Indonesia – Infrastructure Bottlenecks_14!02!11!06!16

8/12/2019 Indonesia Infrastructure Bottlenecks_14!02!11!06!16

1/44

lGlobal Research l

Important disclosures can be found in the Disclosures AppendixAll rights reserved. Standard Chartered Bank 2011 research.standardchartered.com

Contents

Highlights 1

Overview 2

Land infrastructure 3

Seaports 12

Airports 17

Electricity 22

Government support 28Scenario analysis 31

Infrastructure bonds 35

Appendix 1: Sectors closed to foreign

investment in infrastructure 40

Appendix 2: Procedures for direct

investment in the transport sector 41

Tai Hui, +65 6596 8244

[email protected]

Fauzi Ichsan, +62 21 2555 [email protected]

Edward Lee Wee Kok, +65 6596 [email protected]

Eric Alexander Sugandi, +62 21 2555 [email protected]

Jennifer Kusuma, +65 6596 [email protected]

Special Report | 06:00 GMT 14 February 2011

Indonesia Infrastructure bottlenecks

Highlights

Poor infrastructure conditions are the main factor preventing Indonesias economy

from growing at its potential rate of 8%. Inadequate infrastructure also results in

high inflation compared to most of Indonesias peers in South East Asia.

Infrastructure development has been slow in the past decade and has relied

heavily on government spending. The government has not allocated sufficient

funding for infrastructure development, while participation from private investors is

still far below what is needed.

Land infrastructure is concentrated on the island of Java, which contributes about

58% of Indonesias GDP and is home to about 59% of the population. The

government is now focusing on developing a trans-Java toll-road system, but land

clearance remains an issue.

Compared to other ASEAN-5 countries, Indonesias main airports and seaports

are outdated and, in some cases, overcrowded. Meanwhile, electricity supply

needs to be boosted to meet surging domestic demand.

We run scenarios to assess the impact of infrastructure development in the

transport and electricity sectors. Under the best of our most plausible scenarios,

Indonesias economy will grow in a range of 7.1-7.6% during the 2011-14 period if

the private-sector participation rate reaches 50% of what is required and the

government increases spending on transport infrastructure by 20% a year (ceteris

paribus). Under an alternative scenario, if state-owned electricity company PLN

increases annual capex by 20% and private-sector participation reaches 50% of

what is needed, growth can reach 6.9-7.5%. Otherwise, we expect the economy

to grow by only 6.5-7% during the period.

The government is preparing to issue infrastructure bonds to help finance

infrastructure projects.


2/44

Special Report

14 February 2011 2

Overview

Ten years ago, investors in Indonesias real economy would have identified legal

uncertainty and corruption as the biggest hurdles to investment followed by the

chaotic transition to regional autonomy, weak infrastructure, unfriendly labour laws,and tax and customs issues. Today, all six of these hurdles remain. But while

President Yudhoyonos anti-corruption drive has helped to address corruption and

excessive red tape, weak infrastructure particularly the lack of trans-Java and

trans-Sumatra highways, inadequate power supply and insufficient seaport facilities

in the worlds biggest archipelago has become the biggest impediment to foreign

direct investment (FDI).

Under the IMF programme from 1998-2004, Yudhoyonos predecessors focused

primarily on fiscal prudence at the expense of maintaining the quality of existing

infrastructure, let alone building new projects. While this cut public debt to 27% of

GDP in 2010 from 80% in 2000, weak infrastructure is preventing Indonesias GDPgrowth from reaching its potential rate of 8%. Table 1 compares the quality of

infrastructure across selected Asian countries.

Partly as a result of infrastructure bottlenecks, real GDP growth has averaged only

5.1% over the last nine years. Household consumption accounts for the biggest

share of GDP (around 60%), and contributed 2.6ppt of the 5.1% GDP growth over

the period. Investment (23% of GDP) contributed 1.3ppt, with the balance generated

by net exports and government consumption. The investment growth rate therefore

needs to double in order to raise GDP growth to its potential level.

The government has repeatedly said that Indonesia needs around USD 30bnannually (4% of nominal GDP) in infrastructure investment in the next five years. We

believe the economic benefits will exceed the amount invested, as better

infrastructure stimulates both household spending and private investment.

In TheSuper-Cycle Report, we projected that Indonesia could potentially become

one of the worlds five largest economies by 2030, given its population and ample

natural resources. This is based on an average real GDP growth assumption of 7%

between 2010 and 2030. However, this will be difficult to achieve if infrastructure

bottlenecks are not resolved quickly, which is crucial to reducing inflation to a more

moderate level and facilitating a more even distribution of economic growth across

the country.

Table 1: Infrastructure quality in selected Asian countries (Global Competitiveness Report, 2010-2011)

Country Singapore Malaysia Thailand China Indonesia India Philippines

Roads 6.6 5.7 5.1 4.3 3.5 3.3 2.8

Railroad 5.8 4.7 3.0 4.3 3.0 4.6 1.7

Seaport 6.8 5.6 5.0 4.3 3.6 3.9 2.8

Air transport 6.9 5.9 5.9 4.4 4.6 4.6 3.6

Electricity 6.7 5.7 5.7 5.3 3.6 3.1 3.4

Score (out of 7)* 6.6 5.5 4.9 4.1 3.7 3.6 3.2

* 1 = extremely under-developed; 7 = efficient by international standards Source: World Economic Forum

Unless infrastructur e cond i t ions

impro ve, it wi l l be di f f icul t for

Indonesian growth to reach i tspotent ial

We bel ieve Indonesias economy

could po tent ially become one of the

wor lds f ive largest by 2030


3/44

Special Report

14 February 2011 3

Land infrastructure

As the largest country in South East Asia, Indonesia has the regions biggest

networks of roads and railways (see Table 2). That said, the mere length of these

networks can be a misleading measure of the sufficiency of a countrys transportinfrastructure for the following reasons: (1) each country has different criteria for road

classification; (2) this measure ignores differences in road and rail quality; and (3) it

ignores differences in geographical conditions and population distribution.

Indonesias ratio of road distance to square kilometre of area is one of the lowest in the

region, indicating that the road system is inadequate to cover the countrys almost 2mn

square kilometre land area. The road and railroad systems are concentrated in Java

Island, which accounts for only about 7% of Indonesias total land area, while bigger

islands such as Kalimantan and Papua still have limited land transport infrastructure.

RoadsIndonesias current road system does not provide optimum support for the countrys

economic growth. Since 2000, road construction by the central government, typically

of roads that run across different provinces, has been negligible (Chart 1). Following

the political crisis in 1998, when former strongman Soehartos fall from power raised

the risk of secessionist movements in resource-rich provinces, Indonesia introduced

regional autonomy. This radically decentralised the central governments powers and

responsibilities to 33 provincial and 497 municipal governments.

Table 2: Land area, length of roads, and length of railways in selected Asian

countries (2009)

Land area

(000 km2)

Roads*

(000 km)

Road

coverage (%)

Railways

(000 km)

China 9,570 3,860 40 86

India 2,973 3,320 112 64

Indonesia 1,905 473 25 9

Thailand 517 212 41 5

Malaysia 329 100 30 2

Philippines 300 202 67 1

* Including highways and toll roads

Sources: CIA World Factbook, CEIC, Standard Chartered Research

Chart 1: Road development by level of government authority

Excluding expressways and toll roads

0

100

200

300

400

500

Before

1968

1974 1979 1984 1989 1994 1999 2002 2003 2004 2005 2006 2007 2008 2009

'000km

National (central government) Provincial Municipal

Source: Ministry of Public Works, Central Agency of Statistics

Indonesias road network has

hardly expanded in the past decade

due to land clearance di f f icul t ies

Road and rai l road systems are

overstretched in a country with

almost 2mn squ are ki lometres of

land area


4/44


5/44

Special Report

14 February 2011 5

From 2005-09, the number of motorcycles rose by 24% annually and the number of

cars rose by 22%, while the distance of usable roads actually declined from 7,226km

in 2005 to 6,506km in 2009. According to the Ministry of Transportation (MoT), the

economic cost of traffic congestion in Jakarta is IDR 5.5trn (USD 0.6bn) per year,while the cost of air pollution is IDR 2.8trn (USD 0.3bn). The ministry also estimates

that 63% of Jakartas residents spend 20-30% of their income on transport.

Toll roads

The government aims to expedite toll-road development to promote broader

economic development. Toll roads are expected to cut intra-city transport times,

cutting average transport costs, allowing the smooth distribution of goods, and

facilitating economic activity. Indonesia currently has a total of about 742km of toll

roads (see Table 3). According to the government, the ideal distance is 3,088km.

Therefore, 2,337km of new roads have to be built, at an estimated cost of IDR

216.8trn (USD 24bn). Most toll-road investments are expected to be funded byprivate investors, as the government has said that it can only build 70.5km, or 2.6%,

of the planned toll roads. Before building toll roads, private investors must bid for a

toll-road concession from the government (known as a PPJT).

Table 3: Toll-road developments in Indonesia (as of September 2010)

StatusNumber of

routesLength (km)

Investment cost(IDR trn)

Existing 28 741.9 -

PPJT granted* 20 768.7 66.8

In the process of obtaining PPJT 4 154.2 10.3

In preparation for bidding 11 475.4 34.2

To be built by the government 3 70.5 6.6

Other planned toll roads 20 877.1 99.1

Total target 86 3,087.8 216.8

* Toll-road concession agreement with the government;

Source: Toll Road Management Agency (BPJT)

Chart 4: Population of cars and motorcycles vs. distance of roads in Greater

Jakarta

0

2

4

6

8

2005 2006 2007 2008 2009

millions

0

2,000

4,000

6,000

8,000

kilometres

Registered motorcycles Registered cars Length of roads (RHS)

Sources: Central Agency of Statistics, Indonesian Police, Toll Road Management Agency

(BPJT), Standard Chartered Research

Ideal ly , Indon esia needs to extend

i ts road netwo rk by almo st 2,400km,

tr iple the current capaci ty

Congest ion in the capi tal , Jakarta,

creates signi f icant opportu ni ty

costs fo r the nat ional and regional

economies


6/44

Special Report

14 February 2011 6

61% of Indonesias existing toll roads are in West Java and Banten (two provinces

bordering Jakarta that together contribute 14% of Indonesias GDP see Chart 5).

Toll-road projects planned for the near future (those in possession of PPJT) will also

be concentrated in these two provinces.

The government also targets the completion of a trans-Java toll-road system that will

link the western and eastern edges of the island by 2014. This network will span

1,193km and will connect Merak port (in Banten province) to Banyuwangi port (in

East Java). As of September 2010, only about 9% of the targeted length of the trans-

Java toll roads had been completed.

The central government is currently prioritising the development of 10 sections of the

trans-Java toll-road system, stretching 652km from Cikampek in West Java to

Surabaya in East Java (see Chart 6). This road network should provide a better

alternative to the overcrowded conventional Northern Java coastal (Pantura) roadsystem. As of early October 2010, the Ministry of Public Works had cleared about

Chart 5: Distribution of operating toll roads and toll-road projects that have

obtained PPJT(as of September 2010)

0

200

400

600

800

West Java &

Banten

Jakarta Central Java &

Yogyakarta

East Java Sumatra Sulawesi

km

Operating Obtained PJPT and under construction Obtained PPJT but yet to start construction

Sources: Toll Road Management Agency (BPJT), Standard Chartered Research

Chart 6: Existing and planned toll roads in Java (as of September 2010)

Sources: Toll Road Management Agency (BPJT), Standard Chartered Research

Exist ing tol l roads and planned tol l -

road con struct ion are st i l l

concentrated in West Java and

Banten


7/44

Special Report

14 February 2011 7

36% of the land for the 10 sections of the network at a cost of IDR 1.7trn (USD

0.2bn), but another IDR 3.2trn (USD 0.4bn) is required to complete the land

acquisition process in 2011. The second section (Palimanan-Kanci in West Java) is

already operating; the investment cost to build the remaining sections (excluding theland acquisition cost, which is allocated in the national budget) is estimated to reach

IDR 31.8trn (USD 3.5bn).

Bridges

As is the case for roads, the central government has been passive in building new

bridges over the past decade. In fact, new bridge development has dropped

significantly in terms of both numbers and length (see Charts 7 and 8). These

declines were mainly caused by sharp cuts in government infrastructure spending, in

particular during the tight budget years following the Asian financial crisis, when the

government was placed under IMF supervision. As of end-2008, 13% of central

government-owned bridges were heavily damaged or in complete disrepair. In termsof length, 17% of the 333km of national bridges were heavily damaged or

dysfunctional in 2008.

Given that Indonesias resource-rich islands namely Sumatra, Kalimantan, and

Papua have many rivers, maintaining existing bridges and building new ones is

crucial to ensuring smooth transport of mining and forest products. Using bridges

instead of river transport significantly reduces transport costs and time. Well-

maintained bridges therefore help to promote economic growth and reduce logistical

bottlenecks that often result in supply-side inflationary pressures. Moreover, without

adequate support from bridges, the economic impact of developing new road

systems will be less than optimal.

In addition to conventional bridges owned by the central government and local

governments, Indonesia has one toll bridge: the 5.4km Suramadu Bridge connecting

Surabaya and Bangkalan on Madura Island (both in East Java province). It was

constructed from 2003-09 and is the countrys first inter-island bridge. The bridges

construction cost was IDR 4.5trn (USD 440mn), financed by the central government

and the East Java provincial government (which together contributed about 55% of

the total funding) and the Chinese government (the remaining 45%, which came in

the form of a soft loan). State-owned company Jasa Marga was appointed to operate

the Suramadu Bridge.

Chart 7: Number of new national bridges built Chart 8: Length of new national bridges built

0

1,000

2,000

3,000

4,000

5,000

6,000

Before 1970 1970-79 1980-89 1990-99 2000-08

Sumatra Java KalimantanSulawesi Bali, NTB, and NTT MalukuPapua

0

20

40

60

80

100

120

140

Before 1970 1970-79 1980-89 1990-99 2000-08

km

Sumatra Java KalimantanSulawesi Bali, NTB, and NTT MalukuPapua

Source: Ministry of Public Works Source: Ministry of Public Works

Const ruc t ion of new b r idges and

maintenance of exist ing ones is

crucial to support ing land transpo rt ,

which is m uch cheaper than river

transport


8/44

Special Report

14 February 2011 8

The government plans to build the 29km Sunda Strait Bridge connecting Banten

province in Java and Lampung province in Sumatra by 2030. Total funding needed

for the bridge is expected to reach IDR 140trn, with most of the financing to come

from private investors. The government expects Sunda Strait construction to start in2013 at the earliest.

Railroads

Trains are a popular mode of transport in Indonesia for both passengers and cargo,

as they can travel faster than other land transport modes. Yet the poor condition of

existing railroads and the slow pace of new railroad construction have resulted in low

quality of service (including delays and, in extreme cases, accidents). We believe

that the construction of new railroads will help to expedite economic growth,

especially if trans-island networks can be built in resource-rich islands outside Java,

such as Sumatra and Kalimantan. The government has identified railroad

construction as a key priority of its transport infrastructure development programme.

Train transport is heavily concentrated in Java, where about 59% of Indonesias

population lives. In 2010, 97% of Indonesias total train passengers were in Java,

while the number of train passengers in Sumatra was very low (see Chart 9). Most

train passengers in Java are commuters living in Jakarta and surrounding cities (the

so-called Jabotabek area); this area accounted for 63% of Javas total train

passengers in 2010. This is understandable given Javas higher population that

Sumatras. Cargo transport, however, is more active in Sumatra than in Java. In

2010, Sumatra accounted for about 80% of the volume of goods transported by train

in Indonesia (see Chart 10).

While the government and parliament passed a law in 2007 to privatise the countrys

railroad network and abolish the monopoly rights of state-owned PT Kereta Api

Indonesia (KAI), the company is still the countrys sole railroad operator. The

government also continues to provide subsidies to PT KAI (for low-income

passengers) under the public service obligation (PSO) in the budget.

As of 2009, Indonesias railroad network totaled 4,819km, compared to 472,406km of

conventional roads and 742km of operating toll roads. Railroad development is

relatively slow, with the network growing by only 1.1% per year on average from

2004-09, versus 4.9% for the road network. The short distance covered by the

Chart 9: Number of train passengers

mn

Chart 10: Amount of goods transported by train

000 tonnes

0

50

100

150

200

250

2006 2007 2008 2009 2010

Java Jabotabek Java non-Jabotabek Sumatra

0

5

10

15

20

2006 2007 2008 2009 2010

Sumatra Java

Sources: Central Agency of Statistics, PT KAI Sources: Central Agency of Statistics, PT KAI

Passenger train transport is h eavi ly

concentrated in Java, whi le cargo

traf f ic is greater in Sum atra


9/44

Special Report

14 February 2011 9

nations rail network is not the only problem. The infrastructure is also old and in poor

condition, with rails often used for more than 25 years (versus 5-10 years maximum

in advanced countries such as Japan).

The MoT is therefore focused primarily on repairing and modernising the countrys

outdated rail infrastructure, including changing old wooden rail sleepers to concrete-

based sleepers. The ministry is also expanding the network, albeit at a slow pace,

including the construction of double-track railways from Jakarta to Surabaya in East

Java (expected to be completed by 2014).

The railroad system is still concentrated in Java, the only island in Indonesia with a

trans-island network (see Chart 11). Railroads in Sumatra were built more

sporadically and are designed to transport goods (in particular coal) from mining sites

to seaports (see Chart 12). The government plans to build a trans-Sumatra railroad

system linking all provinces on the island, due for completion by 2020. It facesdifficulties in meeting the financing requirements for the project, although some

investors from China have expressed interest in participating.

Most of Indonesias existing railways are owned by the government through the MoT.

As in the case of toll roads, financing and land clearance are the main obstacles to

constructing new railroads. To address financing problems, the government is inviting

private investors, local governments and co-operatives to participate in the railway

development programme.

Chart 13 shows the procedures an investor needs to go through in order to develop

public railroads. Different levels of railroads (national, provincial and local) require

construction permits and operating licences from the different levels of government.

All types of railroad construction and operation must also technically be approved by

the MoT. As Chart 14 shows, similar procedures apply for investors wanting to build

non-public special-purpose railroads.

Some private investors have expressed interest in investing in new railroad projects.

These projects include special-purpose tracks for transporting coal (Muara Wahau to

Bengalon in East Kalimantan, Palaci to Bangkuang in Central Kalimantan, and

Tanjung Enim in South Sumatra to Srengsem in Lampung); the Sukarno-Hatta airport

railway linking the international airport to Jakarta; and a mass rapid transit system in

Jakarta, financed by the Japan International Cooperation Agency and expected to

start operating in 2016.

The governm ent has l iberal ised the

rai l road cons truct ion business in

order to encou rage private

investment


10/44


11/44

Special Report

14 February 2011 11

Chart 13: Procedures to invest in the development of public railroads

Natioa Minister of Transportation Minister of Transportation Minister of Transportation

Governor

Governor

(with technical approval from the

Minister of Transportation)

Governor



Mayor / Regent

Mayor / Regent



Mayor / Regent



Investor

National railroad

Provincial railroad

Local railroad

Business registration Construction permit Operating licence

Source: Ministry of Transportation

Chart 14: Procedures to invest in the development of special-purpose railroads

Minister of Transportation Minister of Transportation

Governor



Governor



Mayor / Regent



Mayor / Regent



Operating licenceConstruction permitInvestor

National railroad

Provincial railroad

Local railroad



12/44


13/44

Special Report

14 February 2011 13

and airfares. Our study reveals that passenger sea transport growth has negative

correlations with both oil prices and the number of air passengers (which implies

some degree of substitutability between sea and air transport for some passengers),

but has a positive correlation with domestic GDP growth. Meanwhile, sea cargotransport activity has been relatively stable, except in 2007, when it surged as rising

oil prices pushed up the cost of air cargo transport (see Chart 16).

As of 2009, Indonesia had 111 commercial seaports operated by Pelindo I, II, III, and

IV and 534 seaports managed by the government, ranging from Prime class (the

highest ranking) to Class IV. Although Indonesia has 645 operational seaports, only

four are classified as Prime (Port Tanjung Priok Jakarta, Port Tanjung Perak

Surabaya, Port Belawan Medan and Port Makassar) and 14 are Class I (see

Chart 17). While some lower-class seaports can still accommodate large-tonnage

ships, Prime and Class I seaports are considered suitable to cater to international

shipping activity.

Chart 19: Distribution of unloaded inter-island sea cargo

by island(2008)

Chart 20: Distribution of loaded inter-island sea cargo

by island(2008)

Java SumatraKalimantan SulawesiBali, NTB, and NTT MalukuPapua

Java SumatraKalimantan SulawesiBali, NTB, and NTT MalukuPapua

Source: Central Agency of Statistics Source: Central Agency of Statistics

Chart 21: Strategic seaports in Indonesia


Only a few Indonesian seaports are

consid ered sui table to cater for

internat ional shipping act iv i ty


14/44

Special Report

14 February 2011 14

Seaports serve both passengers and cargo on inter-island routes. They play a

particularly vital role in eastern Indonesia, in particular Papua, where the road system

does not connect all cities and towns (see Chart 18). However, Kalimantan

(especially South Kalimantan) is the countrys most active hub for sea cargo activity(see Charts 19 and 20). South Kalimantan has only two commercial seaports, but the

province accounted for 34% of Indonesias sea cargo loaded for inter-island trade

and 38% of sea cargo loaded for international trade in 2008, according to the Central

Agency of Statistics. Most cargo transported through South Kalimantan and East

Kalimantan consists of natural resource-based products such as coal and timber.

In its medium-term plan to 2014, the MoT focuses on upgrading the countrys 25

strategic seaports (Chart 21). The ministry aims to enhance the capabilities of these

seaports to service international trade, while reducing Indonesias dependence on

international ports in neighbouring countries. The ministry also plans to strengthen

123 feeder ports to support the 25 strategic seaports and facilitate inter-island tradewithin Indonesian waters.

Among the 25 strategic ports, Port Tanjung Priok and Port Tanjung Perak

(Indonesias two largest seaports) are already overloaded and undergoing

expansion. The countrys other main seaports can handle current cargo flows but

also need to be expanded in the medium term (Table 4). Moreover, compared to

ASEAN peers, Indonesias main seaports are relatively small and outdated. Tanjung

Priok, for instance, can only cater to vessels of up to 50,000 deadweight tones

(DWT); in comparison, the maximum DWT levels are 150,000 for the Port of

Singapore, 130,000 for Port Klang in Malaysia, and 120,000 for Laem Chabang port

in Thailand.

Table 4: Container cargo handling capacity of Indonesias six main seaports

Port name

Estimated optimumcapacity of container

flows per year(million TEUs*)

Number of containerflows in 2009

(million TEUs*)Development plan

Tanjung Priok (Jakarta) 4.0 4.2Capacity expansion to 9.5mn TEUs of containerflows; construction started in late 2010, expectedto be completed in 2020

Tanjung Perak Surabaya(East Java)

2.0 2.4Development of Socah port in Madura (East Java)as part of Tanjung Perak expansion

Tanjung Emas Semarang(Central Java) 1.0 0.4 Terminals can still handle current container flows

Belawan Medan(North Sumatra)

0.6 0.3 Capacity expansion to 1mn TEUs by 2013

Makassar

(South Sulawesi) 0.5 0.4

Terminals can still handle current container flows

but are expected to be overloaded by 2013

Banjarmasin(South Kalimantan)

0.3 0.2 Capacity expansion to 0.7mn TEUs by 2014

*Twenty-foot equivalent units Sources: Standard Chartered Research, Warta Gafeksi, various media reports

The government is aiming to

upgr ade 25 strategic seaports b y

2014


15/44

Special Report

14 February 2011 15

Capacity additions are not the only improvements needed at Indonesian seaports.

Operational efficiency and quality of service also need to be enhanced. A survey

conducted by the ASEAN Port Association in 2008 shows that the efficiency of Port

Tanjung Priok and Port Tanjung Perak, as measured by vessel berthing times andwaiting hours, is relatively low compared to other major ASEAN seaports (see

Table 5). The two ports also scored poorly in terms of quality of service, as measured

by the availability of port workers and equipment, the availability of a cargo location

system, and clear procedures for settling claims on losses or damages.

To modernise and increase the capacity of existing seaports, the government and

parliament passed a sea transport law in 2008 that encourages private investors,

local governments and co-operatives to participate in seaport development. Investors

can choose to invest through the public-private partnership (PPP) model, establishing

joint venture companies with Pelindo or buying shares in Pelindo once Pelindo is

listed in the stock market. Chart 22 shows the procedures investors need to follow todevelop commercial ports under the PPP scheme; Chart 23 shows the procedures

for special port terminals. The government has taken measures to improve the

efficiency and service quality of the countrys strategic seaports, including ordering all

Prime and Class I seaports to operate 24 hours a day, seven days a week (this

started with the four Prime seaports in 2010) and introducing the so-called National

Single Window for electronic processing of export-import documents in January

2010.

Table 5: Comparison of competitiveness among major ASEAN seaports in handling cargo

ASEAN-wide Port Network Survey 2008

Containercargo handling

(per ganghour)

Vesselberthing time

(hours)

Vessel waitingtime

(hours)

Availability ofport workers &

equipmentupon request

Availability ofcargo location

system

Availability ofprocedures forsettling claimson losses ordamages to

life / properties

Tanjung Priok(Indonesia)

23.3 boxes 50-57 2Not always

available duringpeak times

No No

Tanjung Perak(Indonesia)

10 boxes 65 2Shortage of

availableequipment

No No

Laem Chabang(Thailand)

35 boxes 8 0.4 Yes Yes Yes

Bangkok (Thailand) 21.3 boxes 17.7 1.8 Yes Yes Yes

ManilaInternationalContainer Terminal(Philippines)

28 boxesNo answer

givenNo answer

givenYes No Yes

Subic (Philippines) 27 moves 7 1-1.5 Yes

No answer

given Yes

Singapore 31.3 boxesVaries from

vessel to vessel2 Yes Yes Yes

Source: ASEAN Ports Association

In addi t ion to capaci ty expansion,

the qual i ty of service and

operat ional eff ic iency o f Indonesias

seaports need to be impro ved


16/44

Special Report

14 February 2011 16

Chart 22: Procedures to invest in the development of commercial seaports

Minister of

Transportati

on

Minister of

Transportati

on

Minister of

Transportati

on

DGST**

Minister of

Transportati

on

Minister of

Transportati

on

Minister of

Transportati

on

DGST** DGST**

Minister of

Transportati

on

Governor Governor Governor Governor

Minister of

Transportati

on

Minister of

Transportati

on

Governor DGST**

Minister ofTransportati

on

Mayor /Regent

Mayor /Regent

Mayor /Regent

Mayor /Regent

Minister of

Transportati

on

Minister of

Transportati

on

Mayor /Regent

DGST**

Main port

Collector /

hub port

Feeder

port

Investor

Location

license

Master

planlicense

DLKR &

DLKP*license

Cons-

tructionlicense

Opera-

tinglicense

Internati

onaltrade

license

Dredging

reclama-tion

license

24 hrs

operationlicense

Container

terminallicense

Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation


Chart 23: Procedures to invest in the development of special seaports

Minister of

TransportationDGST

Minister of

Transportation

Minister of

TransportationDGST

Minister of

Transportation

Minister of

TransportationGovernor Governor Governor Governor

Minister of

Transportation

Minister of

TransportationMayor / Regent Mayor / Regent Mayor / Regent

Mayor /

Regent

Minister of

Transportation

Investor

Location licence

(incl. spatial plan

& safety

compliance

Construction

licence

Operating

licence

Dredging

reclamation

licence

24 hrs

operation

licence

Container

terminal

licence

International

Inter-province

Intra-province

Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation



17/44

Special Report

14 February 2011 17

Airports

Air transport is a faster but more expensive alternative to sea transport on inter-island

and international routes. Following government deregulation of air transport in 1999,

the passenger transport business grew significantly particularly domestic air travel,where the annual number of passengers grew by 34% on average from 2000-04

(Chart 24). The emergence of low-cost carriers drove rapid passenger growth during

this period. Yet growth slowed from 2005, possibly due to rising crude oil prices (which

increased ticket prices) and the increasing number of domestic air traffic incidents (50

cases in 2005, 85 in 2006, 62 in 2007, 81 in 2008 and 102 in 2009). According to the

MoT, Indonesia currently has 15 airlines operating scheduled flights and 30 charter

airlines.

Indonesias cargo air transport business is more volatile than the passenger business.

There are currently two scheduled cargo carriers (one domestic and one international)

and three domestic non-scheduled (charter) cargo carriers operating in the country. AsChart 25 shows, fluctuations in air cargo volume are determined more by domestic

cargo than by international cargo, which is relatively stable. Growth in loaded air cargo

is driven by factors including oil prices (which has a negative correlation with the

amount of loaded cargo) and domestic GDP growth (positive correlation with the

amount of loaded cargo).

Air transport (both passenger and cargo) is concentrated in Java, given that 59% of

Indonesias population lives on the island and that Indonesias two biggest airports,

Sukarno-Hatta and Juanda, are located there. In 2009, airports in Java accounted for

about 51% of Indonesias domestic air passenger departures, 58% of international air

passenger departures, 45% of domestic air cargo departures, and 81% ofinternational air cargo departures.

As of 2009, there were 27 international airports and 163 domestic airports in

Indonesia, ranging from Class I (the highest) to Class V (the lowest) and including

special-purpose privately operated airports under the supervision of the MoT (see

Charts 26-28). All commercial public airports are currently operated by the state-

owned PT Angkasa Pura I and Angkasa Pura II. Non-commercial public airports are

operated by the MoT, non-public special-purpose airports are operated by state-

owned and private companies, and military airports are operated by the air force.

Chart 24: Number of departed aircraft passengers (mn) Chart 25: Number of loaded air cargo(000 tonnes)

0

10

20

30

40

50

60

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Domestic International

0

50

100

150

200

250

300

350

400

450

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Domestic International

Sources: Central Agency of Statistics, PT Angkasa Pura I and II,

Ministry of Transportation

Sources: Central Agency of Statistics, PT Angkasa Pura I and II,


Faster incom e growth w i l l resul t in a

surge in demand for domest ic and

internat ional air transpo rt in thecoming years

Air passenger and cargo transport

act iv i ty is st i l l concentrated in Java


18/44

Special Report

14 February 2011 18

About 56% of Indonesias airports are located in the eastern part of the country,

particularly in Papua (36% of total airports), where air transport is the only way to reach

the interior of the island. The airports in Papua and neighbouring Maluku are small,

mostly Class IV or below. As air is the only way to transport goods, cities and towns inPapua tend to have higher food prices (in particular for rice, spices and vegetables)

than their counterparts in western Indonesia.

Most of the countrys main airports are already overloaded in terms of handling

passengers, so capacity expansion is badly needed (see Table 6). In 2009, for

example, Jakartas Sukarno-Hatta Airport, the countrys largest, had to accommodate

69% more passengers than its optimum capacity. The most overloaded of the major

airports is Polonia Airport in Medan (North Sumatra), which is only designed to

accommodate 900,000 passengers but catered to 5mn passengers in 2009. Some

major airports are also overloaded in terms of cargo handling, and their capacity

must be urgently expanded (see Table 7).

Chart 26: Distribution of airports in Indonesia by class*

2009

Chart 27: Distribution of airports in Indonesia by island

2009

11%

10%

20%

28%

7%

24%

Class IClass IIClass IIIClass IVClass VUnder supervision by the Ministry of Transportation

7%

15%

13%

11%

10%9%

35%

Java Sumatra KalimantanSulawesi Bali, NTB, and NTT MalukuPapua

*Includes commercial and government-run airports;



Chart 28: Main international airports in Indonesia


Airports play a crucial role in inter-

and intra-is land transport in eastern

Indonesia

Most of Indonesias main airports

are al ready over loaded in terms o

passenger and cargo handl ing


19/44

Special Report

14 February 2011 19

Table 6: Number of passengers and optimum capacity of Indonesias seven main airports

Airport name

Number ofpassengers* in

2009(million)

Estimated optimumhandling capacity

(million passengerspear year*)

Development plan

Sukarno-Hatta Tangerang(Banten)

37.1 22.0Capacity expansion to 60mn passengers a yearby 2015

Juanda Surabaya(East Java)

10.6 7.0Capacity expansion to 14mn passengers per yearstarting in 2011 by re-opening old terminals

Hasanuddin Makassar(South Sulawesi)

5.1 7.0Completed upgrade and expansion in 2008;current capacity is able to handle passengers

Ngurah Rai Denpasar(Bali)

9.6 6.5 Capacity expansion to 13mn passengers by 2013

Polonia Medan(North Sumatra)

5.0 0.9To be replaced by Kuala Namu Airport (optimumcapacity of 8mn passengers) by 2012

Sepinggan Balikpapan(East Kalimantan)

4.0 1.5Capacity expansion to 10mn passengers;construction period from 2011-15

Adi Sucipto Yogyakarta(Special Region ofYogyakarta)

3.2 1.0Bidding process for project to expand capacity to2.5mn passengers started in 2010

* Includes passengers arriving at, departing from or transiting through the respective airport;

Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research

Table 7: Cargo flows and cargo-handling capacity of Indonesias seven main airports

Airport nameCargo handled in

2009(tonnes)

Estimated optimumcargo-handling

capacity per year*

(tonnes)

Development plan

Sukarno-Hatta Tangerang(Banten)

433,180 300,000Capacity expansion to 1mn tonnes a year byrelocating cargo terminals from the east side ofthe airport to the west side; project to start in 2016

Juanda Surabaya(East Java)

61,871 120,000Current cargo terminals have sufficient capacity tohandle cargo flows

Sultan Hasanuddin Makassar(South Sulawesi)

32,420 60,000

Construction of additional temporary cargoterminal was completed in 2010, expanding totaloptimum annual capacity to 60,000 tonnes ofcargo; current cargo terminals can handle cargoflows

Ngurah Rai Denpasar(Bali)

64,924 50,000

Capacity expansion by building an additional

6,000 square metre international cargo terminalthat will expand total optimum capacity to around100,000 tonnes of cargo per year by 2013

Polonia Medan(North Sumatra)

34,837 10,000To be replaced by Kuala Namu airport (optimumcargo capacity of 65,000 tonnes per year) by2012

Sepinggan Balikpapan(East Kalimantan)

28,978 35,000

Current capacity can still handle cargo flows;Sepinggan Airport has been designated by theMinistry of Transportation as one of 14 airports tobe upgraded to international cargo airports by2015

Adi Sucipto Yogyakarta(Special Region of

Yogyakarta)

11,209 5,000Provincial government of the Special Region ofYogyakarta plans to build new international

terminal in Kulon Progo to be started by 2020

* Includes passengers arriving at, departing from or transiting through the respective airports;

Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research


20/44

Special Report

14 February 2011 20

Sukarno-Hatta Airport, Indonesias largest airport, lags behind major airports in other

ASEAN-5 countries in terms of its capacity to handle passengers and cargo (see

Table 8). Sukarno-Hatta Airports optimum passenger capacity is only about 30% of

Singapores Changi Airport and 50% of Bangkoks Suvarnabhumi Airport. Meanwhile,Sukarno-Hatta Airports optimum cargo-handling capacity is only 10% of its

counterparts in Singapore and Thailand.

Financing and land clearance issues are the two main hurdles faced by PT Angkasa

Pura in upgrading and expanding existing commercial airports and building new

ones. The government sees private-sector investment in airports as one solution to

the financing problem. To facilitate such investment, the government and parliament

passed an aviation law in 2009 that allows private investors to invest in airport

development, either through PT Angkasa Pura (by forming joint ventures or buying

shares once PT Angkasa Pura I and II are listed on the stock market) or by directly

developing new airports under the PPP scheme.

To develop a new public airport, an investor must first obtain a location licence from

the MoT, signed by the minister. This licence approves proposals for the master plan,

working area (DLKR), area of interest (DLKP), safe operation area (KKOP), and

noise pollution levels (Chart 29). Once the location licence is obtained, the investor

must obtain a construction licence from the MoT (also signed by the minister). When

construction is completed, the investor requests either registered status or an Airport

Operation Certificate (AOC); again, this must be signed by the minister. Registered

status is given to airports that can cater to planes with maximum capacity of 30

passenger seats or a maximum weight of 5,700kg, and that meet particular

requirements on personnel, facilities, and airport operation procedures. An AOC is

granted to an airport that can handle planes with maximum capacity of more than 30

passenger seats or a maximum weight greater than 5,700kg, and has met

requirements on personnel, airport operation procedures, and flight operation safety

management. Special-purpose airports are built by companies with a special need for

their own airports, i.e., mining companies that need to transport cargo or staff by air.

The required procedures for investing in the development of special-purpose (non-

public) airports are shown in Chart 30.

In its PPP Book 2010, the government gave private investors opportunities to invest

in the development of seven airports through the PPP scheme. The MoT estimates

Table 8: Comparison of major ASEAN airports (2010)

Estimated optimumnumber of passengers

handled per year(millions)

Estimated optimumamount of cargo handled

per year(tonnes)

Sukarno-Hatta (Indonesia 22.0 300,000

Ninoy Aquino(Philippines)

25.0 600,000

Kuala Lumpur(Malaysia)

40.0 1,200,000

Suvarnabhumi(Thailand) 45.0 3,000,000

Changi (Singapore) 73.0 3,000,000

Sources: PT Angkasa Pura II, Suvarnabhumi Airport, Changi Airport, media reports, Standard

Chartered Research

Sukarno-Hatta Airpor t lags behind

the main airports in o ther ASEAN-5

countr ies

The government and the parl iament

issued a new aviat ion law to

faci l i tate pr ivate-sector investment

in ai rpor t const ruc t ion


21/44

Special Report

14 February 2011 21

that about IDR 7.5trn is needed to build these airports, which are targeted for

completion by 2014. They include Kertajati Airport in Majalengka and Banten Airport

(both in West Java), New Bali Airport, and New Samarinda Airport (East Kalimantan).

The government is also continuously building new airports. The MoT has allocated

IDR 236bn (USD 26.2mn) to build 14 new airports in 2011. Most of them are small-

scale domestic airports (Class IV and V) and are located in the less developed

eastern part of Indonesia.

The government also aims to upgrade Class I airports to Prime-class international

airports. In its medium-term plan, the MoT has designated 14 airports to become

international cargo airports by 2015. The execution of these projects is in the hands

of PT Angkasa Pura I and II and private investors.

Given slow progress in upgrading Sukarno-Hatta and its other international airports,Indonesia is less prepared to implement the ASEAN open-skies agreement, which

will take effect by 2015. The MoT has stated that Indonesia will only open its five key

international airports to ASEAN member carriers in 2015, while keeping other airports

closed until they are ready to be opened up. The countrys five international airports

are Sukarno-Hatta, Juanda, Kuala Namu, Ngurah Rai and Hasanuddin.

Chart 29: Procedures to invest in the development of public airports

InvestorLocation licence

(incl. master plan, DLKR, DLKP,

KKOP, and noise pollution)

Construction licenceAirport

operation certificate or

registered status



Chart 30: Procedures to invest in the development of special-purpose airports

Investor Location licence

Special airport

construction

licence

Special airport

operation

certificate




22/44


23/44

Special Report

14 February 2011 23

The countrys electricity market is concentrated in Java, which accounted for around

77.6% of national electricity demand (Chart 32) and 78.7% of national electricity

production in 2009. Electricity consumption is heavily concentrated around Jakarta.

Among the provinces in Java, West Java and Banten (excluding Tangerang), whichare adjacent to Jakarta, have the highest demand for electricity (25.3% of national

demand), followed by Jakarta and Tangerang (24.3%).

As Indonesias economy and population continue to grow, PLN estimates that

electricity demand will grow by 9.2% a year on average, almost doubling from

134,581GWh in 2009 to 334,400GWh in 2014. PLN also estimates that Indonesia

needs to raise electricity production by an average of 3,000MW per year to cope with

increasing demand. While Indonesia has a total electricity surplus of roughly

20,000GWh per year (see Chart 33), in reality, many areas of the country (including

Jakarta) suffer from electricity deficits that lead to blackouts and rationing of

electricity supply. Electricity infrastructure development, in particular new powerplants, is therefore badly needed to ensure sufficient and steady future electricity

supply.

Chart 33: Electricity production and consumption in Indonesia(GWh)

0

40,000

80,000

120,000

160,000

2002 2003 2004 2005 2006 2007 2008 2009

Production (P)

Consumption (C)

Domestic surplus ( = P - C)

Sources: PLN Annual Report 2009, Standard Chartered Research

Chart 34: Electricity production in Indonesia by supplier Chart 35: Energy sources of PLNs electricity production

0%

20%

40%

60%

80%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009

Produced by PLN from leased generatorsPurchased by PLNProduced by PLN's own generators

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 H1-2010

Coal Oil fuel Natural gas Water Geothermal

Sources: PLN Annual Reports, 2005 and 2009 Sources: PLN Annual Report 2009, Standard Chartered Research

The electr ic i ty market is st i l l

concentrated in Java, especial ly in

Jakarta and neighbouring pro vinces

Indonesia needs to bu i ld new pow er

plants to cope with increasing

demand


24/44

Special Report

14 February 2011 24

PLN alone cannot produce all of the electricity Indonesia needs. Using its own

generators as well as leased generators, PLN accounted for 76.9% of the countrys

total electricity production in 2009, while the rest had to be purchased from

independent power producers, or IPPs (see Chart 34). The role of IPPs has risensteadily they accounted for 23.1% of national electricity production (sold through

PLN) in 2009, up from 20.5% in 2005 and 13.1% in 2001. As of 2009, there were

22 IPPs operating in Indonesia (10 of them in Java and Bali) with total generating

capacity of 3,997MW. Meanwhile, the share of electricity produced by PLN from

leased generators increased from 1% in 2001 to 3% in 2009.

PLN has tried to reduce its dependence on fuel oil as an energy resource by

diversifying into cheaper production inputs such as coal. In 2009, around 28% of the

electricity produced by PLN was generated by fuel oil, down from 38% in 2005. The

share of coal rose to 36% from 25% over the same period. Natural gas accounted for

24%, water 9% and geothermal 3%; these shares remained roughly unchanged overthe period (see Chart 35).

While the contribution of fuel oil has declined, PLNs operating costs are still sensitive

to changes in oil prices (see Chart 36). As the government still subsidises PLN, rising

oil prices imply increasing government subsidies for electricity, putting pressure on

budget spending. When the average oil price (WTI) surged from USD 74.9/barrel in

2007 to USD 98.6 in 2008, government subsidies for PLN surged from IDR 36.6trn

(USD 4.0bn) to IDR 78.6trn (USD 8.1bn) over the period. As average oil prices

returned to USD 63.8/barrel in 2009, government subsidies for PLN were cut to IDR

53.7bn (USD 5.2bn).

Although Indonesia has abundant coal and natural gas, it is often difficult for PLN to

obtain steady supplies of these resources for the following reasons: (1) not all power

plants are adjacent to natural gas or coal suppliers, and in some cases, the inputs

have to be sent from other provinces; (2) transport difficulties disrupt supply, as inter-

island coal and gas shipping is often affected by poor weather conditions and sea

currents; and (3) PLN must pay high prices for coal and gas purchased from

suppliers, some of which prioritise export sales and will only sell inputs at prices

above domestic market prices.

Chart 36: Fuel cost comparison for PLN and average crude oil price

WTI NYMEX

0

500

1,000

1,500

2,000

2,500

2004 2005 2006 2007 2008 2009 H1-2010

IDRperKWh

20

40

60

80

100

120

USD

bbl

Coal Natural gas

Fuel oil Oil price (RHS)

Sources: PLN H1-2010 investor update, Bloomberg

Coal and natural gas supply

disrup t ions prevent PLNs power

plants from pro viding a steady

supp ly of electr ic i ty


25/44

Special Report

14 February 2011 25

PLNs electricity-generating capacity has continued to grow in recent years, but at a

slow pace of 2.4% a year from 2000-09 (Chart 37). The companys power-generating

capacity is concentrated in Java and Sumatra, while other islands still suffer from

under-electrification (Chart 38).

PLN plans IDR 66.6trn (USD 0.7bn) of capital expenditure in 2011. Of this, it has set

aside IDR 13.4trn (USD 1.5bn) for electricity infrastructure development (power

plants as well as transmission and distribution infrastructure) in Java and Bali, IDR

6.3trn (USD 0.7bn) for electricity infrastructure in western Indonesia, and IDR 3.7trn

(USD 0.4bn) for electricity infrastructure in eastern Indonesia.

To expedite electricity infrastructure development, the government launched the first

phase of its fast-track electricity development programme in 2006. The objective of

this program is to build 10 coal-fired power plants in Java with a total capacity of

7,520MW, and 26 coal-fired power plants outside Java (10 in Sumatra, five inKalimantan, four in Sulawesi, five in East and West Nusatenggara, two in Maluku,

and one in Papua) with total capacity of 2,391MW by 2012. These power plants are

entirely built by PLN and financed from the companys internal funding (15% of the

total funding required) and by the government (via guaranteed loans from state-

owned banks), private national banks, a consortium of foreign banks, and the

association of provincial development banks. PLN has opted to build coal-fired power

plants because coal is much cheaper than fuel oil and natural gas.

In January 2010, the government launched the second phase of the fast-track

programme, which aims to provide an additional 10,153MW of electricity generation

capacity by 2014. While all of the power plants in the first phase of the programme are

to be built by PLN, the second phase foresees a more active role for IPPs. In this

phase, PLN will build 5,118MW of capacity and buy the remaining 5,035MW from IPPs,

which are expected build new power plants to meet this demand.

The second phase of the fast-track programme is designed to be more environmentally

friendly and focuses on renewable energy, with the total construction cost estimated to

be double that of the first phase. Of the 10,153MW of capacity being added in the

second phase, about 39% (3,997MW) will be generated by geothermal plants, 33%

(3,312MW) by coal-fired plants, 15% (1,560MW) by gas-steam plants, 12% (1,204MW)

by hydro plants, and the remaining 1% (100MW) by gas.

Chart 37: Generating capacity of PLNs power plants Chart 38: Distribution of PLNs power-generating capacity

by island (2009)

0

7,000

14,000

21,000

28,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Megawatt

Coal-fired Gas steam Hydro power Gas Diesel Geothermal

72%

17%

1%

4%

4%

1%

1%

Java Sumatra Kalimantan

Sulawesi Bali, NTB, and NTT Maluku

Papua

Sources: PLN Annual Reports, 2005 and 2009 Sources: PLN Annual Reports, 2005 and 2009

The government has launched a

fast-t rack electr ic i ty programm e to

expedi te new power plant

cons t ruc t ion across the count ry


26/44

Special Report

14 February 2011 26

The financing is expected to come from the state budget, bank loans, two-step loans,

the capital markets, and PLNs internal funding. However, we expect financing

requirements for second-phase projects to be more difficult to meet than for the first

phase, as they are more dependent on the participation of private investors than onsupport from the government budget. As a result, completion may be delayed from

the initial 2014 deadline.

Due to financing problems, land clearance issues and administrative delays, the

execution of the first phase of the programme has been delayed from its original

timetable. Financing problems are the main factor slowing down the projects. While

the first phase was launched in 2006, financing requirements were only fully secured

at end-2009. In addition, PLN faced land clearance problems for its power plants in

Indramayu (West Java) and Rembang (Central Java). Also impeding progress were

the long timeframes needed for branch offices to receive letters of authority to invest

from the PLN head office.

As a result of these obstacles, only 930MW of the 4,135MW target for end-2010 had

been met as of mid-December. Progress has been much faster in Java than in other

regions (Charts 39 and 40), where none of the planned power plants have been

completed. As of H1-2010, of the 35 power plants targeted to be built, only one, the

Labuan plant in Banten province, had been completed.

The government now expects the first phase of the programme to be completed by

2013 instead of 2012 as initially planned. PLN expects seven new power plants in

Java targeted under the first phase to start operating in 2011. These plants will add

4,830MW of electricity supply in Java and Bali.

To support electricity-sector development, the government and parliament passed a

new electricity law in 2009 that allows private enterprises, co-operatives and non-

governmental enterprises to participate in the electricity supply business. As defined

by the law, this business includes generation, transmission, distribution and sale of

electricity to consumers.

Thus, under the new law, IPPs are allowed to sell electricity directly to end

consumers (which was not permitted under the old law). However, priority for

providing electricity to the public is still given to state-owned enterprises (PLN or local

Chart 39: Progress of fast-track electricity development

programme phase 1, in Java (H1-2010)

Chart 40: Progress of fast-track electricity development

programme, phase 1, outside Java(H1-2010)

0

1

2

3

Completed 90-99% 80-89% 70-79% 60-69% 50-59% Below

50%

0

5

10

15

20

Completed 90-99% 80-89% 70-79% 60-69% 50-59% Below

50%

Source: PLN H1-2010 investor update Source: PLN H1-2010 investor update

The government and parl iament

issued a n ew electr ic i ty law in 2009

to faci l i tate p rivate-sector

part ic ipat ion in the sector


27/44

Special Report

14 February 2011 27

government-owned enterprises). In order to supply electricity to the public, IPPs must

obtain electricity supply business licences, known as IUPL. To supply electricity for

special purposes, IPPs must obtain operating licences, known as IO (see Chart 41).

The new law allows for the differentiation of electricity tariffs across regions. National

basic tariffs are set by the central government and the parliament, while provincial

tariffs are set by local governments and local parliaments. The law also prohibits

electricity suppliers from setting tariffs that are incompatible with the tariffs set by

governments and parliaments; details of this rule will be provided in lower-level

regulations implemented by provincial governments.

In 2010, the government issued Presidential Regulation (Perpres) No. 36/2010,

which encourages foreign investors participation in electricity-sector development.

The regulation allows foreign investors to have ownership stakes of up to 95% in

power plants with generating capacity above 10MW, or to form partnerships withdomestic companies for power plants with capacity up to 10MW. Foreign investors

are also allowed to participate in electricity distribution, maintenance and consulting

services (for further details, see Appendix 2).

Regulatory reform and liberalisation in the electricity sector have increased foreign

investor participation, especially in power plant construction. Investors from Japan,

China and South Korea are the most active groups seeking to build new power plants

under the second phase of the fast-track programme. In January 2011, for instance,

investors from these three countries competed for a coal-fired power plant project in

Rembang (Central Java).

Chart 41: Types of licences needed for electricity suppliers

Electricity

supplier

Public

Needs

(IUPL)

Special-purpose

(IO)

Generator

Transmitter

Distributor

Sales

Source: UU No. 20/2009

A president ial regulat ion issued in

2010 encourages fo reign

investment in the electr ic i ty

bus iness


28/44

Special Report

14 February 2011 28

Government support

The government has taken several key steps to expedite infrastructure development

in Indonesia: (1) issuing new laws and regulations to facilitate investment in

infrastructure projects; (2) allocating more infrastructure funds in the state budget; (3)assigning the Coordinating Board of Investment (BKPM) to provide a one-stop shop

licence system for real-sector investors; (4) establishing a government-owned

infrastructure project financing company and an investment project guarantor

company; and (5) assigning a special task force (the so-called UKP4) to alleviate

investment bottlenecks caused by government bureaucratic inefficiencies.

1) Laws and regulations

To allow and facilitate the participation of domestic and foreign investors in the

real sector, the government and the parliament have ratified new laws on

investment in recent years (see Table 10). These laws have been accompanied

by government and presidential regulations to allow their implementation.

The broad goal is to encourage the private sector, co-operatives and local

government-owned enterprises to invest in the real sector. Under these laws and

regulations, the central governments only role is to regulate these sectors,

allowing private entities, co-operatives, state-owned enterprises and local-

government-owned enterprises to compete freely.

The government and the parliament are also discussing a bill on land clearance

for infrastructure development, which is expected to receive parliamentary

approval by mid-2011. The bill requires the government to hold discussions with

and obtain approval from local communities living in designated areas for

infrastructure projects before starting the land clearance process. After approval

Table 10: New laws and regulations to facilitate real-sector investment

Sector State laws (UU)Government regulations (PP) and presidential regulations

(Perpres)

Roads and tollroads

UU No. 22/2009on road traffic andtransport

PP No 44/2009 on toll roads

PP No. 56/2009 on railway implementationRailroads UU No. 23/2007on railroads PP No. 72/2009 on railway traffic and transport

PP No. 61/2009 on seaports

PP No. 5/2010 on navigation

Seaports UU No 17/2008

on sea transport

PP No. 21/2010 on maritime environment protection

Transport

Airports UU No. 1/2009on aviation

PP draft on airports

PP draft on electricity supply business

PP draft on electricity supply supporting business

Power Electricity UU No. 20/2009

on electricity

PP draft on cross-border electricity trade

PP No. 45/2008 on guidance for providing incentives for investment inregions

PP No. 62/2008 on income tax incentives for investment in certainbusiness areas and/or regions

Perpres No. 27/2009 on one-stop shop system for investment licenceprocess

Investment Real-sectorinvestment

UU No. 25/2007

on investment

Perpres No. 36/2010 on list of business areas closed to investmentand areas with conditions for investment

Source: Ministry of Transportation, BKPM, Ministry of Energy and Mineral Resources

The government has sought to

streaml ine regulat ions and reduce

bureaucracy in order to prom ote

investment in infrastructure


29/44

Special Report

14 February 2011 29

has been obtained from the community, an independent appraisal agency will

determine the appropriate price at which the land should be purchased from the

landowners. The involvement of an independent appraisal agency is expected to

minimise price distortions created by land speculators, thereby expediting theprice negotiation process.

2) Budget allocation

Although the government has repeatedly expressed its commitment to boosting

infrastructure development, it can only set aside limited funds for infrastructure in

the budget. While government infrastructure spending has continued to increase in

nominal terms in the past three years, its share of total government spending has

not exceeded 10% in the past five years (see Chart 42). During this period,

government infrastructure expenditure has been below 2% of GDP (see Chart 43).

According to the National Planning Agency (Bappenas), Indonesia will need IDR1,429trn (USD 159bn, assuming a USD-IDR exchange rate of 9,000) for

infrastructure development in 2010-14 in order to achieve an annual economic

growth rate of 5-7% (see Chart 44). Most of these funds will be allocated to the

transport sector (airports and seaports) and the electricity sector (power plants

and transmission infrastructure). However, the government can only provide IDR

386trn (USD 43bn), or 27%, of this amount. It expects the remainder to come

from the private sector.

The government also faces ongoing problems with delayed infrastructure

spending because of land clearance issues, bureaucratic inefficiencies at the

central and local government levels, and a lack of skilled project managers. In2010, for instance, the government only spent 79.4% of its targeted total capital

expenditure in the revised budget.

For 2011, the government has allocated IDR 126trn (USD 13.6bn), or 10% of total

government expenditure, to infrastructure development. Among the planned

projects are the maintenance and repair of 35,059km of national roads, the

preservation of 121,027km of central government-owned bridges, continued land

clearance for and construction of the Trans-Java toll road, the expansion of

Ngurah Rai Airport (Bali), and the construction of the Jakarta MRTs Lebak Bulus-

Hotel Indonesia section.

Chart 42: Government infrastructure spending versus

total government spending

Chart 43: Government infrastructure spending versus

nominal

0

50

100

150

2005 2006 2007 2008 2009E Revisedstate

budget

2010

Statebudget

2011

IDRtrillion

0

5

10

15

%

Amount

As % of total government spending

0

50

100

150

2005 2006 2007 2008 2009E Revisedstate

budget

2010

Statebudget

2011

IDRtrillion

0

1

2

3

%

Amount As % of nominal GDP

Sources: Ministry of Finance, Standard Chartered Research Sources: Ministry of Finance, Standard Chartered Research

The government is constrained in

prov id ing suf f i c ient funds for

infrastructure developm ent


30/44

Special Report

14 February 2011 30

3) One-stop shop system

Under Perpres No. 27/2009, President Yudhoyono assigned the Indonesia

Coordinating Board of Investment (BKPM) to implement a one-stop shop system

to expedite licence processing for direct (i.e., real-sector) investors and to reducebureaucratic red tape. Under this system, 16 ministries have delegated their

authority in granting licences and providing non-licensing services to the BKPM.

Investors only need to submit their business licence proposals to the agency. The

BKPM has also created the National Single Window for Investment to provide

online services for investors, including the granting of investment licences.

4) Financing company and project guarantor

To help provide financing for real-sector investment projects, the government

established PT Sarana Multi Infrastruktur (PT SMI) in 2009 to facilitate

infrastructure investment. The company, which is 100% owned by the

government through the Ministry of Finance (MoF), creates joint ventures withmultilateral agencies, foreign and local banks, state-owned enterprises, and other

business entities to invest in infrastructure projects. The government also

established the Indonesia Infrastructure Guarantee Funds (PT Penjaminan

Infrastruktur Indonesia or PT PPI) in 2010 to act as a guarantor for infrastructure

projects in Indonesia. PT PPI is also 100% owned by the government through the

MoF.

5) Special task force

In his second term in office, President Yudhoyono has established the

Presidential Work Unit on Monitoring and Controlling Development (known as

UKP4), headed by Kuntoro Mangkusubroto, a former energy minister and head ofpost-tsunami reconstruction in Aceh. Mangkusubroto has the status of a minister

without portfolio and is charged with solving investment problems caused by

inefficiencies in government bureaucracy.

Chart 44: Total funding requirements for infrastructure development, 2010-14

0

100

200

300

400

Transportation Electricity Information &

communications

Roads (including

toll roads)

Housing Energy Water resources

IDRtrillion

Government Private sector

Sources: National Planning Agency (Bappenas), Data Consult

Procedures to obtain investment

l icences have been streaml ined

The president has set up a task

force to tackle bott lenecks in

infrastructure developm ent

State-owned companies have been

set up to provide f inancing and

guarantee investment pr ojects


31/44

Special Report

14 February 2011 31

Scenario analysis

1) Investment in the transport sector

The base scenario for this analysis assumes that the budget funds allocated fortransport infrastructure development increase by a constant 10% per annum from

2011, but that the government can only absorb 90% of the allocated funds (see

Table 11). The base scenario also assumes that private investors can only

provide 10% of the total funds needed from them. We assume a 100% budget

absorption rate for all scenarios except Scenario 1. We also use different

assumptions for nominal increases in infrastructure funds in the budget under

each scenario.

According to Bappenas, private-sector funds needed for transport development

from 2010-14 total IDR 258.3trn, or IDR 51.7trn a year on average. We use an

estimate of IDR 51.7trn as the optimum amount for private-sector participation(100% participation). Although Bappenas has identified this as the amount

needed to support a 5-7% GDP growth rate, we believe it would have larger

multiplier impacts on GDP, allowing for even faster GDP growth.

Meanwhile, BKPM data shows that total direct investment (both foreign and local)

in the transport, storage, and communications sector reached IDR 5.0trn in 2009.

We estimate that private investment in the transport sector alone reached IDR

3.5bn, or about 7% of the amount needed. We then use a 7% private-sector

participation rate as the benchmark in Scenarios 1-5. We use a 50% rate for

Scenarios 6-10, and a 100% rate for Scenarios 11-15.

Among these 15 scenarios, we believe that those with a maximum increase of

20% in budget funds allocated for transport infrastructure and a maximum 50%

private investor participation rate are more realistic than the others. We believe it

would be difficult for the government to increase budgeted transport development

funds by more than 50% a year, as most budget funding will continue to be

allocated to subsidies and personnel expenditures.

It would also be difficult to increase private investors participation in the transport

sector to 100%, in our view. While funding problems (including difficulties in

obtaining bank loans) are commonly faced by domestic investors, foreign

investors are generally concerned about Indonesias poor investment climate,including land clearance problems, legal uncertainties and labour-market

rigidities.

While it is hypothetically possible for the Indonesian economy to grow by 9.7% in

2014 (Scenario 15), we project that GDP growth will be between 6.5% and 7.6%

from 2011-14. Under the best of our plausible scenarios, the government will

increase spending on transport infrastructure development by 20% per year, and

private-sector participation in electricity development will reach 50% of the

required level, enabling the economy to grow by 7.1-7.6% in 2011-14. These

scenarios are under a ceteris paribus assumption, meaning that other

components of GDP (i.e., household consumption, exports and imports) areassumed grow at the rates estimated in the base scenario.

Under the best of our m ost

plausible scenarios for the

transport sector, we project

Indon esian growth at 7.1-7.6% if the

governm ent increases spending by

20% per year and private investors

part ic ipat ion reaches 50% of what is

required


32/44

Special Report

14 February 2011 32

Table 11: Impact of investment in transport sector on real GDP growth (ceteris paribus)

2010 2011F 2012F 2013F 2014F

Scenario 1 (base):10% annual increase of nominal allocation in the budget from2012 (90% rate of absorption)+ 7% rate of private participation needed

6.1 6.5 7.0 7.0 7.0

Scenario 2:10% increase of nominal allocation in the budget from 2012(100% rate of absorption)+ 7% rate of private participation needed

6.1 6.6 7.2 7.1 7.1


6.1 6.6 7.3 7.2 7.2

Scenario 4:50% increase of nominal allocation in the budget from 2012(100% rate of absorption)

+ 7% rate of private participation needed

6.1 6.6 7.4 7.4 7.4


6.2 6.6 7.6 7.8 7.8

Scenario 6:No increase of nominal allocation in the budget from 2012(100% rate of absorption)+ 50% rate of private participation needed

6.2 6.6 7.2 7.1 7.0


6.2 7.1 7.5 7.3 7.2

Scenario 8:

20% increase of nominal allocation in the budget from 2012(100% rate of absorption)+ 50% rate of private participation needed

6.2 7.1 7.6 7.4 7.3


6.2 7.1 7.8 7.9 7.9


6.2 7.1 8.2 8.7 8.8

Scenario 11:No increase of nominal allocation in the budget from 2012+ full private participation needed

6.7 7.4 7.5 7.2 7.2

Scenario 12:10% increase of nominal allocation in the budget from 2012(100% rate of absorption)+ full private participation needed

6.7 7.4 7.6 7.4 7.4


6.7 7.4 7.8 7.7 7.7


6.7 7.4 8.2 8.3 8.4

Scenario 15:

100% increase of nominal allocation in the budget from 2012(100% rate of absorption)+ full private participation needed

6.7 7.4 8.8 9.5 9.7

Source: Standard Chartered Research


33/44

Special Report

14 February 2011 33

2) Investment in electricity sector

We use PLNs capital expenditure as a proxy for government spending on

infrastructure development in the electricity sector. According to media reports,

PLN is estimated to have spent IDR 74trn in 2010 and plans IDR 66.6trn in capitalexpenditures in 2011.

Meanwhile, Bappenas estimates that IDR 205.8trn (USD 22.9trn) is needed for

investment in the electricity sector from 2010-14 to support 5-7% GDP growth.

Thus, private investors are expected to spend IDR 41.2trn per year on average.

As in our scenario analysis of investment in the transport sector, we believe that

investment in the electricity sector has a larger multiplier impact on the economy

than Bappenas estimates, allowing for faster GDP growth.

However, in 2009, investment (both foreign and domestic) in the electricity, water

and gas sectors reached only IDR 3.8trn, according to BKPM data. We estimatethat investment in the electricity sector alone totaled IDR 2.0trn, or about 5% of

the annual private investment needed for electricity infrastructure development.

We then develop scenarios by assuming different degrees of increase in PLNs

capex and private participation rate (Table 12).

In Scenario 1, our base scenario, we assume that PLN can only absorb 90% of its

planned capex. The remaining 14 scenarios assume that PLN can meet all of its

targeted capex. We also assume different rates of nominal increase in PLNs

capex under each scenario.

We believe that the scenarios with maximum PLN capex increases of 20% andmaximum participation rates of 50% (i.e., Scenarios 1, 2, 3, 6, 7 and 8) are more

likely than the others. We thus expect infrastructure development in the electricity

sector to boost GDP growth to a range of 6.5-7.5% from 2011-14. This is under a

ceteris paribusassumption for GDP growth, meaning that components of GDP

other than investment and government expenditure household consumption,

exports and imports are assumed to grow at the rates we estimate in our base

scenario. Under the best of our plausible scenarios, PLN will increases capex by

20% per annum and private-sector participation in electricity infrastructure

development will reach 50% what is needed, allowing Indonesias economy to

grow by 6.9-7.5% in 2011-14.

We bel ieve i t is plausible forIndonesia s economy to grow by

6.9-7.5% in 2011-14 if PLN

increases annu al capex by 20% and

private-sector p art ic ipat ion in

electr ic i ty infrastruc ture

development reaches 50% of what

is needed


34/44

Special Report

14 February 2011 34

Table 12: Impact of investment in electricity sector on real GDP growth (ceteris paribus)

2010 2011F 2012F 2013F 2014F

Scenario 1 (base):10% annual increase in PLN capex from 2012(90% absorption rate)+ 5% private participation rate needed

6.1 6.5 7.0 7.0 7.0

Scenario 2:10% annual increase in PLN capex from 2012(100% absorption rate)+ 5% private participation rate needed

6.1 6.5 7.1 7.0 7.0


6.1 6.6 7.2 7.1 7.1

Scenario 4:50% annual increase in PLN capex from 2012(100% absorption rate)

+ 5% private participation rate needed

6.1 6.6 7.4 7.3 7.4


6.2 6.6 7.6 7.8 8.5

Scenario 6:No annual increase in PLN capex from 2012(100% absorption rate)+ 50% private participation rate needed

6.2 6.9 7.3 7.1 7.1

Scenario 7:10% annual increase in PLN capex from 2012(100% absorption rate)+ 50% rate of private participation needed

6.2 6.9 7.4 7.2 7.2

Scenario 8:

20% annual increase in PLN capex from 2012(100% absorption rate)+ 50% private participation rate needed

6.2 6.9 7.5 7.4 7.4


6.2 7.9 6.8 7.8 7.8


6.2 6.9 7.8 8.7 8.6

Scenario 11:No annual increase in PLN capex from 2012(100% absorption rate)+ full private participation needed

6.5 7.0 7.3 7.1 7.1

Scenario 12:10% annual increase in PLN capex from 2012(100% absorption rate)+ full private participation needed

6.5 7.0 7.4 7.3 7.3


6.5 7.0 7.5 7.5 7.5


6.5 7.0 7.8 7.9 8.0


6.5 7.0 8.2 8.7 8.9

Source: Standard Chartered Research


35/44

Special Report

14 February 2011 35

Financing through infrastructure bonds

Overview

Indonesia will introduce infrastructure bonds to help finance the governments

investment plans. One of the infrastructure bonds slated for issuance in 2011-12 is

the Islamic infrastructure bond, or sukuk, to be issued by the MoF to finance projects

in the approved national budget. We expect the structure of the infrastructure sukuk

to be similar to existing government sukuks it will be tradable and have similar

coupon levels. The introduction of a new instrument will help to deepen Indonesias

Islamic bond market and further diversify the MoFs budget funding sources.

Introduction

At the most generic level, infrastructure bonds are securities whose proceeds are

earmarked specifically for infrastructure projects. In contrast, government bonds are

issued for general fiscal purposes. Infrastructure bonds are typically long-dated (5Y

and above) due to the need to match the bonds maturity with the length of time

required to complete the infrastructure project.

There are many possible structures. The bonds can be

Indonesia – Infrastructure Bottlenecks_14!02!11!06!16

Documents

Transcript of Indonesia – Infrastructure Bottlenecks_14!02!11!06!16