Open for business

Author: | Published: 24 Apr 2015
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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.

Offshore rules

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 investors.

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 fairly shortly.

"Several state-owned 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.

Transport needs

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 bottlenecks.

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.