Construction: US$68 million (including other cost) Capital Structure: Equity: Equity: US$20 million (30%) Loan: US$48 million (70%) Economic Feasibility: EIRR: 22.00 % Financial Feasibility: FIRR: 18.00 % Payback Period: 10 years Initial Tariff: IDR 2,900 type of government support

Government support can be made available. Expected Time of Project Development

l Land acquisition: done l The design at build period will take

one year 279

project data indonesia 2011


edan – kualanamu – tebing tinggi toll road, north sumatera project description

The Medan – Kualanamu – Tebing Tinggi toll road will be an alternative route for vehicles heading eastward from the city of Medan towards Tebing Tinggi, and will be connected to the Belawan – Medan – Tanjung Morawa (Belmera) toll road. The construction of this toll road is meant to support the growth of the Mebidang Metropolitan area and the planned Kualanamu Airport. ppp modality

Land acquisition cost and part of construction will be carried out by the Government. The concession period would be granted for 35 years. type of project proposal

Solicited contracting agency

Minister of Public Works

technical specification

type of project proposal

Length: 60.00 km Design speed: 100km/h Number of lanes: 2 x 3 lanes Lane of width: 3.6m Outer shoulder width: 3m Inner shoulder width: 1.5m Median width: 5.5m Right of way: 4.4m (minimum)


financial overview

Estimated Project Value: US$475.52 million Land Acquisition: US$75 million Construction: US$400.52 million (including other cost) Economic Feasibility: EIRR: 22.02 % Financial Feasibility: FIRR: 11.26 % Payback Period: N/A Initial Tariff: N/A type of government support

Government support can be made available. Expected Time of Project Development

persons in charge: l Mr Harris H. Batubara

l Project Preparation (including land

Position: Director for Freeway and Urban Road Address: Sapta Taruna Building 4th Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7395725, +62 21 7245752 F: +62 21 7246373 l Mr Yusid Toyib Position: Secretary of Toll Road Authority (Badan Pengatur Jalan Tol) Address: Sapta Taruna Building 2nd Floor, Jl. Pattimura No. 20, Jakarta 12110, Indonesia T: +62 21 7255779, +62 217255789 F: +62 21 7246487 E:

l l l l

project location

North Sumatera Province project feasibility indicator technical overview Supply and Demand Analysis Demand Forecast:

12,568 vehicles/day in 2011

acquisition): 2011-2013 Tender: 2013 Contract Signing: 2013 Construction: 2014-2015 Operation: 2015


lungkung regency (tukad unda) water supply, bali

project description

The project is intended to assist water supply in Denpasar, Badung, Gianyar and Klungkung. Raw water will be abstracted from Tukad Unda in Klungkung Regency, and then treated in a Water Treatment Plant (WTP) with a capacity of 1,000 lps. Bulk water supply from the WTP is planned to go to Badung (700 lps) and to Denpasar (300 lps) through a treated water transmission pipeline along 40 km. This facility will be equipped with a total reservoir capacity of 15,000m3 as well.

Project Scope:

ppp modality

Toll Road 60km

BOT (Build – Operate – Transfer)


contracting agency

Klungkung Regency person in charge: l Mr. Janapria

Address: Jl. Untung Suropati No. 2 Klungkung, Bali, Indonesia T: +62 366 21901, +62 366 21054 F: +62 366 22848 project location

Klungkung Regency, Bali Province project feasibility indicator Technical Overview

Supply and Demand Analysis

Current Supply: 1,900 lps Current Demand: 2,500 lps Forecast Demand in 2015: 4,000 lps Forecast Demand in 2020: 4,500 lps Project Scope:

l Land Acquisition: 17,000 m2 l Water Treatment Plant: 1,000 lps l Treated water transmission line: ± 40

km l Reservoir 4 unit total 15,000m3 financial overview

Estimated Project Value: US$43.50 million Land Procurement: US$0.8 million Construction: US$42.7 million (including other cost) Financial Feasibility: FIRR: 17 % Net Present Value: NPV: US$12 million Payback Period: 12 years Initial Tariff: IDR 2,900/m3 Type of government support

Government support can be made available. Expected Time of Project Development

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Project Preparation: 2010 Tender: 2011 Contract Signing: 2011 Land acquisition: 2011-2012 Construction: 2012 Operations: 2013

Other Information

In regards to Unda Estuary Reservoir, a Detailed Engineering Design (DED)

project data indonesia 2011

had been prepared in 2006, and Environmental Impact Assessment in 2007.


olid waste final disposal and treatment facility – bogor and depok area, west java project description

To operate a sanitary landfill site which will facilitate the environmentally efficient disposal of household and commercial waste from the greater Bandung metropolitan area in environmentally sound final disposal sites. The final disposal sites should incorporate waste sorting, recycling and/or composting facilities, and may also incorporate methane capture for flaring or secondary power generation. ppp modality

Build Operate Transfer (BOT) 20 years. type of project proposal

Solicited Contracting Agency

Settlement and Housing Agency West Java Province person in charge: l Mr. Setyo Gunadi

Position: Head of Settlement and Housing Agency West Java Province Address: Jl. Kawaluyaan Indah no 4, Bandung 40286, West Java, Indonesia T: +62 22 7319782 F: +62 22 7313675 project location

West Java Province project feasibility indicator technical overview supply and demand analysis Demand Forecast:

1,200 ton/day of waste in 2011 Project Scope:

1 x Final disposal sites Leuwigajah: 40 ha Legok Nangka: 30 ha technical specification:

l Waste disposal loading: 2,500 ton/day


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Annual increase estimated at 2.2% Sanitary landfill specification Leachate capture and treatment Insect vector and odour control 18 hour/day operation 7 days/week

financial overview

Estimate Investment Cost: US$80 million Land Acquisition: US$12 million Construction: US$68 million (including other cost) Capital Structure: Equity: Equity: US$20 million (30%) Loan: US$48 million (70%) Economic Feasibility: EIRR: 22.00 % Financial Feasibility: FIRR: 18.00 % Payback Period: 10 years Initial Tariff: IDR 2,900

about 35 km. This transmission will be provided by the Government; meanwhile local government will provide funds for land acquisition. ppp modality

The concession period will be granted for 20 years. type of project proposal

Solicited contracting agency

Mayor of Bandar Lampung Regency person in charge: l Mr. Gustimigo

type of government support

Position: President Director of PDAM Way Rilau Address: Jl. Pangeran Emir M Noor No. 11 A Bandar Lampung, Lampung Indonesia T: +62 721 484611 F: +62 721 484611

Government support can be made available.

project location

Expected Time of Project Development

Bandar Lampung City Lampung Province

l Under tender preparation l Land acquisition: done l The design at build period will take

project feasibility indicator

one year

l The development of intake: 500 lps. l The development of water supply


andar lampung municipal water supply, lampung

project description

Bandar Lampung Municipal will be more progressive with its role as the capital city of Lampung Province. Demand for infrastructure services, especially drinking water, will increase both for commercial and domestic consumers. Drinking water services in Bandar Lampung is served by PDAM Way Rilau. The level of drinking water services in 2007 was 24% of the total population (815,700 citizens). Future development plans will serve Way Sekampung and Way Sabu regions, each with a capacity of 300 lps and 200 lps. Raw water will be conveyed to a Water Treatment Plan in PDAM. The distance from raw water resources to WTP is

technical overview

pipeline transmission: (ND 800mm, length: 29 km) l The development of WTP: (2 units, at 250 lps). l The development of distribution network: (42,000 connection). financial overview

Estimated Project Value: US$38 million Land Acquisition: US 0.69 million Design & Financial Fee: US$0.54 million Construction: US$36.77 million Private Investment: US$29.2 million Equity: US$14.1 million Loan: US$15.1 million Government Support: US$8.8 million Economic Feasibility: ENPV: US$170 million EIRR: 28% Financial Feasibility: FNPV: US$2.58 million FIRR: 17.27 % Payback Period: 10 years type of government support

Availability of Bulk Water. 281

project data indonesia 2011

Expected Time of Project Development

l The Development of raw water unit:

2011 l The Development of WTP: 2011 l The Development of Distribution Network: 2011-2020 l The Development of Service Unit: 2011-2020


est cikarang & cibitung bekasi regency water supply, west jawa project description

Drinking water service in the Bekasi regency is served by PDAM of Bekasi regency. PDAM of Bekasi regency has six branches that serve several districts from the two administrative regions of different governments, which are Bekasi municipal and regency. The number of PDAM’s customers in Bekasi Regency at the end of 2005 is 110,275 connections. The scope of the project between the local government of Bekasi with the private sector includes development of a new drinking water system that covers Cibitung and West Cikarang Regency. This includes the intake system, the installation of drinking water, reservoir and pipeline distribution network. ppp modality

Concession for 25 years. type of project proposal

Solicited contracting agency

Local Government of Bekasi Regency person in charge:

project feasibility indicator technical overview Supply and Demand Analysis

Current Supply: 1,400 lps Current Demand: 1,850 lps Forecast Demand: 2,300 lps Project Scope:

Intake development Water Treatment Plant development Transmission development Reservoir development Distribution network and 68,000 connections

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financial overview

Estimated Project Value (Constant Price): US$29.7 million Financial Structure: Equity: N/A Loan: N/A Economic Feasibility: ENPV: N/A EIRR: N/A Financial Feasibility: (on project) FNPV: N/A FIRR: N/A Payback Period: N/A Initial Tariff: N/A Expected Time of Project Development

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Project Preparation: 2010 Tender: 2011 Contract Signing: 2011 Operations: 2014


andung regency water supply, west java

project description

Bandung Regency is one of several regencies surrounding Bandung city that has experienced a rapid population increase. Industry is one of the activities in Bandung Regency. This activity is attracting many workers from other areas.

l Mr. Dhana

Position: President Director of Water Supply Local Government Enterprise (PDAM) Bekasi Regency Address: Jl. Raya Kalimalang Kav I/1 Masnaga Bekasi, West Java, Indonesia T: +62 21 89970375 F: +62 21 89970375 project location

Bekasi Regency, West Java Province

Unfortunately, Bandung Regency’s rapid population growth has not been supported by the availability of drinking water. Development of water supply services will be conducted with private participation in construction of a Water Treatment Plant (WTP), water transmission and distribution to customers.


ppp modality

Concession for 30 years. type of project proposal

Solicited contracting agency

Local Government of Bandung Regency Person in charge l Mr. Rudie Kusmayadi

Position: Technical Director of Water Supply Local Government Enterprise PDAM Tirta Raharja Bandung Regency Address: Jl. Kol Masturi Km 3 Cimahi, Bandung, West Java Indonesia T: +62 22 6654184 F: +62 22 6654298 project location

Bandung Regency, West Java Province project feasibility indicator

technical overview Supply and Demand Analysis

Current Supply: N/A Project Scope:

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Development of production unit Development of transmission pipeline Development of distribution unit. Land acquisition (20,000 m2)

financial overview

Estimated Project Value: US$17.17 million Land Acquisition: N/A Construction: US$ 17.17 million (including other cost) financial structure:

Equity: US$5.15 million Loan: US$12.02 million Economic Feasibility: ENPV: N/A EIRR: N/A Financial Feasibility: FIRR: 19.00% Payback Period: N/A Initial Tariff: N/A Expected Time of Project Development

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Project Preparation: 2010 Tender: 2011 Contract Signing: 2011 Construction: 2012 – 2014 Operations: 2014

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  Hogan Lovells is one of the leading global advisers to the infrastructure sector. Our expertise covers the full life cycle of infrastructure investment, procurement and delivery, across of all classes of infrastructure. By representing sponsors, developers, lenders, bidders and government or quasi-governmental authorities, we are able to provide a holistic 360 degree view of any transaction, therefore giving us a unique position to advise on any project. Hogan Lovells’ Asia Infrastructure Group offers clients a multi-disciplinary group of lawyers covering construction, international arbitration, M&A, private equity and project finance, on all aspects of social, economic and commercial infrastructure, including power generation, rail, roads, water and other forms of infrastructure. We have a thorough understanding of infrastructure as an asset class and of the different issues that impact upon the sector in Asia and internationally. This has facilitated our involvement on many of the largest and most complex infrastructure projects in Asia and the world. In particular, we have genuine capability and advise on a wide range of transactions in Indonesia, including energy, financing and disputes. The length of time for which we have been operating in Indonesia has given us an in-depth knowledge of the local market and direct experience of what it takes to close deals in Indonesia. Recognised as one of the leading global infrastructure advisers − Let Hogan Lovells be your guide. James Harris Managing Partner, Partner, Singapore T +65 6302 2552

Ken Hawkes Partner, Singapore T +65 6302 2551

Brad Roach Partner, Singapore T +65 6302 2556           

Your Growth Partner in Indonesia with Comprehensive Coverage across Industries Aerospace & Defense Automotive & Transportation Business & Financial Services Chemicals, Materials & Food Education Electronics & Security Energy & Power Systems Environmental & Building Technologies Healthcare Industrial Automation & Process Control Information & Communications Technology Measurement & Instrumentation

Frost & Sullivan, the Growth Partnership Company, partners with clients to accelerate their growth. The company's TEAM Research, Growth Consulting and Growth Team Membership empower clients to create a growth-focused culture that generates, evaluates and implements effective growth strategies. Frost & Sullivan employs over 45 years of experience in partnering with Global 1000 companies, emerging businesses and the investment community from 40 offices on six continents. For more information about Frost & Sullivan’s Growth Partnerships, visit log on to our website to access complimentary information in your industry through: Analyst Briefing Growth Opportunity Newsletters Chairman’s Series on Growth eBroadcast Your contact in Indonesia Mr. Eugene Van De Weerd E: T: +62(0)21.571.3246