Indonesia’s new president has
created more optimism in the country. But as Hill Choi Lee
explains, long-standing issues must still be addressed,
especially in the projects sector
When considering Asia's most desirable foreign investment
destination in recent times – aside from frontier
market Myanmar – Indonesia undoubtedly comes to mind.
Between 2010 and 2014, foreign direct investment (FDI) has
risen drastically, with sectors such as mining, manufacturing,
infrastructure and food among the main interests.
In 2014, the mining industry saw FDI reaching $4.7 billion.
The food industry pulled in $3.1 billion, infrastructure
– including transport and telecommunication –
saw investments worth $3 billion, and a range of other sectors
ranging from pharmaceutical to electronics amassed a total of
almost $5 billion. The major FDI streams come from Japan with a
near $3 billion, and Europe with over $5 billion. The majority
of investments goes to Java, comprising of the country's
capital Jakarta, West and East Java, and Banten. East
Kalimantan is also a hotspot for FDI.
The inauguration of President Joko Widodo (Jokowi) and his
administration in 2014 has created optimism in Indonesia's
economic market. The decision of Bank Indonesia (BI), the
Indonesian central bank, in 2012 to improve on bank
consolidation and services not only affected banks, with the
issuance of new rules, but also impacted those in the energy
and natural resources sector.
In October 2014, BI issued controversial offshore borrowing
regulations which have since been amended in early 2015. These
amendments touched on the minimum hedging and liquidity ratios,
and their calculations and minimum ratings requirement. The
move by the central bank is designed to reduce the exposure of
currency and liquidity risks posed to Indonesian borrowers
relying on foreign capital.
"In October 2014, BI issued
controversial offshore borrowing regulations, which
have since been amended"
Within the natural resources industry, the sector was again
rocked by the implementation of a raw ore exportation ban in
early 2014, as the government seeks to increase investment in
domestic processing and making Indonesia the next high-value
metal producer. The move is seeing positive results, despite
the initial backlash from the Indonesian Association of Mineral
Entrepreneurs and other mining companies. The result is $18
billion worth of investments, largely from Chinese
This is exemplified by the joint venture project between
China Hongqiao, Indonesia's Harita Group and other partners in
building the $1.2 billion PT Well Harvest Winning Alumina
Refinery on Borneo. In January 2015, Chinese ferronickel
producer Virtue Dragon Nickel Industry announced its plans to
invest $5 billion in the construction of a nickel smelter, port
and power plant in Southeast Sulawesi.
One sector attracting plenty of attention, above all else,
is power. Jokowi has stated that he wants to build power
generating plants with a total capacity of 35,000MW by 2020.
Last year he dismissed the board of PLN in a clear statement of
intent. Indonesia's state-owned utility PLN is expected to
construct 15,000MW with the remaining 20,000MW due to be
tendered out to independent power producers (IPPs).
PLN has already launched the tender for two power projects,
Java-7 and Java-5, both located in the Banten province of Java.
The government has also attempted to restart several stalled
projects, including the Sumsel 9&10 power plants and the
Central Java project.
A friendly face?
The Central Java project poses a real challenge to the new
administration as it seeks to foster a reputation for being
business-friendly. The project was awarded to a Japanese
consortium comprising Adaro, J-Power and Itochu in 2011 but has
been faced with opposition from local landowners, repeatedly
frustrating its attempts to close the financing. Land
acquisition is one of the major sources of delays for projects
in Indonesia and the consortium last year declared a force
majeure because of the difficulties. The Indonesian
government has since said it would look to invoke the 2012 land
acquisition act to acquire the remaining parcels of land,
although this law has so far been untested.
In March this year an Indonesian court decision in favour of
a citizens' group added further uncertainty to the business
environment, forcing investors to question the certainty of
infrastructure contracts with government entities. On March 24
the Central Jakarta District Court ruled that PAM Jaya's
18-year-old cooperation agreements with partners PT PAM
Lyonnaise Jaya (Palyja) and PT Aetra Air Jakarta were null and
void. This is the first time an Indonesian court has annulled a
contract between a government entity and a private party
following a case brought by citizens. It has alarmed
infrastructure investors – and threatens the
government's infrastructure plans. The implications for this
for both existing and planned concessions are still not clear
although Jokowi is expected to respond through regulations
entities have talked about tapping the capital markets
for additional funding"
There are reasons to be more positive though. In the natural
resources sector there are several planned expansions, as
Indonesia seeks to shore up its energy supply. A consortium of
Japanese and Korean developers plus Pertamina closed a
multi-billion dollar financing earlier this year for the
Donggi-Senoro LNG plant. The project is only the fourth LNG
plant in Indonesia to be developed and also the first to be
financed under the new regulations, which allow for a
separation of the upstream and downstream components. BP is
also expecting to add a third train at its Tangguh site. When
the deal is financed it will likely pull in liquidity from all
over the region. Pertamina has also suffered a similar fate to
PLN under Jokowi's leadership with the board being dismissed
last year. The state-owned oil and gas company signed
memorandums of understanding with Aramco, Sinopec and Nippon
Oil last year to upgrade its refineries with the cost expected
to be around $20 billion.
The transport sector is likely to be slower, although the
government has restarted negotiations on the Soekarno-Hatta
International Airport (SHIA) rail link. The development is
still in its early stages, with a tender not due out until at
least 2016, but the project should pique investor interest
provided that the adequate viability gap funding (VGF) is in
place. The project is needed as congestion in Jakarta remains
unbearable and the number of passengers arriving at Jakarta's
international airport rises each year. Like most airport
projects, however, the total costs are not recoverable from
fare revenue and the government will need to provide support to
get the project going.
Elsewhere, Indonesia's PPP market is still relatively
stagnant. Several projects stalled under the last
administration for a variety of reasons, including land
acquisition, permitting procedure, the lack of clarity
regarding government funding and guarantees, and other common
Despite these issues, Indonesia is one of the most exciting
markets in Asia for investors, despite some ongoing issues. The
new administration has a reputation for being business-friendly
and if Indonesia is to develop its infrastructure it needs to
sustain its economic growth rates the opportunities for private
investors should grow exponentially. Buoyed by the recent fuel
subsidy windfall and with a desire to get as many projects
shovel-ready as fast as possible, several projects are expected
to be procured directly or awarded to the state-owned entities.
Several state-owned entities have also talked about tapping the
capital markets for additional funding. In spite of this the
likelihood is that there will be plenty of opportunities for
both domestic and foreign investors since Indonesia's
infrastructure requirements are so vast.