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  • 2. CONTENTS INDONESIA 2012 64 A rising star: Sharia-compliant financing is an ISBN 978-1-907065-50-7 increasingly popular alternative Editor-in-Chief: Andrew Jeffreys 65 Interview: Darmin Nasution, Governor, Bank Editorial Director: Peter Grimsditch Indonesia Regional Editor: Paulius Kuncinas 66 Interview: Gatot M Suwondo, President Director, Editorial Managers: Josh Franken, Jacobo Bermudez de Castro Carbajo Bank Negara Indonesia 67 A closer look: Profiles of the leading banks Chief Sub-editor: Alistair Taylor Deputy Chief Sub-editor: Jennie 70 Roundtable: Jahja Setiaatmadja, President Director, Patterson BCA; Michael Young, President Director, HSBC; Web Editor: Barbara Isenberg Sub-editors: Sam Inglis, Elyse Franko- Zulkifli Zaini, President Director, Bank Mandiri; and Filipasic, Esther Parker, William Zeman, David Fletcher, President Director, Permata Bank Thomas Bacon Contributing Sub-editor: Miia 74 Managing downside: The rate of loan defaults Bogdanoff COUNTRY PROFILE declines as bankers grow more cautious Analysts: Stephanie Durbin, Alex10 Island life: A rich and colourful archipelago Gordy, Jon Gorvett, Matt Mossman, Joe CAPITAL MARKETS Wilcox POLITICS 76 New heights: The IDX rallies while the regulator is Senior Editorial Researcher: Susan14 Rising to the challenge: Growth and reform have increasing options for investors and boosting Manoğlu Editorial Researchers: Matthew continued despite difficult conditions transparency Ghazarian, Souhir Mzali, Owen Barron,18 Interview: President Susilo Bambang Yudhoyono 78 Added liquidity: The subject remains an issue Adeline Oka20 At the helm: Chairing ASEAN presents an 82 Clear targets: A stronger regulatory framework Art Director: Yonca Ergin opportunity to increase regional influence will promote a stable financial system Deputy Art Director: Cemre Strugo Art Editor: Meltem Muzmuz21 Interview: Abdullah Gül, President of Turkey 83 Interview: Nurhaida, Chairman, Bapepam Illustrations: Shi-Ji Liang22 Interview: Marty Natalegawa, Minister of 85 In the mix: Investor appetite for Indonesian bonds Photographer: Mark Hammami Foreign Affairs continues Production Manager: Selin Bolu23 Party lines: Political groups share similar Operations Manager: Yasemin Dirice Logistics & Distribution Coordinator: ideologies but differ in leadership styles Stocks & bonds: Share analysis & data provided Esen Barin24 A focus on unity: Bringing diversity together by Bank Negara Indonesia Operations Assistant: Nefise Gürel25 Interview: Surin Pitsuwan, Secretary-General, 87 Aneka Tambang: Mining & metals OBG would like to thank its local ASEAN 88 XL Axiata: Telecommunications partners for their assistance and support in the research of this project.26 Viewpoint: Hillary Clinton, US Secretary of State 89 Kalbe Farma: Pharmaceuticals29 Viewpoint: William Hague, UK Secretary of State 90 Agung Podomoro Land: Real estate for Foreign and Commonwealth Affairs 91 AKR Corporindo: Distribution 92 Jasa Marga: Toll roads ECONOMY33 At the centre of attention: Growth continues, INSURANCE Indonesia Investment driven by private consumption and investment 94 The contest for coverage: Major players prepare Coordinating Board37 Interview: Hatta Rajasa, Coordinating Minister of to profit from long-term potential Economy 98 Going micro: Targeting low-income markets38 Interview: Agus Martowardojo, Minister of 99 Interview: Hotbonar Sinaga, CEO, Jamsostek Finance 100 Life lines: Rapid growth in unit-linked coverage39 On again, off again: The central bank responds 102 A large margin: Health care coverage is modest43 Investors welcome: Efforts to enhance incentives but profitable45 Interview: Prijono Sugiarto, President Director, Astra International INFRASTRUCTURE46 Interview: Gita Wirjawan, Minister of Trade and 104 Realising potential: Jumping the economic Chairman, Investment Coordinating Board hurdles of connectivity and transport47 Portfolio prospects: Strong fundamentals 108 Footing the bill: Development funding is being support a positive outlook for markets met by a mix of sources49 Defending a stable rate: The central bank steps in 109 Interview: Kuntoro Mangkusubroto, Head,50 Prime target: Foreign investors return Presidential Delivery Unit53 A driving force: Private consumption boosts economic growth ENERGY54 Interview: Bobby Umar, President Director, Bakrie 113 Mixing it up: New acquisitions and expansions in & Brothers hydrocarbons and electricity56 Viewpoint: Maxime Verhagen, Deputy Prime 119 Interview: Evita Legowo, Director-General, Oil and Minister and Minister of Economic Affairs Gas Directorate, Ministry of Energy and of the Netherlands Mineral Resources 120 Interview: Karen Agustiawan, President Director, BANKING Pertamina59 Size and scope: New opportunities emerge as 121 Gassing up: A renewed focus on producing for infrastructure plans are realised domestic consumption
  • 3. 6 CONTENTS INDONESIA 2012Chairman: Michael Benson-Colpi 123 Roundtable: Jim Taylor, President Director, 185 On the market: Several developers are listed onDirector of Field Operations: Elizabeth ConocoPhillips; Sammy Hamzah, CEO, Ephindo; the Indonesia Stock ExchangeBoissevain Terry McPhail, President & General Manager,Regional Director: Laura Herrero ExxonMobil; and Hilmi Panigoro, President TRANSPORT & LOGISTICSCountry Director: Maria Meroño Commissioner, Medco 188 Stepping up to the task: The government speedsProject Director: Meike Neitz 127 Into the deep: Firms see greater potential in coal up development of connectionsField Operations Executive: Meltem bed methane extraction 195 Rise in the skies: Increasing airport capacityOkurField Operations Coordinator: Zeynep 129 Natural potential: Laying plans for renewables 198 Liberalised but protected: Shipping law welcomesAkdamar development private sector participationProject Coordinator: Dian Wulandari 199 Interview: Emirsyah Satar, President & CEO, MINING Garuda IndonesiaFor all editorial and advertisingenquiries please contact us at: 132 Forward momentum: Increasing domestic 200 Interview: Shanti L Poesposoetjipto, Chairman, production is capitalising on high prices Samudera Indonesia GroupTo order a copy of this publicationor to enquire about your subscription 137 Gold standard: Two companies lead production of 201 Greater connectivity: Building partnerships forplease contact us at: gold and copper increased infrastructure 138 Interview: Martiono Hadianto, President 205 Easing congestion: Getting traffic movingAll rights reserved. No part of this Director, Newmont, and Chairman, Indonesia 207 On the move: Addressing bottleneckspublication may be reproduced, storedin a retrieval system or transmitted in Mining Association 209 Charting a safe course: Domestic fleets work toany form by any means, without the 139 Elemental production: Varying tin prices impact meet rising demandprior written permission of OxfordBusiness Group. local manufacturing output 211 Back on track: A dramatic rail overhaul plannedWhilst every effort has been made toensure the accuracy of the informa- INDUSTRY & RETAIL TELECOMS & ITtion contained in this book, the 143 A stronger foundation: The focus remains on 215 A time of change: Thin markets see hope in aauthors and publisher accept noresponsibility for any errors it may becoming an industry-based economy future of sophisticated data servicescontain, or for any loss, financial or 147 Interview: Sudhamek AWS, President Director, 219 Sharing resources: A maturing wireless sectorotherwise, sustained by any personusing this publication. GarudaFood prompts competitors to share towers 148 Interview: John Gledhill, President Director, HM 220 Interview: Rinaldi Firmansyah, President Director,Updates for theinformation provided in this Sampoerna Telkomvolume can be found in Oxford 149 An evolving tradition: Traditional tobacco 221 The big three: A battle for subscribersBusiness Groups Economic Updatesservice available via email or at products continue to lead the segment 223 Roundtable: Erik Aas, President Director & CEO, Axis; 150 A matter of choice: Growing disposable income is Hary Sasongko, President Director, Indosat; Sarwato creating demand for new products Atmosutarno, President Director, Telkomsel; and 152 Roadrunners: Buying an automobile is an option Hasnul Suhaimi, President Director, XL for increasing numbers of citizens 226 Getting connected: The challenges are many, but 156 Plug in, switch on: The market for electronics is so are the potential rewards growing quickly 228 Enter the net: More access in the archipelago 157 Viewpoint: Fransiscus Welirang, Director, Indofood 158 Interview: Suryo Sulisto, Chairman, Indonesian PLANTATIONS & AGRICULTURE Chamber of Commerce and Industry 230 Preparing for the harvest: The government is 159 New demands: Expansion continues, while impact creating growth zones and enhancing rules from free trade agreements begins to be felt 234 The day’s catch: Aiming to become the world’s largest fisheries producer CONSTRUCTION & REAL ESTATE 235 Interview: Franky Widjaja, Vice-Chairman for 165 Ready to be realised: If regulatory barriers can be Agribusiness, Food and Livestock, Indonesian overcome, massive potential awaits Chamber of Commerce and Industry 169 Putting it all together: Cement companies are 236 The sweet spot: Sector players are looking to preparing for significant growth capitalise on expected production boosts 170 Making it work: The government is setting up agencies to encourage investment TOURISM 174 Keeping it green: New environmental initiatives 239 Focused approach: Visitor numbers rise 175 Room for change: Huge expansion and demand 242 Business destination: Expanding the quantity and 179 Interview: Muktar Widjaja, Chairman, Sinarmas range of MICE facilities Land 243 Interview: I Made Mangku Pastika, Governor of 180 Interview: Trihatma K Haliman, President Director Bali and CEO, Agung Podomoro Land 244 Beyond Bali: Encouraging visits further afield 181 Without further delay: A new land acquisition bill will speed up much-needed development EDUCATION & HEALTH 182 Outside looking in: Reforms to laws could see 246 A system test: Funding and regulation are set to foreign investment bolster the economy be overhauled with a range of reforms 184 Sharing the wealth: Expansion and growth is 249 Interview: Ir Ciputra, Founder and Chairman, taking hold throughout the archipelago Ciputra Group
  • 4. CONTENTS INDONESIA 2012 7250 Forging connections: New international student exchange programmes and partnerships251 Striking a healthy balance: Growing demand and Ready to be realised changing profiles are driving a new approach255 Pharmaceuticals in play: The country is an Page 165 increasingly attractive market for drugs firms With infrastructure development thought257 Interview: Dr Endang Rahayu Sedyaningsih, the most promising path for economic Minister of Health growth, the government has embarked on a massive building campaign. Cement sales RELIGIOUS AFFAIRS are up, new agencies have been created260 Politics of faith: Finding a place for religion in a to help encourage efforts and environ- democratic, harmonious and responsible society mental initiatives have been acting as a263 Interview: Suryadharma Ali, Minister of Religious necessary safeguard. Demand for housing Affairs is prompting growth in that sector as well.264 Growing market: Sharia-compliant finance shows strong potential MEDIA266 Breaking news: Growing opportunities for Preparing for the harvest domestic and international media investors Page 230270 The bigger picture: Cinema and television are both expected to see increased demand Despite a thriving domestic agricultural272 Online, but switched on?: The country has rich sector, the country still must rely on potential for highly profitable online marketing imports to help feed its population of 240m. The government has introduced REGIONS a number of development programmes274 Local governance: Decentralisation has presented to address this. Palm oil continues to be both challenges and opportunities a key export and a major contributor to277 Viewpoint: Satish Mishra, Managing Director, the local economy. There are also plans Strategic Asia to further develop the fisheries segment.279 A star performer: South Sumatra receives recognition for its strong potential280 And the winner is…: Regional Champions stand apart with their economic development A system test TAX Page 246 PricewaterhouseCoopers Increased spending has helped make pri-283 Reshaping the environment: An overview of the mary education more accessible to the tax system and regulations for investors population, in line with the country’s Mil-288 Collaborating for success: Regulatory reforms lennium Development Goals. Future suc- accelerate private sector participation in cess in the sector will be dependent on infrastructure development continued government aid, to address290 Viewpoint: Irhoan Tanudiredja, Senior Partner, both low secondary school attendance PricewaterhouseCoopers rates and the mismatch between needs in the job market and tertiary offerings. LEGAL FRAMEWORK Lubis Santosa & Maramis293 The costs they cause: The government enacts new rules on cost recovery294 Laws and regulations: An overview of the current Local governance legal environment in Indonesia Page 274300 Viewpoint: Todung Mulya Lubis, Senior Partner, Lubis Santosa & Maramis The government has been pushing a policy of decentralisation, with region- THE GUIDE al governors throughout the country’s302 Waking up to tourism: Aceh’s many wonders 33 provinces taking on greater author-303 Hotels: A home on the islands ity in local affairs, such as education.307 Listings: Important numbers The “Regional Champions” programme,308 Facts for visitors: Useful information meanwhile, has been boosting devel- opment via a competitive framework. THE REPORT Indonesia 2012
  • 5. 9Country ProfileA rich blend of cultures spread over 17,500 islandsRising regional power and key player within ASEANBlessed with an abundance of natural resourcesGrowing opportunities for foreign investment
  • 6. 10 COUNTRY PROFILE Almost a third of Indonesia’s population is under 15 years of age Island life A rich and colourful archipelago, looking to raise its global standing Spread between Asia and Australia, Indonesia is com- CREATIVE ECONOMY: With almost 50% of the prised of around 17,500 islands, of which over 6000 Indonesian population aged under 29 years, the gov- are inhabited. The archipelago is on a crossroad ernment is encouraging the growth of the creative between the Pacific and the Indian oceans, and economy to increase its contribution to the coun- bridges the Asian and Australian continents. This try’s GDP. The government aims to build the image strategic position has influenced the cultural, social, and identity of the nation while turning innovation political and economic life of the country. After years and creativity into one of Indonesia’s new compet- of political upheaval and a major domestic financial itive advantages. Creative industries such as fash- crisis, Indonesia is now positioned to be one of the ion, handicrafts, advertising and design currently more politically stable countries in the region. In account for around 7.5% of non-oil and gas exports addition, it is widely anticipated to see significant and employ nearly 8m people. economic growth in coming years. POPULATION: Indonesia currently is the world’s EARLY HISTORY: In the sixth and seventh centuries, 17th-largest economy, third-most-populous democ- Srivijaya in eastern Sumatra and Mataram in central racy, largest archipelagic state and home to the Java became the dominant kingdoms on the archi- largest population of Muslims. pelago. Majapahit, the Hindu-Buddhist empire that With a total of 245m people, the country now also lasted from the late 11th to the 16th century, was has the world’s fourth-largest population. Jakarta is one of the region’s most influential and powerful. the most populous city in Indonesia, with 9.1m inhab- Muslim emissaries travelling to and from China itants, followed by Surabaya with 2.1m. The island were the first to introduce Islam to Indonesia, but of Java, which is roughly the size of the state of New its influence in society began only in the 11th cen- York, is the most populous island on earth – home tury. By the end of the 16th century Islam had to 129m people. Java is also one of the most dense- replaced Hinduism in Java and Sumatra. ly populated areas in the world, with some 945 per- COLONISATION & INDEPENDENCE: The Dutch sons per sq km. Despite the family planning pro- began colonising Indonesia in the early 17th centu- gramme in place since the 1960s, Java’s population ry, seeking to monopolise its valuable natural sources. is expected to grow to some 254m by 2020. In 1602, the Dutch East India Company was estab- There are some 300 distinct ethnic identities lished to manage the monopoly on trade and colo- spread throughout the country, with over 700 dif- nial activity, and by the mid-18th century the Dutch ferent languages and dialects. According to the 2000 were firmly established in Java. They consolidated con- census, the ethnic composition of the population is trol of the country over the next two centuries. 40% Javanese, 15% Sundanese, 3.3% Madurese, 2.7% The Japanese occupation during the Second World Minangkabau, 2.4% Betawi, 2.4% Bugis, 2% Banten, War ended Dutch rule. After Japan’s surrender, 1.7% Banjar, with 29.9% unspecified. Soekarno – the leader of Indonesia’s resistance to LANGUAGE: The country is home to numerous relat- Japan – proclaimed independence in 1945 and five ed but distinct cultural and linguistic groups, the years later established a single unitary republic. In languages of many of which are derived from a com- 1967 Soekarno was replaced by Suharto, who mon mother tongue – Malay. Since independence, remained in power until 1998. In 2009, Susilo Bam- Bahasa Indonesia (the national language, a form of bang Yudhoyono, the sixth president of Indone- Malay) has spread throughout the archipelago and sia, was re-elected to office (see Politics chapter). become the most common language for written
  • 7. COUNTRY PROFILE 11communication, education, government, businessand media. However, local languages and dialects arestill important in a number of areas in the country.PHILOSOPHICAL BASIS: The philosophical basis ofthe Indonesian state is known as pancasila. Pancasi-la consists of two Sanskrit words, panca meaning“five” and sila meaning “principle”. It comprises fiveinterrelated principles. They are nationalism, human-itarianism, representative democracy, social welfareand monotheism. These principles continue to havea major underlying role in Indonesia’s political cul-ture today, even though the interpretation of the prin-ciples has varied over the decades.RELIGION: The first principle of the pancasila phi-losophy is the belief in one God. A number of differ-ent religions are currently being practised in Indone-sia, however, and their collective influence has hada significant impact on the cultural, economic andpolitical life of the region during its long history. TheIndonesian constitution guarantees religious free- The islands are home to a variety of religious traditionsdom, but only six religions are recognised by thestate, namely Islam (86.1%), Protestantism (5.7%), people, and the Yogyakarta earthquake, which result-Catholicism (3%), Hinduism (1.8%), Buddhism (about ed in the deaths of nearly 5800.1%) and Confucianism (less than 1%). NATURAL RESOURCES: The country is blessed with Before the arrival of the Abrahamic faiths of Chris- an abundance of natural resources including petro-tianity and Islam, the popular belief systems on the leum, gas, tin, nickel, timber, copper, coal, gold, sil-archipelago were influenced by Hinduism and Bud- ver and fertile soil. Oil production in 2010 reacheddhism. On the resort island of Bali, over 90% of the 965,000 barrels per day (bpd). Oil reserves stand atpopulation still practise Hinduism. 3.8bn barrels and imports about 420,000 bpd. Addi-FLAG: The flag of Indonesia is two equal horizontal tionally, Indonesia is ranked as the world’s top pro-bands of red and white. The colours derive from the ducer of gold, fourth-largest producer of nickel,banner of the Majapahit empire. Red is a symbol of third-largest of copper and the second-largest of tin.courage while white represents purity. Indonesia is the world’s number one coal exporter.CLIMATE: Indonesia’s climate, which is almost entire- The country also has more than 61bn tonnes of coally tropical, incorporates average temperatures of reserves, which are mainly in Kalimantan and Sumat-between 28°C and 34°C in coastal areas, and 23°C era. Coal production has significantly increased inin the highlands. The country is almost fully sur- recent years, rising from 152.7m tonnes in 2005 torounded by warm waters and temperatures vary lit- 305.9m tonnes in 2010. In 2009, exports of coaltle from season to season. The length of daylight amounted to 176.4m tonnes.hours also remains fairly constant, with a difference Indonesia produced more than 18m tonnes ofof only 48 minutes between the longest and short- palm oil in 2009. In 2010 the total area of land allo-est day, allowing for crops to be grown year-round. cated for palm oil cultivation was estimated at 7.8m The most important variable in the archipelago’s cli- ha by the Agricultural Department. This land is divid-mate is rainfall, and extreme variations are due to ed among private and government smallholdersmonsoons. The dry season lasts from June to Sep- mostly in Kalimantan and Sumatra. With regards totember and the rainy season from December to March. illegal logging of the rainforest, by joining the Round-Rainfall and humidity, ranging from 70% to 90%, vary table for Sustainable Palm Oil, a large number ofdepending on the season and region. Indonesian companies have demonstrated they areGEOLOGY: Indonesia’s seismic and volcanic activity taking the issue among the world’s highest. Lying near the edges POWER: In 2004, in an effort to increase electrici-of the Pacific, Eurasian and Australian tectonic plates, ty capacity, the government initiated plans to buildIndonesia is prone to frequent earthquakes and vol- coal-fired thermal power plants by 2010. However,canic eruptions. The archipelago has more than 150 the completion date was pushed back to 2014 as aactive volcanoes, including Tambora and Krakatoa, number of projects are still in development.both of which erupted in the 19th century, with dev- The power transmission and distribution sector inastating consequences. However, the volcanic ash Indonesia is largely dominated by the Perusahaanthat has resulted from such eruptions has contributed Listrik Negara, a state-owned energy company thatsignificantly to the high agricultural fertility that has controls around 85% of generated power. However,allowed islands like Java and Bali to support high pop- a new law on energy was enacted in 2009, replac-ulation densities. Recent seismic-related disasters ing the 1985 legislation and creating a wealth ofinclude the 2004 tsunami, which killed around 167,736 opportunities for foreign investors to meet demand. THE REPORT Indonesia 2012
  • 8. 13PoliticsDecentralisation central to Reformasi policyA major cabinet reshuffle in October 2011Uniting a diverse population presents challengesA variety of parties are represented in the legislatureASEAN plays a central role in regional politics
  • 9. 14 POLITICS OVERVIEW Susilo Bambang Yudhoyono has been president since 2004 Rising to the challenge Growth and reform have continued despite difficult global conditions Since declaring independence from the Netherlands ing their influence throughout South-east Asia. Islam in 1945, Indonesia has become one of the world’s first came to Sumatra in the 13th century, gradual- fastest developing and most economically promis- ly displacing Hinduism and Buddhism to become the ing nations. Transforming itself repeatedly over the dominant religion of Java and most other islands of years, it has also now established itself as an emerg- the archipelago by the 16th century. ing regional giant. Indeed, while many countries felt That time also marked the first arrival of Euro- the strong negative effects of the global financial peans, with trade soon followed by colonisation. The crisis, Indonesia continued to build on its strengths, Dutch emerged as the dominant colonial power over with its economy growing in spite of the global down- the archipelago by around 1800, when the islands turn and its political life continuing to be vibrantly became known as the Dutch East Indies. Dutch rule independent and democratic. continued until 1941, when the Japanese invaded and In 2011 Indonesia also assumed the chairman- began an occupation of the country that lasted ship of the Association of South-East Asian Nations throughout the Second World War. (ASEAN), boosting its engagement with regional and With Japan’s defeat and surrender in August 1945, global powers – a sign that it could play a much Indonesian nationalist leaders took their chance and more internationally influential role in the future. declared independence from Holland before Dutch CHALLENGES AHEAD: However, the country also colonial forces could return. Conflict then followed, continues to face some important political and social but the Dutch finally recognised the sovereignty of challenges. Hopes of further and faster reform with all the current Indonesian territory, except West the re-election of President Susilo Bambang Yudhoy- Papua, in 1949; Papua then joined Indonesia in 1963, ono in 2009 have been put on hold to some extent completing the modern country. as political battles continue, while efforts to root out FROM “GUIDED DEMOCRACY” TO REFORMASI: graft have also proved problematic. Post-independence, Indonesia went through a series Yet at the same time, Indonesia has displayed a of different political systems, with an early demo- political maturity and capacity that few expected cratic system giving way to the period of “Guided when the current period of multiparty politics began. Democracy” under the charismatic President Today, Indonesia is a stable, democratic country expe- Soekarno, who instated dictatorial rule from 1960 riencing high growth and escalating investor inter- until 1965, when a particularly violent series of est from around the world. That this has been events occurred, having been triggered by an achieved at a time of growing international uncer- attempted coup blamed on the communists. tainty is also no mean feat. In its 66 years of sover- From that point onward, Soekarno’s power rapid- eignty, Indonesia has experienced tremendous ly waned as that of Major General Suharto rose, withAfter gainingindependence in 1945, the growth, with a nominal GDP of $540bn and a pop- the latter becoming president in 1967. This markedcountry went through a ulation of 240m, and is counted among the world’s the beginning of the “New Order” period, with Suhar-number of different most dynamic emerging markets. to maintaining his position of power until 1997, whenpolitical periods, including HISTORICAL BACKGROUND: With its declaration of the Asian Financial Crisis hit Indonesia particular-the “Guided Democracy” of independence on August 17, 1945, Indonesia is a rel- ly badly. The resulting chaos led to Suharto step-President Soekarno and the“New Order” of President atively young country; yet its history is tied to rich ping down in 1998 to be succeeded by his vice-Suharto, which lasted until ancient civilisations. The Srivijayan and Majapahit president, Bacharuddin Jusuf Habibie. This was the1998. kingdoms were two of the most powerful, extend- start of the current period, known as the “Reformasi”.
  • 10. POLITICS OVERVIEW 15 The first parliamentary elections since the earlypost-independence years were then held in 1999.The parliament elected Abdurrahman Wahid, com-monly known as Gus Dur, to the presidency, a posi-tion he held until 2001. He was followed by MegawatiSoekarnoputri, Soekarno’s daughter. She ruled aspresident until 2004, when Susilo Bambang Yudhoy-ono, commonly known as SBY, won the country’sfirst direct presidential elections. SBY won again in2009, becoming the first president in the country’shistory to be elected for two consecutive terms.CONSTITUTIONAL CHALLENGES: With thisdecades-long history of authoritarianism and polit-ical change that has long promoted a centralisedJakarta- and Java-based system, the Reformasi peri-od has been characterised by a determination toensure plurality, decentralisation and democraticaccountability. At the same time, the country hasfaced up to the legacy left by the challenge of sep-aratism, chiefly in Aceh, northern Sumatra and Papua, The cabinet consists of ministers from different political parties, as well as non-party officialsbut also on a lower level in several other provinces.The government has also admitted wrongdoing in of different political parties, as well as non-partythe case of the Indonesian invasion of East Timor in experts and officials. A cabinet was sworn in in 2009,1975, which until that point had been a blemish on but the president reshuffled the cabinet and appoint-the country’s international standing. ed some new ministers in October 2011. Indeed, post-Suharto governments have worked A TWO-CHAMBER LEGISLATURE: The People’s Rep-to defuse these conflicts and establish a structure resentative Council (Dewan Perwakilan Rakyatm,that accommodates regional, ethnic and religious dif- DPR) is one of two chambers in the Indonesian leg-ferences. One of the first acts of the newly demo- islature, the other being the Regional Representa-cratic Indonesia was to relinquish control of East tives Council (Dewan Perwakilan Daerah, DPD). TheseTimor following a UN-sponsored referendum, while constitute the People’s Consultative Assemblyalso working toward a solution with the rebel forces (Majelis Permusyawaratan Rakyat, MPR).in Aceh, which is today a special region of the coun- The president has the right to propose bills to thetry, with its own elections and laws. In Papua too, the DPR and to debate with DPR members to securegovernment has attempted to reach an agreement passage or amendment. In emergencies, the presi-with demands for increased autonomy. dent also has the right to issue government regula- Decentralisation, a policy that transferred many tions instead of going through the normal processpowers from Jakarta to the regions, has also been of consultation and debate with the DPR.widely praised for its foresight in heading off other The president appoints chief justices, but cannotseparatist claims. Indonesia today is thus a much sign treaties, appoint or accept ambassadors, par-more peaceful and democratic place than it had don prisoners or appoint members of the judicialbeen under previous – often authoritarian – rulers, committee without DPR approval – a nod to concernseven if the Reformasi has created many challenges. about the previous sweeping powers that wereElections themselves have also been largely judged afforded to and fair by outside authorities, while Indone- DPR: The DPR is the more powerful of the two bod-sia’s media culture is one of the most open in Asia. ies, with 560 deputies elected to it in 2009 and aEXECUTIVE POWERS: The head of state is the pres- total of nine different parties gaining representation.ident, currently Susilo Bambang Yudhoyono, whose Chaired by a speaker, the DPR can draw up and passterm is due to end in 2014. The president is direct- laws of its own, as well as debate and vote on billsly elected for a five-year term, with a maximum of from the president and from the DPD. It has the righttwo terms, meaning that SBY cannot run again. The to question the president, and to draw up the budg-president is elected on a ticket that includes the et in consultation with him or her.vice-president, who is also elected to a five-year DPR representatives are elected for five-year termsterm. Currently Boediono – like Soekarno, he is known from multi-candidate constituencies. Indonesian cit-by only one name – holds this post. izens can vote at the age of 17. A proportional rep- The president is the commander-in-chief of the resentation system is in practice, meaning that noarmed forces and has the chief executive role in the one party has to secure an outright majority in the The People’s Consultative Assembly consists of twogovernment. The president is also responsible for legislature and that coalition-building is an impor- chambers: the 560-appointing a cabinet, thereby playing a major role tant part of Indonesian politics. member DPR, which is thein both domestic and foreign policy. The cabinet has With the power to choose cabinet members, the more powerful of the two,so far been composed of ministers from a number president can influence the voting habits of the DPR, and the 128-member DPD. THE REPORT Indonesia 2012
  • 11. POLITICS OVERVIEW 17building coalitions in the House that reflect the com-position of the cabinet. However, difficulties havearisen since the election in 2009, with many criticalof political infighting over posts, which they consid-er to be slowing the pace of reform.THE DPD: The DPD has 128 members, with eachprovince electing four members on a non-partisanbasis. The DPD may propose bills to the DPR, and anybill specifically concerning the regions must also bedebated by the DPD. It does not have the power torevise bills on any non-regional issues, however. Both presidential and legislative elections occurredin 2009, with the former being won by SBY and Boe-diono, who garnered 60.8% of the votes in the firstround – enough to see them declared winners with-out a second ballot. In the legislative elections, SBY’sgrouping, the Democratic Party (DP), also won themost seats, with 148 DP representatives having beenvoted to the DPR. The second-largest party wasGolkar, with 107 seats, followed by Megawati The country is playing a greater role in regional and global politicsSoekarnoputri’s Indonesian Democratic Party-Strug-gle (PDI-P) with 94 seats. Other parties included the rule in cases of impeachment of the president. It has In addition to the nationalProsperous Justice Party (PKS) with 57 seats, the nine members: three appointed by the president, government, there are more localisedNational Mandate Party (PAN) with 46, the United three by the DPR and three by the Supreme Court. governments at theDevelopment Party (PPP) with 38, the National Awak- LOCAL AUTHORITIES: Indonesia consists of some province, regency and cityening Party (PKB) with 28, the Great Indonesia Move- 33 provinces, each of which is divided into a num- levels – a decentralisedment Party (Gerindra) with 26, and the People’s Con- ber of regencies and cities, with all three adminis- approach popularised sincescience Party (Hanura) with 17. trative levels having their own local governments. the start of the Reformasi period. Coalition-building began at once after the elec- Since the start of the Reformasi period, Indonesiation, with six parties represented in the 2009 cabi- has been working to establish an effective form ofnet. A reshuffle in October 2011 saw changes in 12 decentralised politics, which has meant that theseministerial positions and the appointment of 13 local administrative units have all gained in terms ofdeputy ministers, but the president has been wide- power and influence since 1998. In 2005 direct elec-ly criticised for seemingly making appointments with tions for provincial governors, as well as heads ofthe aim of influencing the 2014 elections rather regencies and cities, were held for the first time.than for the betterment of the country. Up to now, decentralisation legislation has large-JUDGES AND COURTS: The judicial branch is head- ly strengthened the political and economic respon-ed by the Supreme Court, which has oversight of sibilities of the regencies and cities, rather than thearound 20 high courts. These in turn preside over provinces. This has had implications for investors, as250 district courts spread around the country. The local authorities have considerable power over landSupreme Court is thus the final court of appeal and and resources in their areas, with the past seeing ahas the power to re-examine cases should sufficient lack of clarity in some instances between nationalnew evidence be presented. The Supreme Court does and local jurisdictions. There are also continuingnot have oversight of constitutional cases, howev- concerns of the capacity of some regencies to han-er, which must go to the Constitutional Court. dle their enlarged responsibilities. Candidates for the Supreme Court are shortlist- Decentralisation remains a controversial issue,ed by the Judicial Commission, the members of which with further reforms of the system likely in the peri-are appointed after agreement between the presi- od ahead. Indeed, a new draft law on regional elec-dent and the DPR. Supreme Court candidates must tions was passing through the national legislaturealso be approved by the DPR before taking office. as this book was going to print. The Indonesian legal system is a blend of native OUTLOOK: While the first years of the government’scustomary law, known as adat, Roman-Dutch law second term have shown that there are many chal-and modern Indonesian law. There are also Islamic lenges facing reform, they have also demonstratedcourts, which have powers only in civil cases of mar- the country’s commitment to democratic methodsriage, divorce, reconciliation and alimony involving and policies. Progress may be slow, but it is beingMuslims. The highest court of appeal for the Islam- achieved in a stable and legal manner, with theic courts is also the Supreme Court. involvement of many stakeholders. The Constitutional Court, meanwhile, has the final This is quite an achievement for a country of suchsay in any disputes over the constitution, the pow- diversity that has had only just over a decade ofers of state institutions, election results and the dis- democracy. Surely, the decade ahead should thus besolution of political parties. It also has the power to another promising one for Indonesia and its people. THE REPORT Indonesia 2012
  • 12. 18 POLITICS INTERVIEW President Susilo Bambang Yudhoyono At the forefront OBG talks to President Susilo Bambang Yudhoyono What are the primary pillars of the Master Plan for be essential in reducing the economy’s entire cost Acceleration and Expansion of Indonesia’s Econom- structure, which would create synergies between growth ic Development (MP3EI) through 2025? centres and realise equitable access to services. This YUDHOYONO: The MP3EI was launched to enable will be significant for business and development. Our Indonesia to facilitate economic growth over the next motto is “locally integrated, globally connected”. 15 years. The plan expects economic expansion at an Indonesia’s large and youthful population will augur average rate of 7% a year to become a $4.5trn econo- well for economic activity and future productivity, which my by 2025. With the spirit of discarding the “business- is the primary reason why we seek to synchronise human as-usual” paradigm, the MP3EI is a long-term develop- development programmes, improve education and ment plan that will spur employment creation by driving invest in the required time and resources it takes to har- investments, synchronise and consolidate the govern- ness our most precious resource – human capital. ment’s action plan with the real estate sector and clus- The acceleration of our scientific capability and inno- ter economic growth centres that are consistent with vation is key to enhancing Indonesia’s competitiveness. each region’s unique strengths. Indonesia is the world’s We seek to achieve this by raising the quality of edu- largest archipelago with over 17,000 islands, and cation through incentives and an increased education although we are blessed with a wealth of resources, budget. We base a big part of MP3EI on public-private there is an abundance of untapped potential. partnerships. The government stands ready to work MP3EI serves the purpose of improving the econom- closely with state-owned companies and private busi- ic and social development in designated regions through nesses on numerous projects. I welcome and encour- a well-planned development programme. It is intend- age participation of investors to realise the MP3EI. ed to accelerate the development of designated regions Indonesia has accomplished much in the last 13 to catch up with the level of that seen in Java and Suma- years, from achieving democratic transition to with- tra. This will be achieved through the six economic cor- standing financial crises and natural disasters. It is evi- ridors that have been deemed to be the country’s dent that Indonesia has shown remarkable resilience “growth centres”. The programme is based on the prem- and adaptability in the face of ever-changing global chal- ise that each of these corridors can propel its own lenges. The policy directions outlined in the MP3EI will regional economies through clustering, as well as oper- guide us towards achieving our development goals. ating in areas with a distinct comparative advantage. Priority sectors for investment are industry, mining, What measures are being taken to move toward a agriculture, marine, tourism, telecommunications, ener- legal system that meets international business stan- gy, infrastructure and regional development. dards as a means to increase competitiveness? In addition to the development of the six economic YUDHOYONO: Of utmost importance is the need to corridors, the MP3EI also aims at improving Indonesia’s adhere to the universal principle of equality before the connectivity. This is of paramount importance in our law, without which, no credible legal system can be mission to unleash the real value of Indonesia. I have built. A strong legal system and a solid rule of law will to admit that poor infrastructure is one of the most sig- allow not just businesses, but societies to flourish. nificant deterrents to job-creating investment and Meeting international business standards is what remains a significant challenge to competitiveness. Indonesia strives for. My government devotes tremen- Connectivity refers to both hard and soft infrastruc- dous efforts to ensure legal certainty, combat corrup- ture development. An effective roll-out of projects will tion and minimise inefficiencies caused by bottlenecks
  • 13. POLITICS INTERVIEW 19in the bureaucracy. Our success in overcoming these Indonesia is the Chair of the ASEAN. With such a posi-challenges will increase our global competitiveness. tion, Indonesia is striving to consolidate the ASEAN We constantly work to detect and tackle loopholes community by 2015. We have invested intellectual asthat impede business opportunities. Indonesia also well as political leadership to achieve these goals. Wecontinues to combat graft. My administration has zero have convened two ASEAN Summits in 2011.tolerance for corruption. We are in the process of Indonesia also hosted the East Asia Summit. We inau-reforming our judicial system, with considerable gurated the participation of the US and Russia for theadvances in recent years. The Corruption Eradication first time. Under this regional forum, Indonesia hopesCommission has been prolific in their investigations of to build a robust and inclusive regional architecture.graft, with notable successes since its inception. Apart from ASEAN and the East Asia Summit, Indone- sia has hosted many important international events, suchHow will bureaucratic capacity at both the central as the World Economic Forum on East Asia, the Over-and regional level be improved to increase efficien- seas Private Investment Corporation Conference, thecy and cooperation among ministries? Business for Environment Summit and the Forest Con-YUDHOYONO: Bureaucratic reform and good gover- ference. I believe the decision to hold such importantnance are key components of economic development. events in Indonesia reflects our significance in theWe are working to improve professionalism, and to world’s economy. Moreover, by hosting such events,instate and uphold a system of meritocracy. To effect Indonesia offers the participants a range of econom-change, we apply a system of reward and punishment. ic opportunities, including the forging of partnerships.Nevertheless, this cannot be achieved overnight. At the G20 Summit in Cannes, Indonesia brought into After a long period of autocratic rule, Indonesia discussion the issues of development and pressed forunderwent a massive nationwide decentralisation effort a reformed global financial architecture. These issuesstarting in 1999, whereby 33 provinces and 450 regen- are highly important to developing countries.cies were given greater authority over how their respec- There remains significant downside risks to the futuretive regions were managed. Given the massive scale of health of the global economy. However, Indonesia inthis undertaking, a heightened level of policy coordi- particular has demonstrated remarkable resiliencenation between central and local governments became throughout the global debt crises. Investments haveessential. I have attached particular significance to so far grown 20.9% from the previous year, and Indone-inter-ministerial coordination, as well as coordination sia’s economy is on track to grow 6.5% this year.between central and local governments. I stress the I have been following closely the recent develop-importance of inter-agency modalities in tackling mat- ments in the Middle East and Northern Africa, and doters that are multi-faceted and multi-layered. My coor- hope that the reform process will result in a peacefuldinating ministers and Indonesia’s vice-president are political solution. Democratic transitions that meet thealso engaged intensively in these efforts. expectations of the people will guarantee stability. Indonesia experienced a democratic transformationWhat events have characterised Indonesia’s for- 13 years ago, so it is always willing to share with othereign policy in 2011? How can the country bring its nations its own experiences. Nevertheless, I stronglydevelopment experience to bear on global events? believe that every country should cultivate its ownYUDHOYONO: The year 2011 has been very eventful homegrown democracy, as there is no such thing asfor Indonesia in terms of foreign policy activities. First, a one-size-fits-all path to nationhood and statehood. THE REPORT Indonesia 2012
  • 14. 20 POLITICS ANALYSIS ASEAN has been central to regional economic and political relations At the helm Chairing ASEAN presents an opportunity to increase regional influence As one of the founding members of ASEAN, 2011 has line for the creation of a free trade area among the been a special year for Indonesia, as it has assumed six members at the time (Brunei joined in 1984). the chair of the 10-member regional group. At a time With the end of the Cold War, ASEAN’s integrationist when Asia is becoming increasingly important in glob- economic policy continued to grow in prominence, al affairs, this is an opportunity for the country to while the political initiatives of that era diminished. demonstrate its growing influence. ASEAN’s membership also grew further, with Vietnam The year has been one of growing uncertainties too, joining in 1995, Laos and Myanmar in 1997 and Cam- within the global economy. At the same time, within bodia in 1999. The newer members – often referred the ASEAN region, moves toward economic integra- to as the CMLV countries – must enact virtually zero- tion continued to gather pace, while several disputes tariff rates on imports from ASEAN countries by 2015, –both within and outside of the organisation – at a target other members set for 2010. times threatened to damage the peace and stability FREE TRADE SUCCESS: There has been immense of the region. Through these developments, Indone- progress in achieving this giant free trade zone of over sia sought to play a more active role in contributing 500m people with a combined GDP of around $1.8trn. to further integration and conflict resolution. Yet in terms of achieving a more unified foreign poli- HISTORICAL TIES: ASEAN was founded on August 8, cy, until now there has been relatively little achieved. 1967, when the foreign ministers of five countries – It is in this second area that Indonesia wanted to make Indonesia, Malaysia, Thailand, the Philippines and Sin- progress during its term of office as chair of ASEAN. gapore – met in the Thai capital to sign the Bangkok This meant, first and foremost, resolving some of the Declaration. The Suharto government, anxious to end internal disputes between ASEAN members. its conflict with Malaysia and align with the anti-com- Thus Jakarta has taken a much more active role in munist powers of the region, sent Foreign Minister seeking a resolution to the long-standing border dis- Adam Malik as a representative. The organisation’s pute between Thailand and Cambodia, which flared up General Secretariat has since been based in Jakarta. again in early 2011. Indonesia, under the ASEAN ban- Since then, ASEAN has been a key part of Indone- ner, sought to resolve the conflict and provide a facil- sia’s foreign policy. This centrality is in line with the coun- itator for the two sides to meet. By August, with a try’s founding foreign policy principles, as outlined by change of government in Bangkok, most analysts were Mohammad Hatta, who authored Indonesia’s decla- optimistic that the dispute was no longer a hot one. ration of independence, along with Soekarno, in 1948. Indonesia has also been leading efforts to resolve Hatta declared the country to be in support of a for- a series of overlapping claims between several mem- eign policy independent of great and superpower ber states to parts of the South China Sea. These also interests that would take an active role in the world, conflict with China’s claim to almost the entire body rather than a passive or reactive one. of water. A third area of controversy is Myanmar, which ZONING MATTERS: ASEAN provides an excellent forum is due to chair ASEAN in 2014 yet continues to have for the realisation of these goals. In the 1970s Jakar- cold relations with many Western countries, furtherThe country’s founding ta was taking part in efforts to make South-east Asia underscoring the difficult nature of any attempt toforeign policy principles a nuclear-free zone and in the 1980s stood behind the pull ASEAN’s 10 states into a unified force. Nonethe-declared the importance oftaking an active role in idea of a zone of peace in the region. In the 1990s Jakar- less, the steps taken by Indonesia in 2011 have shownregional and global political ta signed up to the ASEAN Free Trade Agreement, that ASEAN is not simply about free trade and hasaffairs. which was launched in 1992 and set a 15-year dead- other responsibilities and opportunities for influence.
  • 15. POLITICS INTERVIEW 21 Abdullah Gül, President of TurkeyWorking togetherOBG talks to Abdullah Gül, President of TurkeyHow can Turkey and Indonesia, the world’s leading ance. I therefore believe that both countries could bemoderate Muslim-majority nations, play a role in the sources of inspiration for the Muslim world. Both havedevelopment of relations between East and West? the ability to play essential roles in bringing the EastGÜL: The age we live in requires new approaches to and West closer in a number of different and inter-communal relations. We needprogrammes that aim to collaborate, harmonise and syn- In which sectors is Turkey looking to develop strongerthesise varying cultures, and to build upon the com- ties with Indonesia to reach the targeted $5bn inmon wisdom and achievements of humanity. We must trade volume between the two countries by 2014?show that diversity is not a weakness but a source of GÜL: Increasing the trade volume between our twostrength. As cohabitants of the same planet, we should countries must be the core goal of future economicunite in a common understanding of “world citizenship”. and commercial cooperation. With regards to trade This is increasingly important in today’s globalised volume, the composition of that volume is one of theworld. The international community is more intercon- most important factors to examine.nected than ever and has become a “small village” in The import-export balance between Turkey andmany ways. The world is now in such a delicate balance Indonesia is highly asymmetric. The statistics for thethat no country or region can be immune from the prob- last 10 years reveal that the foreign trade deficit of ourlems of others and no single actor can enact signifi- trade with Indonesia was increasing regularly until 2007,cant change alone. International solidarity and coop- when the deficit reached around $1.2bn, and haseration have become essential in tackling common remained about the same since then, excluding2009,challenges. We need to better understand each other when the deficit dropped to $ order to make the best use of our collective efforts. Turkey’s objectives for commercial relations with Turkey is a democratic, secular country based on Indonesia are not only limited to increasing the tradeuniversal values and has historical, social, ethnic, reli- volume, but also include correcting the considerablegious and cultural links with almost every nation with- asymmetry by multiplying exports to a three-hour flight from Istanbul. As such, Turkey forms Turkish exports to Indonesia can be classified underan essential link between these diverse cultures. In this two categories: agricultural goods and industrial goods.regard, we are keen to promote peaceful co-existence, Under agricultural goods, Turkish products exported todialogue, mutual respect, friendship, harmony and Indonesia include wheat flour, tobacco, ferment, choco-cooperation between different cultures and faiths. late products, citrus fruits, olive oil, pasta and hazel- In line with this, Turkey pioneered the “Alliance of Civil- nuts. Industrial products include petroleum oils andisations” initiative, which has now become a success- products, motor vehicles and their accessories, trac-ful UN programme aimed at mitigating differences and tors, semi-finished and flat-rolled products of iron andfostering harmony and tolerance between nations. non-alloy steel, worked monumental or building stone, We believe such efforts will help enhance understand- marble and travertine, feldspar and and cooperation throughout the world, and there It is obvious that the larger the trade volume betweenis much we can do alongside Indonesia in this regard. two countries, the closer our relations will be in theBoth Turkey and Indonesia possess unique character- future. I think a higher trade volume and a well-balancedistics, but they also share a common commitment to trade structure would pave the way for a higher leveldemocratic and pluralistic secular systems that respect of social integration and political cooperation as wellthe rule of law and symbolise moderation and toler- as more stable and continuous economic collaboration. THE REPORT Indonesia 2012
  • 16. 22 POLITICS INTERVIEW Marty Natalegawa, Minister of Foreign Affairs An example to follow OBG talks to Marty Natalegawa, Minister of Foreign Affairs What are the main obstacles to achieving the ASEAN transformation, so that other nations may benefit from integrated economic community by 2015? our experiences, struggles and achievements. NATALEGAWA: The concept of integrating and syn- ergising an economic community of 10 sovereign How is Indonesia using its influential position as the nations, all of which have their own economic concerns 2011 Chair of ASEAN to augment the economic and priorities, is fundamentally challenging. However, and political status of the region? ASEAN long ago recognised the importance of achiev- NATALEGAWA: We are keen not simply to chair ASEAN, ing this objective. The alternative, i.e. not integrating, but to exercise constructive leadership. We want to would have been detrimental to our economic pros- effect change and to direct ASEAN along a certain path. perity. With the rise of China and India and the contin- Our first priority is to make significant progress toward ued strength of Japan, the competitive landscape has achieving an integrated ASEAN community by 2015. expanded dramatically. For ASEAN to maintain a com- Specifically, we want to improve coordination among petitive advantage it is crucial that we develop policies ASEAN countries in economics, socio-cultural affairs and that not only play on our individual abilities, but also security. ASEAN has already put the foundations in help us to complement one another’s strengths. place in terms of various documents, declarations and This in itself will be a difficult task, but when you take statements. The map has been laid out and the time into account the need for equitable development — for implementation and real action is now. That is why, where each country feels they are benefitting from when the conflict between Thailand and Cambodia being a part of the system — economic integration arose this past year, we took concrete measures to help becomes even more challenging. Regardless of the facilitate a resolution rather than remaining silent. We obstacles, globalisation is not simply something we can put into practice the commitments and promises that choose to opt out of. Our individual economic and all ASEAN community members have made. social development will greatly depend on our collec- This leads us to our second priority, which is to ensure tive ability to compete on a global level. that we continue to maintain a peaceful and benign regional atmosphere. This has been a key ingredient in What role can Indonesia play on the world stage, ASEAN’s drive to achieve economic prosperity. given its status as a secular, populous Muslim nation Our final priority is to create a strategy beyond 2015. enjoying good relations with both East and West? This is where the theme of our chairmanship, “ASEAN NATALEGAWA: Indonesia has the largest Muslim pop- Community in a Global Community of Nations”, becomes ulation in the world, as well as the third-largest democ- apparent. We laid down a 10-year map that will begin racy. We are a nation that embraces religious tolerance a process whereby ASEAN will speak with greater cohe- and ranks modernisation and development as two of sion and collectiveness on issues both regional and our greatest priorities. Our success story is relevant not global. It is insufficient for ASEAN to be a community only among ASEAN nations, but also for countries in unto itself and is no longer acceptable to help main- North Africa and the Middle East. tain peace and stability solely within the immediate Recently we have seen how issues of governance, region. ASEAN must project its collective voice at the economics and human rights can become security international level, as currently ASEAN countries con- issues that could potentially bring about destabilisa- tribute only at a national or bilateral level. With greater tion. It is therefore our responsibility to try to share the cohesion and coordination we can bring positive change lessons we have learned during our own democratic and contribute beyond our own individual strengths.
  • 17. POLITICS ANALYSIS 23 Trying to satisfy the many groups in the legislature is a challengeParty linesPolitical groups share similar ideologies but differ in leadership stylesWith nine parties represented in the Indonesian legis- become increasingly based on their respective leader- The largest party in thelature – and six of those present in the cabinet – the ship styles rather than on ideologies. It is difficult to DPR is the Democratic Party, which has 148 seats,political landscape of the country is clearly very multi- make a distinction between secular and Islamic plat- followed by Golkar, withfaceted. Though three parties tend to dominate the forms as all three parties, usually seen as secular, have 107 seats, and thescene, no one group has been able to gain a majority incorporated many Islam-based policies in recent years. Indonesian Democraticin parliament and shifting coalitions and alliances ensure POLITICAL ISLAM: One of the major debates in Indone- Party-Struggle.a wide variety of influences and viewpoints. sian politics has long been over the role of Islam, withTHE MAJOR PLAYERS: Currently, the largest party in a rough divide between secular and Islamic-leaningthe legislature – the People’s Representative Council parties sometimes evident. Coalition governments,(DPR) – is the Democratic Party (DP), with 148 seats in however, have always included groups from both sides.the 560-seat assembly after the 2009 general election. The political Islamic movement in Indonesia has longThe DP is also one of the newest groups, formed large- been dominated by two groups – the more tradition-ly as an election vehicle for the current president, Susi- alist Nahdlatul Ulama (NU) and the more reformistlo Bambang Yudhoyono (SBY), in September 2001. Its Muhammadiyah. These have sometimes given theirfortunes have thus been tied to SBY, with the surge in backing to political parties, although in 2009, Muham-support for him illustrated well by the fact that the madiyah declared neutrality, while NU traditionally backsDPR, the DP won only 57 seats in the 2004 elections. the National Awakening Party (Partai KebangkitanThe DP’s beliefs are those of pancasila, the five official Bangsa, PKB), which won 28 seats and is in the govern-founding principles of the Indonesian state: belief in ing coalition, with representation in the god; a just and civilised humanity; the unity of the These traditional Islamist groups have been joinedcountry; democracy; and social justice. in recent times, however, by more contemporary out- The oldest and second-largest party, Golkar, won 107 fits. The Prosperous Justice Party (Partai Keadilanseats in 2009 and also adheres to pancasila. Indeed, it Sejahtera, PKS), modelled on Turkey’s pragmatic Islamistwas the ruling party during the whole period of the Justice and Development Party, won 57 seats in 2009,Suharto regime, from 1966-98, and under the presi- mobilising a more urban, middle-class religious voterdency of Bacharuddin Jusuf Habibie in 1998-99. It thus base than the PKB. The PKS is also represented in thehas one of the oldest established local party networks, cabinet. Two other Islamist groups are the United Devel-with many powerful and influential supporters. Its opment Party (Partai Persatuan Pembangunan, PPP),leader is Aburizal Bakrie, who also leads the governing which won 37 seats in the DPR, and the National Man-coalition in the DPR and is a member of the cabinet. date Party (Partai Amanat Nasional, PAN), with 43 seats. The third-largest party is the Indonesian Democrat- Both also took places in the cabinet.ic Party-Struggle (PDI-P), led by Megawati Soekarnop- With a parliament dominated by coalitions, the post-utri, the daughter of former President Soekarno. The 2009 government is often faced with the challenge ofofficial ideology of the party is also pancasila, although maintaining a common purpose among so many groups.the PDI-P is the largest opposition party in the DPR. It This has in many cases given way to power strugglesis the result of a split in the Indonesian Democratic Par- within the cabinet and the DPR, thereby hampering thety, which was also led by Megawati and – with Golkar legislative timetable. While this has created some lev-– was one of two parties allowed by Suharto. el of dissatisfaction among the public, the fact that soLEADERSHIP: As all the major parties have platforms many viewpoints are represented in the politics of thebased on pancasila, differentiation between them has country today is undoubtedly a positive development. THE REPORT Indonesia 2012
  • 18. 24 POLITICS ANALYSIS The past few years have seen a major reduction in political risk A focus on unity Bringing a diverse population togetherMany areas of the country As an archipelago comprising some 17,500 islands, signing of the Malino II Accord in 2001. However, vio-have experienced intense Indonesia has an ethnically and religiously diverse pop- lence has occurred sporadically and tensions remain,conflicts over the past ulation – a characteristic long the source of both oppor- with government agencies and NGOs working to over-decades, including Aceh,Central Sulawesi, the tunities and challenges. Indeed, different perceptions come hostility between the communities.Malukus and Papua. of this diversity have engendered conflict in recent A similar story pertains in the Malukus, and particu- decades. However, the past few years have seen a major larly in the capital, Ambon. Violence between Christians reduction in political risks and a corresponding increase and Muslims has been intense for more than a decade, in foreign investment and interest. Political risk in with the most recent outbreak in September 2011. Indonesia today thus bears little comparison with what While peace is generally kept, the two communities con- it was when the current period of Reformasi began in tinue to mistrust each other. More positively, the most 1998, with the fall of Suharto. recent outburst was tackled by grassroots “peace provo- SEPARATISM & REGIONALISM: Under Suharto, there cateurs” who seem to have achieved success. A spe- were four main areas of the country suffering from sep- cial unit for dealing with these issues in Papua, called aratist or religious conflicts: Aceh, in northern Suma- UP4B and based in the vice-president’s office, was tra; Central Sulawesi; the Malukus; and Papua. The ter- established by presidential decree in September 2011. ritory of East Timor, occupied by Indonesian forces in Papua, meanwhile, has seen one of the most long- 1975, was also a site of conflict, although with differ- running separatist conflicts in Indonesia. Over the years, ent causes than the others. During the decade that fol- the armed wing of the Free Papua Organisation, the lowed, successive governments in Jakarta moved to National Liberation Army, has conducted violent attacks, tackle these disputes, with generally good results. not only against Indonesian army and police, but also RESOLUTIONS: One of the first moves was in 1999, against foreign investments and foreigners, mainly when a vote was held in East Timor regarding independ- operating in the mining sector. ence. The East Timorese voted overwhelmingly in favour, ADDRESSING EXTREMISM: Radical Islamic groups with this unfortunately followed by an outbreak of vio- have also posed a risk to the country over the past lence between secessionists and integrationists. How- decade, such as hotel bombings in Jakarta in 2009. ever, in 2002 the territory finally gained independence However, recent times have seen the main groups of and relations between the two states have improved Indonesian jihadis – Jemaah Islamiyah and Jamaah considerably. East Timor is now moving toward becom- Ansharut Tauhid – take significant hits. The February ing a member of the Association of South-East Asian 2010 break-up of a jihadi training camp in Aceh led to Nations with Indonesian support. a successful shutdown of many networks. The Indone- The conflict in Aceh has also been largely resolved. sian authorities have a well-trained and -equipped anti- The tsunami of 2004, which hit Aceh particularly bad- terrorism force, the National Anti-Terrorism Agency. ly, had the effect of bringing the warring parties to the Many arrests and successful prosecutions have been peace table. Aceh received special autonomy within made, with mainstream Islamic groups also being Indonesia, the Indonesian army withdrew from the mobilised against the extremists. province and the guerrillas, known as GAM, disarmed. Risk has declined in recent years, although in cer- Direct elections for governor were held in 2006, with tain specific areas, tensions remain. Attempts to address GAM leader Irwandi Yusuf winning office. these challenges continue, with additional units and In Central Sulawesi, violence between Christian and forces being mobilised, including a new rise in the num- Muslim communities in 1999 and 2000 eased with the ber of corporate security firms offering their services.
  • 19. POLITICS INTERVIEW 25 Surin Pitsuwan, Secretary-General, ASEANFurther integrationOBG talks to Surin Pitsuwan, Secretary-General, ASEANHow can ASEAN assist Indonesia in addressing its services. Towards this end, ASEAN has identified strate-significant infrastructure challenges? gic initiatives in these areas, as set out in the ASEANPITSUWAN: Assistance to ASEAN member states for Economic Community (AEC) Blueprint, and has takenaddressing infrastructure challenges is carried out in steps to realise these by 2015. One bold initiative toindirect ways, mostly through sharing experience and establish this free and open regime has been the ASEANbest practices in areas such as urban transport plan- Comprehensive Investment Agreement (ACIA). As thening, development and management. Other avenues name suggests, the ACIA is comprehensive, but it is alsoof support include harmonising regulations and pro- based on international best practices and on par withcedures and developing ASEAN-wide hard infrastruc- other international investment agreements in terms ofture networks like the Singapore-Kunming rail link and scope, rights and obligations. An important pillar of thethe ASEAN highway network. Furthermore, we have ACIA is its liberalisation component. ASEAN adopted aalso established effective mechanisms of financial negative list approach in the formulation of the reser-mobilisation for regional infrastructure projects, such vation list under this agreement, meaning anythingas the ASEAN Infrastructure Fund. outside the list is open. We hope member states can now complete the domestic approval process and theWhat contribution do you expect Indonesia will agreement will be in force by the end of 2011.make to advance ASEAN’s policy agenda? ASEAN also agreed to progressively reduce or elim-PITSUWAN: Indonesia’s theme for its ASEAN Chair- inate reservations contained in the list following themanship was “ASEAN Community in a Global Commu- strategic phases of the AEC Blueprint, and membernity of Nations.” I hope Indonesia will continue to be as states are now working to improve the region’s invest-ambitious in the economic and socio-cultural commu- ment regime by reducing or removing impediments.nity as it is in political security. Indonesia has the polit-ical weight to offer assistance to its regional neighbours What benefits and opportunities will come of ASEANand resolve disputes through peaceful means. nations working together to make the region a leading destination for international tourism?How are logistical integration issues within the PITSUWAN: Member states all have tremendous poten-ASEAN market being addressed? tial for tourism. Combining individual efforts into a col-PITSUWAN: ASEAN plans to achieve full integration of lective campaign would multiply rewards to individuallogistics services by 2013. To guide this agenda it has countries as well as the region as a whole. ASEAN hascreated a map, endorsed by the ASEAN economic min- been implementing a number of initiatives to promoteisters in 2007, that provides detailed measures and the region as a single tourism destination, such asaction plans to integrate logistics services across the developing multiple-country tour packages, joint pro-region. This involves various related ASEAN services, cus- motion campaigns and ASEAN-wide tourism websites.toms, transport, telecommunications and investment Currently, ASEAN is running joint marketing and pro-bodies, as well as private sector organisations. motional efforts within the main source markets of Australia, China, Japan and the Republic of Korea. TheHow will a free and open investment regime be collaboration will also include the establishment of anachieved to increase ASEAN’s competitiveness? ASEAN common area within international travel fairsPITSUWAN: ASEAN’s vision for an integrated regional and the establishment of the ASEAN Promotional Chap-economy includes the free flow of both investment and ter for Tourism in Australia, among other initiatives. THE REPORT Indonesia 2012
  • 20. 26 POLITICS VIEWPOINT Hillary Clinton, US Secretary of State Realising the dream Hillary Clinton, US Secretary of State, on regional entrepreneurship Indonesia is one of the three largest democracies rights. If someone comes up with a good idea they in the world in a dynamic region increasingly at the need to be sure it is protected, so that they can then heart of global commerce and growth. Like so many make the most of it. That is why we created the other countries, Indonesia is also home to an enor- Global Entrepreneurship Programme and why we mous population of young people, with almost 75m support initiatives such as “Partnerships For a New under the age of 18. Those young people are grow- Beginning”, which recently opened a local chapter ing up in a world very different than the one I grew in Indonesia. It is a pleasure to know that Indonesia up in, and they are connected in ways that I could is one of the five countries around the world in never have imagined even 10 years ago. which the US will begin work to foster angel investor The jobs and opportunities that they need and groups and to connect them with a variety of start- deserve will not be created by governments alone, ups and entrepreneurs. no matter how large the public sector grows. While We want to see stories that are successes repeat- traditional corporations and established industries ed here in Indonesia, across the ASEAN region, and are very important, the fact is they are unlikely to around the world. We want to see this happen create all the jobs needed for the future. So what because it will help make a more prosperous, peace- needs to be done is to tap the creativity and inno- ful and secure world. If people are given the oppor- vation of citizens, men and women alike. tunity to live up to their own God-given potential, I like to say that talent is universal but opportu- they are more likely to make a contribution to their nity is not. We can begin to change that if we find families, communities, countries and indeed the ways to unleash people’s potential and help good world. We’re also doing it because we think it works ideas take root and flourish. Potential entrepreneurs and our own experience demonstrates that. are all around us. They are anyone with the imagi- We have seen over now 235 years, but particu- nation to conceive of a new product, process or larly in the last 150 years, people come from many service, who have the ability, persistence and sheer of the ASEAN nations to our country with nothing work ethic to turn that idea into something real. in their pocket except a big dream that they hope We need to tackle the obstacles that entrepre- to be able to realise. And yes, they worked hard, but neurs face. These include cumbersome government they had worked hard back home. So we know this regulations, corrupt officials who demand a bribe works. Furthermore, we know too that free and open before issuing a business permit, cultural norms that societies are much more likely to derive benefits might prevent women from handling money or own- from more people over a longer period of time than ing land and similar challenges. any other kind of society. The US wants to work with Indonesia to bring It is not only a chance to vote in elections, it is not down these barriers. That means reducing the time only a free press, or democratic institutions in a gov- it takes to open a business here in this region. That ernment that is transparent and accountable and means making it easier for foreign investors to find produces results for people. local projects worthy of support, and that means con- Open societies have a free market and an econ- necting entrepreneurs with the domestic and for- omy that works for people who get up every day and eign investors they need to further their goals. work hard to realise and further their goals. Entre- That means also improving the business climate preneurs can help to shape the future, not only by ensuring the protection of intellectual property with their product or service, but with their dreams.
  • 21. POLITICS VIEWPOINT 29 William Hague, UK Secretary of StateBound togetherWilliam Hague, UK Secretary of State for Foreign and CommonwealthAffairs, on UK-ASEAN relations in the 21st CenturyToday the idea of the “developed West and developing region are strongest with our Commonwealth part-rest” is all but irrelevant. The world has changed and ners, Singapore and Malaysia. But while strengtheningso must the UK if we are to prevent our role and influ- these we should be looking for opportunities else-ence in international affairs from declining. Key to this where as well. We also need to continue to work along-will be making the most of opportunities presented by side EU partners to secure free trade agreements witha new international paradigm in which economic pow- ASEAN countries to open markets and boost trade. Fur-er and influence is moving east and south. We are doing thermore, we need to do more to promote two-waythis by shifting our diplomatic weight to reflect these investment. International institutions rate the UK aschanges and by building our relationships with emerg- the easiest place to do business in Europe, with theing powers. These relationships will be increasingly vital strongest business environment on the continent andfor forging agreements on the international stage and the lowest barriers to entrepreneurship in the world.for boosting trade and investment that support the UK. But our relationship is about more than trade and South-east Asia epitomises the rationale for this investment. We have interests in maintaining securityapproach. The ASEAN countries are already more pop- in a region that straddles some of the world’s mostulous than the EU and the Arab world, have a larger important shipping routes and in tackling commoneconomy than India and absorb more UK exports than threats, such as terrorism, nuclear proliferation, cyber-China. They hold substantial geopolitical significance, crime and climate change. There are a number of sep-with influence on neighbouring major powers. They aratist or other conflicts within ASEAN, and tensionsshould be, and are, key partners for the UK. remain in the South China Sea. The UK has a wealth of The region deserves serious attention from global experience and we are keen to share our knowledgepartners. The UK is fortunate to draw on a foundation to promote stability. We form part of a small group ofof existing relationships, and we already enjoy multi- countries formally supporting efforts by the Filipino Gov-billion pound trade and investment links with ASEAN. ernment and rebel groups to end their conflict.Our largest businesses in finance, energy, life sciences The voices of ASEAN leaders will be increasingly influ-and food and drink are establishing a regional foothold ential, both regionally and globally, in the future. Indone-and more of our retailers are becoming household sia’s impressive democratisation and Malaysia’s strongnames, especially in Thailand. Furthermore, every year stand against violent extremism can serve as examplesover 30,000 ASEAN students study in the UK, often for the entire international community.returning to positions of influence. They form part of We also want to work with ASEAN members on cli-the rich people-to-people links between our countries. mate change. They are among the heaviest emitters of We build on these links all the time. On his visit to greenhouse gases, but could also be among those mostIndonesia last month the business secretary, Vince seriously affected by the consequences of changingCable, launched the new UK-ASEAN Business Council temperatures. Any durable solutions will thereforeto strengthen commercial engagement with the region. require commitment and close coordination with ASEAN.The government’s public-private partnership body, Thus, our approach will be to build up our relationsInfrastructure UK, is already in the Philippines sharing with ASEAN, to share expertise and knowledge, to pro-expertise, and we aim to do this more widely across the mote increased and freer trade and to work togetherregion. Moreover, we continue to support develop- in a wide range of areas, from security to climate change.ment, democratic freedoms and transparency. But there We will continue to look east, toward the tremendousis more we can do. Our commercial relationships in the wealth of opportunity to be found in South-east Asia. THE REPORT Indonesia 2012
  • 22. 31EconomyDomestic consumption and exports drive GDP growthCentral bank takes measures against inflationFacilitating new public-private partnershipsCapital markets highly attractive for portfolio investors
  • 23. ECONOMY OVERVIEW 33 Indonesia is among the three fastest-growing economies in AsiaAt the centre of attentionGrowth continues driven by private consumption and investmentIn the midst of turbulent international economic con- ing its credibility in defending a more stable environ-ditions, Indonesia’s growth and investment potential is ment when it comes to inflation (see analysis).increasingly attractive. Authorities seek to leverage on RESILIENT GROWTH: Growth is well on track to exceedthe economy’s key competitive advantages to attract that of last decade, averaging 6.1% in 2010 and onthe long-term investment needed to realise their goal track to reach between 6.3% and 6.5% for 2011 as aof turning the country into one of the top 10 economies whole – the economy has expanded more than 6%by 2025. Already the world’s 17th largest with a nom- year-on-year (y-o-y) from the fourth quarter of 2010,inal GDP of Rp6400trn ($768bn) in 2010, Indonesia’s when growth peaked at 6.9%. While the rate fell slight-economy is one of the three fastest-growing in Asia. ly to 6.49% in the second quarter, analysts such as theA PRUDENT RECORD: The country’s young demo- Danareksa Research Institute expect it to remain abovegraphic structure, significant resource base, low lever- 6% well into mid-2012 based on the domestic econo-age ratio and resilient consumer demand have long been my’s inertia and commodity exports, which togetherrecognised by investors. With Asia widely expected to account for more than 70% of Indonesia’s GDP. Thecontribute some 50% of global growth over the next 6.2-6.5% annual growth projected by analysts in the peri-five years, Indonesia’s changing trade and investment od 2012-15 would fall short of the government’s ambi-flows are in the process of adapting to new partners tions of 6.5-6.9% yet would still be the fastest sustainedin the region. The government’s strong record in pru- growth since the 1997-98 crisis.dent macro-economic management has added to the The services and primary sectors have registeredsustainability of the archipelago’s long-recognised strong growth since late 2009. Services grew by 8.4%growth story. The fundamentals of the Indonesian econ- in 2010, accounting for 3.8 percentage points of GDPomy have improved significantly since the 1997-98 growth, while transport and communications achievedAsian financial crisis. Soon to be upgraded to an invest- double-digit growth. Although 2010 was a bumperment-grade credit rating, it has made Goldman Sach- year for foreign investment, portfolio investment ands’ “next 11” list, and has been spoken of as the “next I consumer demand, the agriculture and mining sectorsin BRIC” – the grouping of Brazil, Russia, India and Chi- in particular faced tailwinds caused by poor, key drivers of current global growth. This caused agriculture to register its weakest growth The archipelago has a key advantage in the global in five years, at 2.9%. But improved conditions in 2011economic climate of 2011, as by regional standards it and greater foreign interest have sustained a better per-is a relatively closed economy. Exports account for only formance. Manufacturing recovered to pre-crisis out-25.5% of GDP, down from roughly 30% in 2008. This pales put levels in the second quarter of 2011. The servicesin comparison to more than 70% in Thailand or 120% sector has softened slightly in 2011 but remains buoy-in Malaysia. The country’s approximately 240m con- ant on the back of Indonesian consumer demand.sumers provide a strong engine of domestic growth in The central bank estimates that a cut in global growth In the current globalthe face of turbulent global conditions. “The global cri- in 2011 from 4.5% to 4% would simply reduce expan- economic climate a keysis has not hit our real sector except for the financial sion to 6.3%, from the 6.5% in the revised May 2011 advantage is that bymarket,” Darmin Nasution, governor of Bank Indone- budget. While the Ministry of Finance still targets regional standards Indonesia has a relativelysia (BI), the country’s central bank, said in October 6.5% and BI expects 6.6%, the IMF downgraded its fore- closed economy. At present2011. Meanwhile, inflationary pressures that were high cast in September to 6.4% for 2011 and 6.3% for 2012. its exports account for juston investors’ radar until mid-2011 remain a latent con- This would still make it the top performer in ASEAN 25.5% of GDP, as comparedcern, yet Indonesia has taken long strides in establish- for 2011, according to the Asian Development Bank. to Thailand’s 70%. THE REPORT Indonesia 2012
  • 24. 34 ECONOMY OVERVIEWThe economy reached the Indonesia’s economy reached the milestone of $3000 that continue to hinder manufacturers, exporters andmilestone of $3000 in GDP GDP per capita in 2010, although significant diver- consumers. The government, conscious of the need toper capita in 2010, gences in income distribution persist. In the run-up to engage private finance in bridging these gaps, hasalthough this figure maskssignificant divergences in an election cycle in 2014, the government is seeking sought to clarify rules for public-private partnershipsincome distribution. to spread the dividends of growth more evenly, although (PPP) in infrastructure.Nonetheless, the incidence the unemployment rate has fallen from 7.9% in August Increasing spending is necessary, given the 50% dropof poverty has been falling, 2009 to 6.8% in mid-2011. Jakarta has made some in public infrastructure spending over pre-1997 levelsfrom 17.8% in 2006 to inroads in its efforts towards achieving the UN Millen- – public expenditure on infrastructure has averaged 4%around 13% in 2010. nium Development Goals, expanding two key social to 5% of GDP over the past five years. Much of fiscal assistance programmes in 2011 to an additional 1.1m spending has focused on reducing the public debt over- people. The incidence of poverty has dropped from hang, energy subsidies and poverty alleviation and edu- 17.8% in 2006 to roughly 13% in 2010, and it is expect- cation programmes, to the detriment of infrastructure ed to fall further to 11.5% in 2011. development. This has contributed to a rise in logistics While no significant wage inflation has emerged in costs, which now account for around 14% of total pro- 2011, the 2004 Labour Law stands as one of the bar- duction costs (see Transport chapter). riers to investment, restricting the flexibility of hiring A large part of this stems from the legacy of decades workers. This has encouraged internal migration as of under-investment under Suharto’s dictatorial rule, some investors have moved from more unionised cen- but decentralisation at the start of the millennium con- tres such as Bandung, Surabaya and Jakarta estates tributed its own challenges by fragmenting funding towards more mixed and fragmented populations like and governance. A key plank of the MP3EI plan is to those in Semarang, Central Java. Indonesia has seen coordinate federal, provincial, district and mayoral juris- stronger growth in its commodity exports than in the dictions to expedite completion of infrastructure proj- job-creating manufacturing sector in recent years – ects, particularly in transport and utilities. almost two-thirds of its labour force remains informal. GROWTH CORRIDORS: The aim of the plan is to accel- CLEARING BOTTLENECKS: To attain growth in the 7- erate the distribution of the dividends from Indonesia’s 8% range necessary to achieve the targets of Master economic growth geographically and socially to reduce Plan for the Acceleration and Expansion of Indonesia’s disparities. The blueprint is structured around six cor- Economic Development (MP3EI) 2025, the archipela- ridors – Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa go will have to address the infrastructural weaknesses Tenggara and Papua-Maluku – to cluster activity. Eight
  • 25. ECONOMY OVERVIEW 35industries that drive growth are being targeted forexpansion: mining, energy, agriculture, industrial, marine,tourism, telecoms and the development of strategicareas such as Jabodetabek and the Sunda Straits. Keyto the plan’s success will be boosting input in existingstrengths in agriculture and mining and improvingnational linkages by addressing weaknesses in infrastruc-ture and developing human resource capacity. An integrated approach is planned to both developthe intra-island physical infrastructure, but also tostreamline the republic’s soft infrastructure. Authori-ties will act as facilitators – providing roughly a third ofthe financing over the term of the 15-year plan andsimplifying regulations – while the private sector isbeing invited to lead project development. The plan,steered by the National Economic Committee and theNational Innovation Committee under the presidency,runs from 2011 to 2025 and seeks to redress histori-cal shortfalls in gross capital investment. The share ofgross fixed investment in GDP in the past decade has Exports account for 25.5% of GDP, down from around 30% in 2008remained below rates achieved in the heyday of the ear-ly 1990s (24% annually from 2001 to 2009 compared lower than the constitutional cap of a 3% budget- Despite incentives andto 26% from 1991 to 2000). Yet investment has picked deficit-to-GDP ratio) are partly due to inefficient budg- penalties to encourage ministries to reach theirup since 2010, reaching 32.2% that year. et disbursement by the Ministry of Finance. Indonesia spending targets, capital The government’s medium-term programme for the has undershot its budgeted fiscal spending by an aver- expenditure disbursementfive years to 2014 requires Rp1429trn ($171.5bn) in age of 1% of GDP a year over the past five years. Yet remained low, at 26% ofinfrastructure financing, of which roughly 41% is to the final deficit figures compares favourably to exces- the budgeted amount instem from PPPs. The amount budgeted for public invest- sive budget deficits in other countries in the eyes of late September 2011.ment in 2011 already represents a 30% rise on 2010 foreign investors. So does the aggregate public-debt-levels . Improvements in Indonesia’s investment climate to-GDP ratio of 26% in 2011, down from 90% in 2000.and the prospects of a strengthening currency have A major explanation for low disbursement has beendriven credit growth and new investment. the back-loading of spending, in the final quarter of Fixed capital investment grew a solid 8.5% in 2010, the fiscal year. The government is trying to streamlinecontributing 2 percentage points to GDP growth – it the budget execution process, improve procurementis expected to sustain an 8.6% annual expansion for years by its agencies and move forward tendering and proj-to come. Funding for construction, including infrastruc- ect execution by at least three months. The Ministry ofture, increased 7% in 2010. Investment in equipment Finance introduced incentives and penalties to encour-and machinery jumped 17.1% that year, recovering from age each ministry to achieve their spending targets, yetits sharp drop in 2009. In 2011 aggregate investment capital-expenditure disbursement remains a challenge.grew 27% y-o-y in the first quarter. By the end of first- “The Ministry of Finance has moved forward the starthalf 2011, working capital loans grew by 23.8% y-o-y, of tendering from the first quarter of the budget yearconsumer loans 23.2% and investment loans 20.8%. to the fourth quarter of the preceding year,” BaraditaLoan growth could yet exceed the forecast 23.5% for Katoppo, the country head Indonesia at Fitch Ratings,financial year 2011, banks having met 56.84% of their said. “The deadline for the budget plan is now twoyearly loan targets by mid-August 2011. months before the budgeted year starts (November).” BI has been frustrated by the still high commerciallending rates as it seeks to channel loans towards pro- Economic indicators, 2008-12Fductive investment, to drive multiplier effects such as 2008 2009 2010 2011F 2012Femployment. “In promoting infrastructure financing Real GDP growth (%) 6 4.6 6.1 6.4 6.3while keeping sound banking practices, we have relaxed Growth in private consumption (%) 5.3 4.9 4.6 4.9 5.2our regulations with regard to the legal lending limit Growth in govt consumption (%) 10.4 15.7 0.3 5.4 8.8from 25% to 30% of bank’s capital applied only for loan Growth in gross fixed investment (%) 11.9 3.3 8.5 7.3 8.9provisions to state-owned enterprises (SOEs) engag- Growth in exports of goods & services (%) 9.5 -9.7 14.9 10 10.3ing in development projects,” Nasution told OBG. Growth in imports of goods & services (%) 10 -15 17.3 10.8 11.5SPENDING THE BUDGET: Yet disbursement of budget- Public debt (% of GDP) 28.3 27.4 25.5 24.4 23.2ed capital expenditure remains chronically low – it CPI (annual growth in %) 11.1 2.8 7 5.3 5.4stood at some 26% of the budgeted amount in late Sep- Trade balance ($ bn) 22.92 30.15 31.09 37.41 39.75tember 2011, for instance. The state has scope to boost Current account balance ($ bn) 0.13 10.19 6.29 9.48 11.77spending and plans to raise its budget deficit to 1.2% Total intl reserves ($ bn) 51.64 66.12 96.21 121.04 133.56of GDP (less than the originally budgeted 1.8% of GDP SOURCE: IMF & Bank Danamonin 2011), up from 0.6% in 2010. Such low deficits (much THE REPORT Indonesia 2012
  • 26. 36 ECONOMY OVERVIEW Indonesia for instance, accounting together for some 90% of global crude palm oil exports, have witnessed improving terms of trade. Following the crisis, its exports of natural rubber doubled, while that of CPO, coal and metal ore jumped by a third. Resilient Chinese demand for these commodities fed double-digit growth in 2010. The export position has also remained resilient into late 2011 – key markets in Asia such as Japan, China, South Korea and India have sustained their sharp rebound since 2009. It is as yet unclear whether growth drivers like Japan’s rebuilding of its tsunami-devastat- ed economy will be sufficient to counterbalance slight- ly weakening production orders in China in late 2011. While the picture remains uncertain for commodity export prices, analysts do not expect too sharp or pro- longed a correction for either coal or CPO. The tightening of the trade balance to 1% in third- quarter 2011 was mainly due to a slowdown in oil and gas exports, yet high prices for Indonesia’s non-oil exports, particularly to emerging Asian giants, coun-A major driver of economic growth, exports are expected to expand by double digits in 2012 terbalanced the loss of earnings. This offset between With a fiscal deficit in the 0.5-2% range yearly and a oil and non-oil commodity cycles has mitigated the debt-to-GDP ratio of below 25%, the Ministry of Finance impact of strong consumer demand on the country’s can afford to speed up disbursement to clear some of current account balance. Analysts expect a current its cash in hand of Rp200trn ($24bn). Despite the cur- account surplus of 1% annually in the next few years. rent six-month implementation period, disbursement TAX & SPEND: Indonesia’s tax take increased to 11.7% has improved to above 90% for the full year, even with of GDP in 2010, up from 11% in 2009, but it remains relatively low levels of actual capital expenditure. Indeed, low relative to the regional average of between 15% expenditure fell 20.6% short of budgeted levels in 2010, and 18%. The narrowness of the tax base is due to the causing a total budget-spending shortfall of 6.5%. fact that less than half of Indonesia’s estimated base The country has been upgraded in the recent past of 40m actually pays tax, according to the Ministry of by three major rating agencies to BB+ or the equiva- Finance. The state is seeking to bring parts of the large lent. Sound fiscal oversight, fast growth, rising savings informal sector into the tax base, as it is widely esti- and investments, combined with a sharply reduced mated to represent roughly half of the economy. The debt burden have painted a rosy macro-economic pic- government has already achieved some success thus ture for ratings agencies, in stark contrast to the suc- far by expanding the tax pool by 13m Indonesians from cessive rating downgrades of some developed 2006 to 2010. It has also sought to speed up the pay- economies. Indeed, in December 2011 the republic ment of tax returns in recent years, especially on exports, received an investment-grade sovereign debt rating although this strategy has run into some delays in 2011. from ratings agency Fitch. This improvement to invest- The aim is to implement new systems for better com- ment grade should lower the cost of credit and bring pliance with tax policies. Authorities have also imple- down the country’s sovereign credit default swap. Yet mented a tax holiday system, effective December 2011, the main effect will likely be on the currency, expect- for new companies established in six key sectors. ed to strengthen, and equity inflows. OUTLOOK: Amidst global economic uncertainty Indone- EXPORT STRENGTHS: Exports have been a key driver sia has shored up its credibility as a viable investment of GDP growth after domestic consumption. Despite destination. Prudent management and a convincing weaker global growth in 2011, analysts expect exports growth story have raised the profile of this large econ- to just sustain double-digit growth into 2012. While the omy for investors hungry for emerging market returns. global economic slowdown post-August 2011 caused If the state is successful in addressing the lingering many to expect commodity prices to plateau, prices for bottlenecks in infrastructure and human resources, coal and crude palm oil (CPO), two of Indonesia’s key the sleeping giant will surely awake. Developments exports, sustained their rise albeit at a slower pace as illustrate that private capital has a clear role to play. of October. The volume of key commodity exports con- tinued to grow, driven by the two main buyers of India FDI inflows, 2008-2011 H1 ($ bn)In December 2011 ratings and China, sustaining consumption beyond Java in com- Intra-ASEAN Extra-ASEAN Totalagency Fitch awarded modity-producing regions such as Sumatra and Kali- 2008 3.4 5.92 9.32investment grade status to mantan. Meanwhile, reconstruction in Japan followingIndonesia’s sovereign debt. 2009 1.38 3.5 4.88 the early 2011 earthquake and tsunami is expected toThis should have a positive 2010 5.9 7.4 13.3impact on the value of the stimulate demand for Indonesia’s commodity exports. H1 2011 2.21 6.97 9.18rupiah as well as boost Commodity price inflation has proved positive for pri- SOURCE: BKPM & ASEANequity inflows. mary goods exporters in Indonesia – Malaysia and
  • 27. ECONOMY INTERVIEW 37 Hatta Rajasa, Coordinating Minister of EconomyCourting investmentOBG talks to Hatta Rajasa, Coordinating Minister of EconomyWhich key reform measures will remove adminis- To what extent has decentralisation contributedtrative hurdles and encourage private investment? to creating a more attractive environment for invest-RAJASA: Our primary focus has been to address issues ment in Indonesia’s regional economies?related to land and land acquisition. With this in mind, RAJASA: Decentralisation has created a more stream-we have revised policies that deal with private partic- lined bureaucracy, with a larger role for local govern-ipation in infrastructure development by clarifying the ments to provide laws and regulations that fit well withissues of unsolicited projects, provision procedures and local conditions. It has also provided one-stop servic-the government’s role in land provision. We have also es for investments and licences and encouraged localimplemented three initiatives to support infrastruc- governments to fully develop their territory, giving theture. First, the government will provide support to mit- private sector a wide array of opportunities to investigate land price risk in the construction of 24 toll roads. in the regions of their choice.Second, we have prohibited commercial transactions However, decentralisation in some regions has cre-that involve certain areas, to be determined by the ated additional obstacles to investment. A weak under-government, in regards to the location of future infra- standing of how to conduct regional governance andstructure projects. Third, we are enacting a new law on attract investment has led to a less friendly businessland provision for public interest. climate in some areas. To address this we have held var- Infrastructure investors require a certainty and access ious discussions with regional governments, which willto financing that matches the long-term return goals eventually lead to wiser governance at a local level.of their projects. Accordingly, we have increased the In the making of the Master Plan for the Accelera-amount of money available to the land revolving fund, tion and Expansion of Indonesia Economic Developmentwhich will give investors the supporting funds to pro- (MP3EI), provincial governors, mayors and regencyvide land for the 24 toll roads. We have also issued a heads were involved from the very beginning, so thatpolicy of land capping to cover the risk of increasing they would better understand how to attract invest-land acquisition prices, as well as established the Infra- ment from the private sector and be able to identifystructure Fund to provide bridge financing that may be local projects in their respective corridors within theneeded to support infrastructure developments. MP3EI. With this backdrop, a better investment climate Furthermore, Indonesia Infrastructure Finance was for private investors should be on its way.established with a clear mandate to deepen the fund-ing market for infrastructure projects by providing tru- How is the government creating added value inly non-recourse financing and focusing on the provi- Indonesia’s downstream industries and addressingsion of mezzanine and quasi-equity-type instruments the lack of domestically produced materials?for infrastructure projects. We also established the RAJASA: We have created legislation designed to sup-Indonesia Infrastructure Guarantee Fund, which already port our downstream industries and have taken vari-provides guarantees on the government’s contractual ous steps to ensure these industries have the energyobligations under power purchase agreements and supplies they need. Additionally, the MP3EI is designedtoll road concessions. In addition, we provided non- to support these industries by reducing bottlenecks infunding support for infrastructure development, includ- laws and regulations; supporting the development ofing a project development facility to support the cen- science, technology and human resources; and creat-tral and local government in preparing various nation- ing new laws and revising current laws dealing with theal and regional public-private partnership projects. import of the raw materials needed to support them. THE REPORT Indonesia 2012
  • 28. 38 ECONOMY INTERVIEW Agus Martowardojo, Minister of Finance Putting partnerships in place OBG talks to Agus Martowardojo, Minister of Finance How strong is the correlation between Indonesia’s ket to support our budget needs. Global issuance – espe- economic fundamentals and investment capital? cially Islamic bonds, or sukuk – is complementary to our MARTOWARDOJO: The Indonesian economy is stronger budget and it is important not only to create a bench- than ever. Economic growth is primarily supported by mark in the market, but to also increase our financing an improvement in domestic consumption and solid rise and investor base. In our first global sukuk issuance, 30% in exports, which has lead to an increase of invest- of the investors came from the Middle East. ment. The government supports fiscal health by main- taining a budget deficit at a level below 2% of GDP, while What can the ministry do to help the private sec- boosting tax collections by increasing tax potential and tor and state-owned enterprises access financing improving compliance. On the expenditure side, the to address infrastructure developments? budget is directed to decrease unemployment and MARTOWARDOJO: The government supports private poverty levels through higher levels of capital spend- and state-owned companies and aims to gain domes- ing. Indonesia’s moderate deficits, strong nominal tic and international investors’ trust to work together growth and an effective appreciation of the currency in the creation of public-private partnerships (PPPs) to led to a steady reduction of public debt, specifically for- develop all necessary infrastructure projects. To do so, eign debt, with net general government debt dramat- we have established two new companies to support ically falling to 26% of GDP in 2010 from 89% in 2000. infrastructure funds: Sarana Multi Infrastruktur (SMI) In line with the above improvements, international and Indonesia Infrastructure Finance (IIF). SMI has been ratings agencies have upgraded Indonesia’s sovereign operating since 2009 with Rp1trn ($120m) in start-up rating to Ba1 (Moody’s), BB+ (Standard & Poor’s) and capital and was allocated the same sum again 2010. BB+ (Fitch). The country attracted strong capital inflow IIF, a subsidiary of SMI, was established in 2010 with from foreign direct investment and portfolio investments contributions from the International Finance Commis- in 2010. Going forward, we intend to improve govern- sion, the Asian Development Bank and Deutsche Investi- mental and judicial transparency to ensure that foreign tions und Entwicklungsgesellschaft. and domestic investors find our bureaucratic standards The government has also established Penjaminan aligned with international best practices. Infrastruktur Indonesia (PII) to act as a guarantee fund to secure infrastructure projects. PII was funded by the How will you raise debt to plug the budgetary deficit? government with an initial capital of Rp1trn ($120m), MARTOWARDOJO: We are improving government debt which will be extended to Rp3.5trn ($420m) in 2011. securities management to develop a deep, active and We will expand its capital to help it meet the increas- liquid bond market in Indonesia. To pursue this target ing demand for guarantee coverage from PPP projects. we are strengthening the primary and secondary bond market by enhancing methods of issuance, developing What is the “non-discrimination principle”? trading platforms, maximising the function of primary MARTOWARDOJO: The no-discrimination principle dealers and diversifying government securities instru- concerning fiscal incentives in Indonesia mandates ments. These actions are being supported by an effec- equal tax treatment and facilities for foreign enterpris- tive communications plan, which is helping us to improve es. Companies will not be discriminated against based coordination with our main stakeholders while broad- on who owns their capital. It must be noted that the ening and strengthening our domestic base of investors. principle will be applied so long as a company fulfils Our financing strategy is to focus on the domestic mar- the requirements necessary to obtain those incentives.
  • 29. ECONOMY ANALYSIS 39 Food prices have been a key component of inflation in recent yearsOn again, off againThe central bank responds to challenging inflationary conditionsIn an uncertain global economic environment, emerg- spreads with other central banks, which could causeing markets like Indonesia have faced volatile inflation- significant currency inflows, and containing inflationary pressures. While local monetary authorities have partly caused by seasonal price fluctuations.had to quickly adapt to a shifting balance between The central bank only raised its reference rate onceinflation and economic growth, the government con- between August 2009 and October 2011, from 6.5%tinues to keep the prices of necessities down through to 6.75% in February 2011, before bringing it back downa mix of price controls and imports. to 6.5% in October 2011 and lowering it again by half While inflation re-emerged as a key downside risk in a percentage point to 6% in November 2011.early 2011, it cooled markedly as the year drew on. Other than policy rate adjustments, the central bankDespite favouring cyclically exposed economies such has other tools at its disposal to boost or slow theas Indonesia and Korea, investors watched inflationary economy, such as changing the reserve requirement.pressures closely as the year began – overall consumer For example, in September 2010 the central bankprice inflation had risen from 4.8% year-on-year in 2009 announced that it was raising the rupiah primary reserveto 5.1% in 2010. Disruptions in food supply due to poor requirement from 5% to 8%, effective November 2010,weather in 2010 were compounded by enduring weak- citing concern about rising inflationary pressures.nesses in the country’s infrastructure to cause an uptick As Fauzi Ichsan, senior economist and head of gov-in inflation, rising from 2.8% month-on-month at the ernment relations at Standard Chartered Bank, toldclose of 2009 to 7% in December 2010. Inflation eased OBG, “Acting on reserve requirements presents a cheap-considerably to 4.61% annualised following the end of er tool of monetary policy for BI, since raising interestRamadan in September, down from 5.15% in August, rates increases its cost of issuing central bank certifi-and in comparison to other key emerging markets of cates (SBIs) as well as its cost of offering deposits tosimilarly significant size, such as India and China, Indone- private banks. As such I don’t foresee any cut in reservesia has succeeded in taming excessive inflation. ratios for the foreseeable future.”A NUANCED APPROACH: Bank Indonesia (BI) runs a In September 2010 the bank also announced regu-flexible inflation-targeting policy, within a 1% margin lations regarding the loan-to-deposit ratio (LDR), in anof an inflation target set by the Ministry of Finance – apparent effort to boost lending, which might seem atthe target is 5% for 2011 and 4.5% in 2012. BI seeks to odds with the increase in reserve requirements. The newmanage capital flows and thus the volatility of the cur- rule, which went into effect in March 2011, requiresrency through sterilised interventions, which carry a high banks to maintain an LDR of 78-100%, mandating high-cost for its balance sheet. It also plays a supervisory er reserve requirements for banks on either side of thisrole for banks and financial institutions and seeks to target range. Many banks, such as Mandiri and Banklower the commercial lending rate to boost lending. BI Central Asia, have opted to pay the penalty rather thantargeted inflation in the range of 4% to 6% for finan- extend more loans (see Banking chapter).cial year 2011 while the government forecast 5.65%. FOOD PRICE INFLATION: Although seen as too early While inflation was a key Facing volatile global conditions and shying away a move, the central bank’s interest rate rise February downside risk in early 2011,from any moves that might dent resilient domestic 2011 showed eagerness to stop food and energy price it fell as the year progressed. The Bank ofgrowth, BI’s monetary policy committee remained hes- inflation working through to higher expectations. Agri- Indonesia’s inflation targetitant to change interest rates following its 300-basis cultural commodity prices were a key driver of the spike for 2011 is in the range ofpoint cut during the 2008-09 crisis. The fine balance in inflation at the turn of 2011, with food price infla- 4% to 6%, while theto strike was that between exacerbating interest rate tion reaching 16% a year at the close of 2010 and government forecast 5.65%. THE REPORT Indonesia 2012
  • 30. 40 ECONOMY ANALYSIS Energy subsidies account for 14.79% of the 2011 budget. Although President Susilo Bambang Yudhoy- ono’s administration cut fuel subsidies in 2005 and in 2008, momentum on reform has stalled somewhat despite pressure from the IMF – the government has repeatedly delayed plans to end subsidises on fuel sales for transport in Java in recent years. The focus has shift- ed in the shorter term towards reducing usage vol- umes rather than the subsidised fuel price by limiting consumption rather than promoting greater fuel effi- ciency. Given the dip in the government’s popularity in various 2011 polls, it seems unlikely that it will move ahead with cuts in subsidies, particularly as the coun- try moves into an election cycle by 2014. The revised May 2011 budget assumes average oil prices of $80 a barrel, when prices at the time stood at around $113. Yet subdued pressure on oil prices in the second half of 2011 and high prices for Indone- sia’s commodity exports mitigated the fiscal impact of subsidies and budgetary pressure for reform. “The over-Despite a cut in energy subsidies, they still comprise nearly 15% of the 2011 budget shoot on energy subsidies will not be excessive in 2011 18.25% in January 2011. The government has moved given the strengthening rupiah and the relatively sub- to tame food inflation by resuming imports of basic sta- dued international oil prices,” Fauzi told OBG. “Also, any ples such as rice, while fuel subsidies continued to increase in subsidies is likely to be offset by higher tax shield consumer demand from energy price increases. revenues from coal and crude palm oil exports.” Rice prices typically rise in the last two months of the The main revision since 2008 has come in the form year and start to subside (albeit at a higher base level of a plan to shift from the use of kerosene to liquefied than the year before) from March onwards as harvests petroleum gas, a cheaper source of energy that car- are sold on the market. ries a lighter fiscal burden in the form of subsidies. The PRICE CONTROL MEASURES: Price controls on fuel government hopes to cut the fuel subsidy bill from and imports of basic food items including rice are a key Rp129.7trn ($15.6bn) budgeted for 2011 to Rp123.6trn component of Indonesia’s budgeted expenditures. ($14.8bn) in 2012 through the fuel rationing pilot proj- Although they are a drain on budgetary resources and ect in Jakarta. It is still unclear how the government plans have been criticised by the Bretton Woods institutions, to limit consumption – it has only said it wishes to cap they have worked to tame inflation. consumption at 40m KL in 2012, down from an expect- Spending on subsidies has typically overshot bud- ed 41m KL in 2011. geted amounts, as in 2010 when it reached a total of The government has also announced plans to shift Rp214.1trn ($25.7bn), 6.4% over allocations. A large part from subsidies on goods to subsidies targeted to peo- of the budget overshoot in 2010 was caused by an ple by 2014, which would double domestic prices, expansion of a programme by the state procurement although concrete plans have yet to be issued by the agency, Bulog, to distribute 15 kg of rice monthly to Ministry of Energy as to how this would happen. While 17.5m poor, as well as higher electricity subsidies. the details of such a system have yet to be announced, Imports typically start towards year-end to counter- the state would either give cash handouts or discount act the price cycle, yet procurement orders were only cards to the lowest income-earners. placed in February 2011, exacerbating food price infla- Analysts agree that the impact would be minimal if tion in the early part of the year. In light of seasonal enacted gradually, but it seemed clear in late 2011 that fluctuations in commodity prices including food and no move on subsidies would take place until later in government rice imports, inflation fell back as the sec- 2012 at the earliest. Following the drop in inflation ond quarter wore on, dropping to 4.79% by September after Ramadan, BI cut its reference interest rate by 25 2011. Analysts expect the annualised rate to remain basis points to 6.5% in October 2011 and then again roughly at or below 5% for the full year. to 6% in November 2011. SUBSIDY REFORM: Fuel subsidies are by far the biggest Although seen as too early by surprised analysts, the drain on state resources, although rice imports have move did follow similar cuts by central banks in other proved politically important in the authorities’ fiscal major emerging economies such as Brazil and Turkey.Price controls on fuel and response to inflation. Energy subsidies (both fuel and With the expectation of cooling commodity and ener-imports of basic food items power) in the 2011 budget total Rp195.5trn ($23.5bn) gy prices given anaemic growth in developed markets,such as rice comprise a out of a subsidy bill of Rp237.2trn ($28.3bn), with total inflation forecasts for 2012 remain in line with or slight-major component of the subsidies accounting for 17.96% of the budget. While ly below authorities’ targets, between 3.5% and’s budgetedexpenditures. In 2010 these official rhetoric has touched upon the politically But downward pressure on the rupiah in late 2011subsidies exceeded the sensitive issue of subsidies, little concrete reform is may yet bring inflationary pressures to bear, testingbudgeted amount by 6.4%. expected to take place before the 2014 electoral cycle. authorities’ abilities to respond to changing conditions.
  • 31. ECONOMY ANALYSIS 43 Attracting private capital is key to resolving infrastructure challengesInvestors welcomeConcerted efforts to enhance regulations and incentivesAlthough the country has already made strides to mented 11 key reforms since 2005 in the areas ofimprove its investment climate, further bureaucratic streamlining the procedures required to establish areforms meant to streamline procedures and encour- company, expanding credit information as well asage private investment are central to Indonesia’s ambi- improving minority shareholders’ rights.tions over the next 15 years. After years of centralised Since the 2007 Investment Law No. 25 provided forrule under Suharto, the initial “big bang” of decentral- equal treatment of local and foreign investors, theisation in 2001 wrought its own set of challenges stem- administration has pursued a liberalising agenda for for-ming from at times overlapping federal, provincial and eign direct investment (FDI), coordinated by the Invest-district levels of governance. The number of kabupat- ment Coordinating Board (BKPM). While the landmarken (districts) has grown from 292 in 1998 to 480 today, regulation established a “negative list” of sectors inincreasing the scope for delays and costs. which a ceiling or ban on FDI was announced, this Since 2004, however, two successive administrations nonetheless clarified regulations on FDI. Although wide-under President Susilo Bambang Yudhoyono have pri- ranging, the list, last revised in June 2010, is set to beoritised improvement of the investment climate, mak- reviewed in late 2011 to allow a greater scope for Indonesia Asia’s most active reformer of business Concrete recent reforms have been enacted on sev-regulations since 2008, according to the World Bank. eral fronts, ranging from a cut in the corporate income“The primary bottleneck in terms of the investment cli- tax rate to 25% in 2010, an online national single win-mate has been poor infrastructure, in part linked to land dow (NSW) to facilitate and speed up the processingclearance challenges and the lack of timely completion of documents, new tax concessions on certain invest-of projects by local governments,” Fauzi Ichsan, senior ments planned for 2012 and the lifting of ceilings oneconomist and head of government relations at Stan- FDI in five sectors. In 2010, the time to start a businessdard Chartered Bank, told OBG. in Jakarta was cut by 16 days and the cost by 52%. TheAGENDA FOR REFORM: Beyond physical investments, NSW for Investment (so-called SPIPISE) in particular,attracting private capital is key to resolving infrastruc- launched by BKPM in Batam in 2010, has establishedture challenges. The government’s Master Plan of Accel- itself as a one-stop shop for investment licensing online,eration and Expansion Economic Development of vastly improving the efficiency of the old system.Indonesia (MP3EI) to 2025 sets out a clear reform agen- Following the cut in corporate tax rates to 25% in 2010,da to improve the investment climate. “Incentives can authorities are moving forward with more targeted taxbe supporting policies on tariffs, taxes, import duties, incentives. A new tax holiday of five to 10 years, whichlabour regulations, licensing and permits, land pro- came into effect December 1, 2011, will cover invest-curement and so forth,” Hatta Rajasa, coordinating ments in excess of Rp1trn ($120m) in five industrialminister for the economy, told OBG. The areas of pri- sectors: oil refining, petrochemicals, renewable ener- Reforms to support privateority are reforming Indonesia’s bureaucracy, particular- gy, base metal and telecommunications equipment. investment include a cut inly legislature and judiciary; amending the tax code to SOFT INFRASTRUCTURE: While the administration is the corporate income taxprovide systematic incentives; creating special eco- making concerted efforts to boost investment in infra- rate to 25%, an onlinenomic zones for investment in each of the six planned structure, historically low levels of funding have result- national single window to ease processing ofcorridors; and developing human resources. ed in inadequate support for business, particularly in documents, new tax The government has gone some ways in improving toll roads, power generation and ports. A notable area concessions and lifting thethe economy’s soft infrastructure, the legal and regu- of improvement in soft infrastructure was proposed in ceiling on foreignlatory framework for private investors. Jakarta has imple- 2011 when the administration forwarded legislation to investment in five sectors. THE REPORT Indonesia 2012
  • 32. 44 ECONOMY ANALYSIS The World Bank published its first subnational invest- ment climate report for Indonesia in 2010, ranking 14 cities and regions according to their ease of starting a business, handling construction permits and register- ing property. The disparities between provinces and even districts are certainly significant. While it takes eight procedures in 43 days to start a business in Yogyakar- ta, the top-ranked city, for instance, the same process extends to 11 procedures in roughly 60 days in Mana- do, the worst performer. Jakarta stands in the middle. Larger cities such as Bandung and Jakarta have more successfully streamlined procedures for registering property, making them the two top performers on this criterion. Crucially, none of the reviewed cities perform well on all three indicators. BKPM issues its own annu- al list of the most investor-friendly provinces, naming seven in its latest in October 2011: Aceh, Central Java, West Kalimantan, South Sulawesi, Central Sulawesi, North Sulawesi and West Sumatra. The World Bank estimates that significant improvements in the nation-Corporate income tax was reduced to 25% in 2010 and targeted tax incentives implemented in late 2011 al climate would come from following best practicesReform efforts have Parliament meant to facilitate land acquisition, partic- already in existence in certain regions.attracted international ularly for infrastructure projects. Overlapping areas of jurisdiction between differentattention, with Indonesia “The government also supports private business ministries also presents challenges for investors. Thisclimbing 10 places to 44thin the World Economic practice by increasing legal certainty and security for points towards enduring regulatory challenges, partic-Forum’s 2010-11 “Global investment,” Agus Martowardojo, the finance minister, ularly in the area of reforming the civil service, whichCompetitiveness Report”, said. “With the bureaucracy reform programme, the the Yudhoyono administration has only slowly tackledwhile the World Bank also government has committed to reducing various regu- so far. This may change going forward, however. “Weupgraded it by five places latory areas less conducive to the investment climate.” intend to improve the level of business, governmentalto 115th in its 2011 “Easeof Doing Business” ranking. Indonesia has been gaining kudos for its concerted and judicial transparency and to ensure that bureau- efforts, despite remaining challenges in implementa- cratic standards meet international best practice,” Mar- tion. The World Economic Forum notched it up 10 towardojo, the minister of finance, said. places to 44th in its 2010-11 “Global Competitiveness While corruption and legal uncertainties remain chal- Report”, while the World Bank upgraded it by five places lenges, investors are affected to a greater or lesser to 115th in its 2011 “Ease of Doing Business” ranking. extent depending on the sector. “Particularly if you are Key downside risks highlighted include potential legal catering to less highly regulated middle-class consump- uncertainties over land rights, contract sanctity and sub- tion, investors are less affected by corruption issues,” standard corporate governance. Fauzi told OBG. “Of course investing in more regulated COORDINATING ALL THE PARTIES: A key challenge sectors such as mining, oil and gas and infrastructure, has been coordinating actions between federal gov- you will encounter governance issues.” ernment agencies such as BKPM and sub-national LABOUR LAW: Another issue is the restrictive labour (provincial, district and municipal) authorities. A recent law, last reformed in 2004. In particular, the 2004 law Regional Autonomy Watch survey found that 85% of mandates strict rules for employee redundancies, with local laws were inconsistent with national regulations, repercussions for labour-intensive industries such as hampering potential investment. Although the formal textiles that have started moving from highly unionised institutional framework remains challenging, President urban areas including Jakarta, Medan, Bandung and Yudhoyono has taken steps to address such frictions Surabaya towards zones with less union activity such by holding regular meetings with the three key levels as Semarang, in Central Java. The political unpalatabil- of sub-national government and crystallising their sup- ity of labour reforms may continue to hamper progress port to improve the investment climate. Although still ahead of the 2014 electoral cycle. ad hoc, such measures have eased bottlenecks in proj- Despite challenges in certain reforms, the adminis- ect approvals and implementations. tration has staked its ambitions for rapid economic One idea to address the issue on a more systematic development on streamlining investment procedures basis is to establish an independent government-spon- to attract private investment. As FDI flows have increas- sored rating of all districts according to their invest- ingly balanced portfolio inflows, markets are respond- ment climate, with this building on the World Bank’s ing positively to the moves thus far. As the country yearly subnational “Ease of Doing Business” ranking. “This works to attain investment-grade status, sustaining would encourage a kind of beauty contest, a race to the rhythm of reforms will be crucial to supporting a the top, for all districts and we would likely see rapid wider shift from a consumption-driven economy improvements,” Purbaya Yudhi Sadewa, the chief econ- towards an investment-driven one. All sides of the polit- omist at the Danareksa Research Institute, told OBG. ical spectrum agree foreign capital will be key to this.
  • 33. ECONOMY INTERVIEW 45 Prijono Sugiarto, President Director, Astra InternationalOngoing improvementsOGB talks to Prijono Sugiarto, President Director, Astra InternationalWhat is the perception of corporate governance BAPEPAM steadily improves through the developmentamong Indonesian businesses? of local talent, these issues can easily be overcome.PRIJONO: Corporate governance has taken on a To protect investors, it would also be advisable togreater importance in this country, with more com- improve best practice standards as they relate to own-panies beginning to adhere to its principles. They ers and those who control company assets. We mustrecognise the positive impact that it can have in strive to adopt principles that will foster the equalterms of their ability to expand their business through rights of shareholders, improve the accountabilitybetter access to capital markets. With a system of of board members, encourage ethical actions andcorporate governance in place, companies would improve transparency and disclosure.also find it easier to enter into joint ventures andadapt to unforeseen circumstances. Do international companies view Indonesia as a This trend seems likely to continue, especially with country in which to make investments?assistance from programmes offered by multilater- PRIJONO: The perception of the international busi-al agencies such as the IMF, as well as local associ- ness community is that Indonesia is a country withations like the Forum for Corporate Governance in great opportunity, highly qualified companies andIndonesia. Adhering to good corporate governance ample professionals. They also recognise that theis an ongoing process and should be continuously country has an abundance of natural resources thatimproved upon, as the market tends to reward those it can leverage. If the development process is well-organisations that have a lasting commitment to managed, Indonesia could be one of the wealthiestthe practice. Not only is it good for the company, but countries in the world within 20-25 years. For theit also aids in the development of capital markets past 12 years, we have enjoyed a level of politicaland advances the growth of the economy. stability that did not exist here previously, and our new-found economic and social development willHas the country made progress in protecting continue to preserve political stability in the future.investors and enhancing disclosure? While the international community has begun toPRIJONO: Indonesia is making progress in all areas focus on many of these positive factors, a numberof corporate governance, but the country still faces of major concerns continue to deter foreign com-challenges when it comes to complying with inter- panies from making considerable investments here.national standards. That being said, the country is The first, of course, is infrastructure, which is theheaded in the right direction. For example, the greatest obstacle to increasing economic growthIndonesia Capital Market and Financial Institution beyond 7% per year. For example, in terms of the avail-Supervisory Agency (BAPEPAM) provides guidance ability of labour, market size and political stability,to those companies that would like to comply with Indonesia is seen by many international brands asinternationally recognised corporate governance one of the most attractive markets in the Asia-Pacif-principles. With the assistance of BAPEPAM, many ic region for the development of the automobilebusinesses have been able to implement procedures manufacturing industry. While numerous compa-that have resulted in higher levels of disclosure, nies in this sector have submitted proposals thatinvestor protection and board performance. Their reflect more than $900m in investment, this figuremonitoring at times is so stringent that processing could be exponentially larger if many of the chal-times can be lengthy. However, as the capacity at lenges associated with infrastructure were resolved. THE REPORT Indonesia 2012
  • 34. 46 ECONOMY INTERVIEW Gita Wirjawan, Minister of Trade and Chairman, BKPM Reinforcing relationships OGB talks to Gita Wirjawan, Minister of Trade and Chairman, Investment Coordinating Board (BKPM) What progress has been made in attracting invest- country. However, they cannot be used indiscriminate- ment in the regions and in added-value industries? ly and should only be applied only in certain situations, GITA: We are seeing investment flourish as our strat- and under careful scrutiny, when you are confident egy to shift Indonesia from a resource-based econo- that the incentive will act as catalyst to realise the actu- my to a value-added one has begun to bear fruit. As a al investment. Additionally, when choosing the sectors reflection of this strategy, foreign direct investment in which to apply such incentives, it has to be deter- (FDI) destined to value-added industries has reached mined whether the type of investment will add value. its highest ever level. In 2010 FDI was close to $17bn, For instance, does it bring a higher degree of technol- and of that only $2.2bn was in the mining sector, rep- ogy to the country? We have to work very closely with resenting a much smaller percentage compared to the Ministry of Finance to create a universal policy and 2009. In terms of allocation, a larger percentage of the try to avoid working on a case-by-case basis. FDI received – 33% in 2010 compared to 18% in 2009 However, we must also be realistic; over the last 30- – has been deployed outside Java, thus contributing to 40 years our nation has not been able to provide attrac- a more equal distribution of investment. tive fiscal incentives. Therefore, we advocate working This achievement has to a large extent been accom- on a year-to-year basis, creating incentives for special- plished thanks to a reinforcement of the relationships ly selected sectors and monitoring them to see whether with regional leaders and a strengthening of commu- or not the incentives attract new investors effectively. nication mechanisms, conducted primarily trough field- If they prove to be useful in this instance, then the log- work activities in all 33 provinces. ical next step is to universalise these incentives and pro- mote them to legislative status. How has BKPM addressed conflicts arising from the issue of overlapping regulations between the What specific advancements have been made to the central government and regional government? private-public partnership (PPP) mechanism to GITA: Part of our job in this matter is to act as an inter- improve investment in infrastructure projects? mediary between government agencies when they are GITA: We are approaching the execution of PPPs by involved in regulatory conflicts. Very often our partic- specifically promoting a select number of projects every ipation in these disputes is orientated to help them year and making sure that they each step in the process understand the fact that most of these so-called over- is successfully completed, from pre-qualification to bid- laps are simply misinterpretations of existing laws or ding and financial closing. We are currently working on regulations. In many instances these situations were the 2x1000 MW Central Java Coal Fired Power Plant, resolved simply through an exercise of communica- the Soekarno-Hatta Airport – Manggarai Railway, the tion between the central and the regional govern- Umbulan Spring Water Supply System and the Tanah ments. Regional leaders who have demonstrated their Ampo Cruise Terminal. While there have been many capability to engage in meaningful dialogue have ben- improvements to the PPP model over the past year, we efitted the most in terms of increased investment. are still pushing for a more simplified regulatory frame- work for PPPs. We know this will be a long process, but How should tax incentives and tax holidays be we have to take a long-term view and ensure that we applied? Should these policies be universal? implement clear guidelines, since investments within GITA: Tax incentives shape investors’ perceptions of capital-intensive industries, such as infrastructure devel- Indonesia and will help us attract further FDI into the opment, require a high degree of clarity and stability.
  • 35. ECONOMY ANALYSIS 47 In 2010 portfolio investment grew 47.1% year-on-year to $15.2bnPortfolio prospectsStrong fundamentals support a positive outlook for marketsDespite a history of balance-of-payments crises caused bonds, while Pertamina raised significant interest withby rapid swings in Indonesia’s current account balance, its $1.5bn debt issue in July. The turmoil that affectedportfolio investors have by and large returned with global markets in August weakened appetite for for-confidence to the country’s capital markets since the eign currency issues, however, and the rupiah-denom-recovery from the 2008 crisis – and this despite short- inated corporate bond market is expected to growterm corrections such as those during the summer of between 10% and 20% in financial year 2011.2011. Although still volatile due to their limited depth, OTHER ISSUES: In contrast, the pace in issuance of dol-Indonesia’s bourses seem to have once again become lar-denominated corporate bonds has proven volatilea darling of investors. Portfolio investment grew by a due to fluctuations in international demand, but ansignificant 47.1% year-on-year to $15.2bn in 2010. Com- average of five to 10 corporates have tapped the inter-bined with foreign direct investment (FDI) flows, Indone- national markets in this way annually. A total of $2.6bnsia’s capital and financial accounts reached a surplus in such international bond issues was floated in the yearof $26.2bn in 2010, up from $5bn a year earlier. Loose to late September 2011, including Pertamina’s $1.5bnmonetary policy stances in the US and European international debt issue in July. At the same time, debteconomies encouraged large-scale capital flows into issues such as electricity utility PLN’s planned $2bnemerging markets such as Indonesia. global issue have been delayed given global uncertain-RUPIAH BONDS: Prospects for portfolio investors ties after August 2011. Yet the pause following theremain highly attractive. Authorities expect the strong August turmoil will likely only be short-lived – indeed,fundamentals of firms issuing stocks and bonds and the Indonesian government issued a $1bn Islamic bond,the solid fiscal position for sovereign bond floats to sus- or sukuk, in November 2011. It was priced at 4%, whichtain longer-term growth in demand. Foreign investors was low when compared to Indonesia’s historical trackhave flocked to rupiah bonds, spurred not only by low record, especially given the volatility in sovereign debtdebt levels and compelling growth rates but also by the markets during the final months of 2011.prospects of strengthening Asian currencies vis-à-vis More resilient to liquidity crunches in global markets,the dollar. They owned 34% of all local-currency bonds sukuks already account for 22% of the government’sby late September 2011, compared to roughly 20% in dollar-denominated debt. The government has ear-Malaysia and 10% in South Korea. Having floated bonds marked Rp34trn ($4.1bn) worth of assets to supportsince 2002 to finance its budget deficit, the Indone- its Islamic debt issuance. The government’s first dollarsian government has made important progress in estab- sukuk issue in April 2009, worth $650m, attractedlishing a yield curve for its bond markets. The story is $4.7bn worth of orders, of which Middle Easterncertainly compelling, with a debt-to-GDP level of 26%, investors accounted for 30% and Asians 40%. These twofiscal deficits of less than 2% and an investment-grade groups are eager buyers on Indonesia’s capital rating expected soon that will allow Western The equities markets rebounded strongly from theirpension and insurance funds to place their assets in depth in March 2009, making it one of the world’sIndonesia. More risky, 10-year Indonesian bonds yield- fastest-growing markets since. Foreign investors bought Thanks to low debt levels,ing 6.8% returns remain far more attractive than 10- approximately $23bn in stocks on the Indonesian Stock strong growth rates and the prospect of Asianyear US government bonds at 2.6%. Exchange in 2010, driving the index up 46% in the full currencies strengthening The dollar and rupiah debt markets for private and year. The picture was mitigated as 2011 wore on, with against the dollar, rupiahsovereign issues started 2011 strongly. In April alone major swings in foreign demand as large internation- bonds have been popularthe government raised $2.5bn in traditional dollar al banks consolidated their positions in core markets. among foreign investors. THE REPORT Indonesia 2012
  • 36. ECONOMY ANALYSIS 49 The rupiah has been vulnerable to rapid swings in sentimentDefending a stable rateThe central bank steps in to avoid rapid currency fluctuationsWhile government spending has not been a key driv- owned enterprise and budgetary funds to buy rupiah The Indonesian rupiah roseer of growth thus far, monetary policy has remained government bonds should capital flows reverse sharply. 14.4% against the dollar in 2010 and is the world’sthe key instrument of macro-economic management. These moves have been welcomed by investors. fastest-rising currencyAffected by balance-of-payments crises exacerbated NEW MEASURES: BI introduced new earnings repa- after the Singapore dollarby currency volatility, the central bank has maintained triation measures that will be mandatory by January 2012 in 2011.a watchful eye on the rupiah, which rose 14.4% against requiring companies to store export revenues and thethe dollar in 2010 and stands as the fastest-rising cur- proceeds of foreign loans in Indonesian financial insti-rency after the Singapore dollar in 2011. tutions. But whereas countries such as Thailand and The international carry trade from low-interest-yield- Malaysia mandate a minimum onshore stay period foring economies towards high-yielding ones explains such funds, Indonesia allows them to move offshoresome of the rise, as do inward investment levels. Com- again after only one day, meaning the measures are morepared to ballooning budget deficits, exponential debt meant as a monitoring instrument for real export earn-burdens, stagnating growth rates and looming ratings ings rather than to bolster foreign currency reservesdowngrades for many Western economies, Indonesia in-country per se. “These earnings repatriation meas-makes a convincing case for investment. Bank Indone- ures are not capital controls since the law passed undersia (BI) has taken long strides in establishing its credi- the IMF programme of the late 1990s expressly for-bility for prudent macro-economic management. The bids such controls,” Fauzi Ichsan, senior economist andauthorities are eager to avoid a repeat of the 1997-98 head of government relations at Standard Charteredcrisis when BI used its foreign reserves to defend a cur- Bank, told OBG. According to BI, around $110bn ofrency target; the aim remains to avoid rapid move- Indonesia’s $140bn in yearly export earnings are repa-ments in the currency but not to change its direction. triated onshore, while $30bn remains offshore. If evenBRINGING STABILITY: The rupiah has long been vul- 10% of this repatriated revenue remained in Indone-nerable to rapid swings in sentiment. Its upward trend sian banks, this would come to an extra $3bn-5bn inin early 2011 dampened some inflationary pressure but foreign currency in the domestic economy.then fell below the Rp9000-per-dollar mark over late The central bank has imposed restrictions on thesummer 2011 in the face of large foreign portfolio out- trading of SBIs to control potential large capital out-flows. Although by no means as large as in 2008, when flows. It placed a one-month minimum holding periodthe rupiah dropped to Rp12,000 per dollar, the central for SBIs in June 2010, further raising the period to sixbank has intervened to reduce the swing. To do this, BI months in May 2011. In the first quarter of 2011 a lim-has used central bank certificates (SBIs), relatively cost- it of 30% of bank’s capital was imposed on short-termly at 6.75%, government bonds and, mainly, buying and foreign loans to cap excessively speculative carry trades. New earnings repatriationselling foreign exchange on the open market. BI also introduced a term-deposit facility for banks to measures introduced by The central bank has historically shied away from reduce dependency on SBIs, raised requirements for the central bank willusing more than $1bn in a short period in such ways, foreign currency deposits, and increased its supervi- become mandatory byfearing a depletion of its foreign currency reserves. Yet sion of foreign exchange transactions and capital flows. January 2012. Thesewith over $123bn in backing as of September 2011 it Large flows still have the potential to cause exces- require companies to keep export revenues and thehas increasingly moved to prove its ability to reduce rap- sive swings in sentiment on the markets as in mid-2011, proceeds of foreign loansid swings. It used more than $2bn in open-market oper- yet strong FDI inflows and the central bank’s keen vig- in local financialations in a single week in September, for instance. The ilance are likely to ensure any wider macro-economic institutions, albeit onlygovernment has also tabled measures to allow state- impact through the current account is rapidly addressed. briefly. THE REPORT Indonesia 2012
  • 37. 50 ECONOMY ANALYSIS Foreign investment is spread across a variety of economic sectors Prime target Foreign investors return to the marketDespite volatility in Sources of long-term capital, particularly needed for culture, manufacturing and services. Traditionally stronginternational markets, large-scale projects in infrastructure, remain more elu- investors still dominate Indonesia’s FDI landscape: Sin-inward foreign direct sive in Indonesia than in neighbouring economies. The gaporeans, Americans, Japanese, Chinese and Koreansinvestment (FDI) grew15.7% year-on-year in the contribution of pension funds and insurance compa- remain bullish on opportunities. Singapore-basedthird quarter of 2011. The nies has remained limited, yet the size of the mutual investors were by far the largest originators of FDI intotal targeted FDI for fund industry has grown significantly. Interest will like- 2010 with 414 projects worth $5bn, although some of2011 is $16bn. ly grow further when Indonesia attains an investment- these funds represent Indonesian-owned corporates. grade rating in 2012. The country has, however, returned Other Asian investors, such as those from Japan, Chi- as a prime target for foreign direct investment (FDI). na and South Korea, have also expanded their presence. The central bank is confident FDI will provide some STRONG INTEREST: Bullishness continued in the first cushion should short-term portfolio investment flows half of 2011 and investment exceeded the already reverse, but also as a source of much-needed financ- strong 2010 levels, with FDI totalling $9.6bn up from ing for infrastructure and productive capacity. $6.2bn in the first half of 2010. The strong y-o-y growth ATTRACTIVE: Foreign investors have returned in force was sustained in the third quarter, with BKPM announc- since late 2009 in the face of anaemic growth in devel- ing a 15.7% y-o-y rise in inward FDI, reaching $5.3bn in oped markets. Interest has been particularly strong in that quarter alone. Despite volatility in international mar- the resource sector and for businesses targeting the kets, the authorities have maintained their target of country’s significant domestic consumption base and $16bn in inward FDI for financial year 2011. US investors commodity exports. Total investment grew 54.2% year- alone injected $936.1m in the first half, surpassing on-year (y-o-y) to reach Rp208.5trn ($25bn) in 2010. 2010 levels. The 71 US projects are spread over a vari- Both Investment Coordinating Board (BKPM) and bal- ety of sectors including, among others, construction ance-of-payment data reflect a significant growth in and mining equipment with Caterpillar’s $500m invest- FDI flows. “Balance-of-payment data reveals that a sig- ment and IT with Microsoft and Cisco Systems. nificant portion of FDI consists of intra-multinational While traditional Western investors have sustained company lending across borders and retained earnings,” their FDI interest, Asian investors have emerged as the Anton Gunawan, the executive vice-president and chief most vocal proponents of the Indonesian FDI story. economist of Bank Danamon Indonesia, told OBG. “The South Korean investors have announced some big-tick- remainder, what could be called real FDI flows, are et investments. Pohang Iron and Steel Company plans smaller than total FDI figures suggest, although these to invest $6bn in mining and steel production, while have been growing too,” he added. Honam Petrochemicals Corporation has unveiled a The ratio of FDI to portfolio inflows has risen from planned $4.5bn petrochemicals complex. roughly 1:5 in the past to 2:3 and even 1:1 (depending Investors from countries such as China, India and on the quarter) in 2011. Ratings agencies speak of a the Middle East have joined traditional source mar- new period of sustained growth for the economy. kets. Kuwait Petroleum Corporation wants to build an Indeed, in December 2011, ratings agency Fitch upgrad- $8bn-$9bn oil refinery to feed growing domestic ed the country’s sovereign debt rating despite a weak demand, while the UAE was expected to invest $9.5bn global economy in the second half of 2011. in aluminium smelters in October 2011. India’s Reliance Commodities have been key targets for investors – ADA Group announced in early 2011 its intention to 20% of total investment is in mining – while much of invest between $5bn and $10bn over the next three the remaining 80% is made up of investment in agri- years in mining, transport infrastructure and power.
  • 38. ECONOMY ANALYSIS 53 Household spending accounts for more than 55% of GDPA driving forcePrivate consumption boosts economic growthStrong domestic spending has proved a key advantage In 2011 the automotive, telecoms and real estate sec-for Indonesia, with its 240m consumers helping to insu- tors have all registered double-digit y-o-y growth inlate it from global economic tailwinds. Private con- the first two quarters. Around 750,000 automobiles andsumption has risen sharply above pre-1997 levels, 8m motorcycles were sold in 2010. Auto sales grew bybecoming a key driver of Indonesian economic growth an annualised 29% in the first quarter, while motorcy-– aggregate domestic consumption now accounts for cle sales expanded by 21%. According to Sudirman Maround 70% of GDP, similar to the structure of a post- Rusdi, chairman of the Association of Indonesia Auto-industrial economy. The Japanese bank Nomura Capi- motive Industries, “Auto sales are likely to surpasstal estimates that the Indonesian middle class (with dis- 850,000 units in 2011.” Yet disruptions in the supply ofposable household income in excess of $3000 a year) automotive parts from Japan hit the sector and carhas grown from just 1.6m in 2004 to 50m in 2011 and sales dropped 7% month-on-month in on track to reach 150m by 2014 following these CREDIT GROWTH: The accommodative monetarytrends. Although this may prove too optimistic – oth- stance of BI has supported domestic consumption ander estimates put the current figure closer to 30m (see private investment, leading to strong growth in recentIndustry & Retail chapter) – such projections do reflect quarters. Although commercial banks passed on onlythe bullishness of investors seeking to cater to grow- some of BI’s 300-basis-point rate cuts to August 2009,ing middle-class consumption. credit growth accelerated from mid-2010, reachingCONFIDENCE: Spurred by a strengthening labour mar- roughly an annualised 22% by the turn of the year. Bankket and high agricultural commodity prices, private credit grew a further 24.7% y-o-y in the first quarter ofconsumption grew by 4.6% year-on-year (y-o-y) in 2010, 2011. With non-performing loans (NPL) well containedcontributing 2.7 percentage points to GDP growth. – dropping to 2.7% of all loans at the end of first halfHousehold spending accounts for over 55% of GDP, pro- of 2011 from 3.3% in the first half of 2010 – the cen-viding a domestic engine for economic growth and tral bank had hoped for faster growth. The net inter-further insulating Indonesia’s prospects from those of est margin remains still at about 5%, far higher than inthe global economy. Consumer confidence is set to neighbouring countries. Although consumer NPLs havecontinue its rise in 2011, as the Bank Indonesia con- been growing at a marginal rate, their small share ofsumer confidence index proved resilient throughout total loans means that the aggregate NPL ratio has2011, reaching its highest level in two years. Analysts remained on a downward trend. BI has also kept an eyeexpect private consumption to expand 5.3% on aver- on the growth in consumption loans, tabling the optionage from 2011 to 2015, spurred by the growth in real of raising down payments on home and car loans ifwages, causing the retail confidence index to strength- growth exceeds its target by too wide a margin.en throughout August. Yet despite such growth, the economy remains broad- While estimates vary as to Domestic demand looks set to remain strong with ly under-leveraged, with a bank-credit-to-GDP ratio of the size and growth of theconfidence levels sustaining a two-year high in Sep- 28%, lower than pre-1997 levels and lagging far behind local middle class, it lookstember 2011 according to central bank indicators. Suc- India’s 80% and China’s 120%. Credit to the services sec- set to drive the expansioncessive surveys of business managers conducted by the tors grew apace in 2010, while consumption loans grew of consumption in the coming years, increasingCentral Statistics Agency (BPS) indicate clear optimism rapidly. Credit growth in the mining sector outpaced uptake of loans andon the part of both local consumers and businesses. the rest at 53.5% y-o-y in 2010, followed by credit to buoying a range of sectorsDanareksa Research Institute expects Indonesia’s econ- agriculture (32%), construction (19.4%) and manufac- from real estate toomy to sustain its current expansion until at least 2016. turing (15.5%) – all sectors that will drive growth ahead. telecoms and retail. THE REPORT Indonesia 2012
  • 39. 54 ECONOMY INTERVIEW Bobby Umar, President Director, Bakrie & Brothers Prioritising private partnerships OGB talks to Bobby Umar, President Director, Bakrie & Brothers Why have public-private partnerships (PPPs) in Should priority be given to energy projects? infrastructure projects been relatively minimal? UMAR: The supply of energy is paramount. Since the UMAR: Before the 1998 crisis, infrastructure, includ- majority of the economy is still very much concentrat- ing electricity, was a government priority, and its sup- ed in Java, its development will require increased port and development of major projects helped the amounts of coal and gas to fuel its growth. The supply Indonesian economy to grow some 8-10% per year. and distribution of these vital energy sources needs to However, since then, the country has yet to be able to be adequately developed by constructing new toll roads attain the same level of success. The current adminis- and ports. However, these projects must be built through tration is working hard to improve the regulations and a coordinated effort to maintain efficient costs of pro- facilitate a more favourable investment climate. PPPs duction. There is also a need to increase the number have been identified as one of the main channels to of power generation projects. In the last five years, accelerate infrastructure development. Indonesia has had many difficulties in attracting invest- The issue now is how to make PPPs an attractive ment to develop the industry, mostly due to low tariff instrument to encourage local and foreign investment. rates being offered by the state. However, that trend Specifically, the challenge is how to create partnerships is changing and the increased price of electricity has where the rate of return is attractive for both the gov- now made projects profitable. That has stimulated ernment and investors while ensuring that risk is even- more interest from private investors, including Bakrie ly shared between both parties. Currently, there are very & Brothers. Private investment, which is vital to pow- few concession agreements that have been deemed er generation facilities development, will be available potentially profitable. A move to enhance the capaci- as long as the state maintains an attractive tariff rate. ty of those responsible to construct bankable or com- mercially viable PPP projects would be recommended. What financing challenges exist for PPP projects? However, of the upmost importance to investors is UMAR: The establishment of Sarana Multi Infrastruk- the issue of land acquisition. Land acquisition is direct- tur under the Ministry of Finance and the creation of ly linked to the internal rate of return for infrastruc- the Indonesia Guarantee Fund have both alleviated ture projects as the price of land can fluctuate during some of the concerns of investors by mitigating our the bidding process, negating the usefulness of cash risk and our exposure. However, within the concession projections and feasibility studies. If a clear law is estab- agreements, measures that guarantee our investment lished governing acquisition it would provide a certain in the event that there is some sort of contractual level of financial guarantee so that companies to prop- default by the government are either not strong enough erly analyse on the commercial viability of a particular or are not there at all. Additionally, the government must project and ultimately stimulate investment. find ways to assist private companies in raising mon- So, while there has been considerable progress in ey to develop infrastructure projects. Either the gov- the way in which the PPP model has been developed, ernment should directly provide the necessary funds as well as in the supporting regulations to facilitate through its own fundraising mechanisms or it should investment, it may be misplaced effort if a bill on land encourage banks to allocate a certain percentage of acquisition is not ratified. The sustainable long-term their lending to be specifically directed at infrastruc- economic advancement of the country will be direct- ture financing. This should especially be the case for ly dependent on the government’s ability to address state-owned banks that have a specific responsibility these issues and rapidly develop our infrastructure. to ensure the economic development of the country.
  • 40. 56 ECONOMY VIEWPOINT Maxime Verhagen, Dutch Deputy Prime Minister Coming together Maxime Verhagen, Deputy Prime Minister and Minister of Economic Affairs of the Netherlands, on shared development projects The Netherlands and Indonesia enjoy strong ties that As major cities and economic centres in both countries span the realms of culture, politics and the economy. are situated in low-lying areas that are threatened by Numerous Dutch companies, ranging from small and rising seas, our countries share similar challenges. medium-sized enterprises to global players, are active Dutch history shows that we can turn risks into oppor- in Indonesia. Indeed, many Indonesians have grown up tunities for growth. We want to do the same for Indone- with Dutch brands in industries ranging from consumer sia through innovation and cooperation. One example goods and manufacturing to financial services and is the Jakarta Coastal Defence Strategy. Over the next trade. In fact, the Netherlands is among the five largest three years, this will result in a master plan for North investors in the country, creating value for consumers Jakarta that will increase security against floods and tack- and jobs for families. Moreover, bilateral trade and le aspects of coastal development, such as transport investments grew strongly in 2011 and we see ample and logistics. Transport and logistics are key to Indone- opportunities for the years ahead. Our optimism is bol- sia’s future, as rapid economic growth necessitates sig- stered by Indonesia’s impressive economic performance nificant investments in infrastructure. The Master Plan and apparently solid macroeconomic fundamentals. for the Acceleration and Expansion of Indonesia’s Eco- We believe that Indonesia will weather the current nomic Development (MP3EI) identifies substantial global economic storm. Emerging economies, partic- opportunities, particularly in the area of ports. ularly those in Asia, are becoming significant engines This makes us natural partners: both our countries of global growth. It would, however, be wrong for Indone- are gateways to our respective regions and our ports sian businesses to neglect Europe in general and the are located in congested urban areas. I believe there Netherlands in particular. Europe continues to be a key are many opportunities for the Dutch to share their export market for Asian products and an important expertise in ports and logistics with Indonesia. In fact, investor in Indonesia. A comprehensive economic part- cooperation is already ongoing between training insti- nership agreement (CEPA) between Indonesia and the tutions in the maritime and road transport sectors. By EU would significantly boost our trade and investment. involving the private sector and aligning the expertise Experts predict that a CEPA would increase Indone- of all involved, we can tackle complex issues and achieve sia’s trade surplus and raise European investments in lasting results. In the Netherlands, this “golden trian- Indonesia. The Netherlands is willing and able to help gle” between government, the private sector and aca- Indonesia boost its trade and investments. demia has been the cornerstone of our prosperity. The Dutch government is encouraging the private sec- The Netherlands is currently providing value in oth- tor to innovate and develop new knowledge and prod- er areas as well: for example, as the world’s leading ucts that will bring solutions to today’s challenges. exporter of fruit, vegetables and seeds, we are able to Additional measures aimed at improving our investment help Indonesia improve food security for its growing climate include reducing red tape and creating an population. Our companies are also well positioned to attractive tax regime. Together, these measures allow deal with complex environmental issues that challenge the Netherlands to excel in areas like chemicals, logis- our wealth and well-being. These range from shortages tics, automotives, energy, life sciences and the creative of food, water, energy and raw materials to climate industries. One area of particular relevance to Indone- change, rising CO2 emissions and loss of biodiversity. sia is the reduction of flood risks and land subsidence I am convinced that by working together in stimu- through integrated water management, an area in lating sustainability, entrepreneurship and innovation, which the Netherlands is a recognised global leader. our two countries can lead the way to continued growth.
  • 41. 57BankingVolume of lending continues to increase in 2011Loans to SMEs a driver of growth in systemRegulator proposes changes to ownership rulesMajor banks required to publish prime ratesExpanding presence for sharia-compliant finance
  • 42. BANKING OVERVIEW 59 The country’s banks held assets worth nearly $400bn as of mid-2011Size and scopeNew opportunities emerge as infrastructure plans are realised andlending growsDespite a turbulent history in financial services, that these countries, Indonesia perhaps chief amongIndonesia has plenty to offer overseas bankers. Some them, have enough domestic demand to sustainof what is compelling has long been so, such as the growth regardless of external economic cycles.huge potential inherent in the world’s fourth-most- In the near term, it seems clear that Indonesia’spopulous nation. Indonesia has for decades had a banks will do well with their current mix of activity,significant and largely untapped customer base – only which focuses on short- and medium-term lending,about 20% of the country’s adults have any sort of and their generally conservative approach to busi-ongoing financial services relationship. It was for ness. Performance will also likely be boosted as morethis reason that some of the larger names in the Indonesians start to use formal financial services asindustry, such as Citigroup and HSBC, original sought they move out of poverty and into the middle class.a banking licence in Indonesia. CHANGING FOCUS: However, at the same time,RESILIENCE: Now there is more reason to enter the there is pressure for financial institutions to do more,banking sector. The market has become both broad- particularly with respect to the average length ofer and deeper, and interest rates are sinking lower. maturity for loans. Only select clients receive repay-These factors have combined to boost the already ment terms that extend into multiple years, whichgrowing demand for financial services in the archi- means that it is difficult to use bank financing to fundpelago, from microcredit to mezzanine finance. infrastructure development. Indeed, Indonesia is Since 2008 an extra incentive has been the coun- looking to build the roads, ports, bridges, powertry’s remarkable resilience in the face of economic plants and other key public works that are neededadversity. As banks worldwide were asking for aid to unlock the country’s economic potential. Howev-from politicians, Indonesia’s lenders did well, many er, the government cannot afford to do all of thisof them even recording profits during the fourth building and instead wants most of the money andquarter of 2008. Reactions to the global financial expertise to come from the private sector. A mix ofcrisis of 2008 have helped sort out the well-man- Indonesian and foreign investment is expected.aged financial sectors from those with improve- For the banks, the problem is that infrastructurements to make, and Indonesia has been one of the projects typically require a long gestation period,key winners in this process. Thanks in part to the fresh and it is often more than a decade before profitsmemories of the 1997-98 Asian financial crisis, the materialise. That length of time is beyond the com-country’s regulators have shown themselves to be fort zone of most Indonesian banks, whose loan offi-a competent group, and confidence in their leader- cers expect to evaluate credit requests based on aship is a large reason why investors have stayed. faster turnaround. Guarantee funds and other meth-SOUND FUNDAMENTALS: But beyond that, what ods have been created to help share the risk, and At present banks focusthe crisis has proved is that Indonesia no longer suf- the overall performance of these groups of finan- mainly on short- andfers from the concerns that have sunk South-east ciers will be closely watched in the next few years. medium-term lending.Asian economies in the past – a drop in demand for RETAIL OPERATIONS: The consumer finance side Although this businessimports from the region. Indonesia and its neighbours for banks will likely be more familiar in 2012 and model is profitable, the government would like tohave grown in large part by supplying cheap labour beyond. Indonesia’s banks run the gamut from small see banks engage in moreand therefore exports, and when global demand has rural lenders to international players, and Indone- long-term financing,shrunk, the fortunes of these countries did as well. sians are progressing through stages toward sophis- particularly forNow, in the aftermath of the 2008 crisis, it is clear ticated financial relationships, starting with small infrastructure projects. THE REPORT Indonesia 2012
  • 43. 60 BANKING OVERVIEWAs of August 2011 there loans and deposits with microfinanciers and rural holding assets worth Rp3252.7trn ($390.3bn). Aboutwere 1681 rural banks, banks, and then moving to regional or national banks 15 of these banks account for approximately 70% ofwhich do not have direct and deepening their relationships through lines of the nation’s credit. Four banks, including three of theaccess to the nationalpayment system and are credit, credit cards, savings schemes and other top four, are at least partially state-owned. Of the pri-restricted to operations in options. The country remains one of the world’s vate lenders, 11 are Islamic banks. Indonesia doesdefined territories. most important markets for microfinance, which in not require banks to choose between sharia-com- Indonesia – unlike in some less developed countries pliant or conventional operations, instead allowing – is commercially-oriented and centred on making them to open windows or units if they choose to do small loans to entrepreneurs. Most of the main banks so. However, BI does offer licences specifically for are involved in this segment (see analysis). sharia-compliant banking. It also offers a separate As the world’s largest Muslim country, Indonesia category of licence for rural banks, of which there is also a growth market for Islamic finance – lend- were 1681 as of August 2011, holding assets valued ing, saving and investing without the use of inter- at Rp51trn ($6.1bn). Rural banks do not have direct est, speculation or excessive risk. Jakarta has not access to the national payment system, and they are promoted Islamic finance from on high, as has hap- restricted to operations in defined territories. pened in neighbouring Malaysia. There, the govern- REGULATION: BI, the system regulator, uses as its ment has worked hard to establish one of the world’s governing framework the Indonesian Banking Archi- largest and most sophisticated Islamic finance mar- tecture, a 2004 comprehensive plan introduced as kets. By comparison, Islamic finance in Indonesia is a set of guidelines for development. Six broad goals evolving along with demand, which continues to are considered the pillars of the plan: a healthy bank- increase steadily over time (see analysis). ing structure, effective regulation, effective and HIGHLY FRAGMENTED: The country’s banking sys- independent supervision, adequate infrastructure, tem has undergone a decade of significant change, robust consumer protection and a strong banking as the 1997-98 crisis spurred bailouts, mergers, industry. Overall the approach is a conservative one. acquisitions, closings and a host of other changes. One of the issues that has seemingly slid down the When things settled the banking roster ended up regulator’s agenda is consolidation. In the wake of about half its previous size. According to the Bank the financial crisis and with so many banks in the of Indonesia (BI), the country’s central bank, as of country, slimming the roster to a smaller number of August 2011, there were 120 commercial banks, larger players was a significant goal. For some, the
  • 44. BANKING OVERVIEW 61number of banks is too large, and many believe thatBI would still like to see some consolidation, but thereality is that this is unlikely to happen. Banks aremotivated to get bigger just as anywhere else, butwith such explosive growth in the system, organicexpansion – increases in customer base, branch net-work, loan books and so on – is an effective a toolfor gaining market share, and does not come withthe potential challenges of doing a deal. Acquisitions in the near future are likely to comefrom major banks buying specialist banks in orderto access a specific market. Microfinance is an exam-ple, as lenders such as Bank Mandiri and Bank Tabun-gan Pensiunan Negara (BTPN) have recently boughtmicrofinance lenders or are set to do so soon.FOREIGN BANKS: Perhaps the biggest regulatory dis-cussion in 2011 addressed the presence of foreignfinancial institutions in the system. The banking sec-tor has been largely welcoming to foreign investorssince 1999, when the government opened up its Since March 2010, banks that do not keep loan-to-deposit ratios between 78% and 100% face penaltiesfinancial system in an effort to recapitalise its failedbanks after the financial crisis. As of mid-2011 about While Temasek and Khazanah have each since mergeda third of banks operating in the country were either their multiple banks into single institutions, thepartially or entirely foreign owned, with several in the Indonesian government asked BI for an exemptiontop 10, including CIMB, Danamon, Bank Internation- from the rule until 2012. The exemption was grant-al and Permata. Foreign lenders also account for ed, and what happens next for the four state-ownedabout 27% of outstanding loans. banks in Indonesia is unclear. According to rules that have been in place since It is also unclear whether or not Nasution’s pro-1999, any entity, whether domestic or foreign, can posed 50% cap on ownership would also apply to theown up to 99% of a bank’s shares. However, in July state-owned banks, and how it would be implement-Darmin Nasution, the governor of BI, said that the ed. The idea of finding new takers for up to half ofcentral bank was considering a regulation to cap the shares in more than 100 banks could create mar-the maximum individual stake in a bank at 50%, to ket confusion. It could also mean that assets wouldprevent a few people or companies from gaining be sold at discounted prices. As Tony Costa, the pres-too much control. Although the regulation would ident director of Commonwealth Bank Indonesia,not single out foreign owners, there was sufficient told OBG, “There is talk of a new regulation limitingspeculation that this was the case such that Nasu- the ownership of a bank to less than 50% per share-tion made another announcement in August that the holder. The major risk when implementing such meas-intent was not to target foreigners. ures is not to offer the owners the right timeframeOWNERSHIP RULES: Foreign investors may have to carry out the sale, which could lead to a severesome basis for being concerned about the poten- decrease in the price of their shares.”tial for the introduction of the new 50% regulation, Another proposed regulation would force foreignhaving been subject to the government’s changing bank branches to operate as limited companies,of ownership rules in the past. The single-presence which under Indonesian law would give BI morepolicy, introduced in 2006, prevents any person or scrutiny of them, and perhaps the ability to insist thatcompany from owning a controlling stake in more top management jobs are filled by Indonesians only.than one bank. This policy has affected three groups ENCOURAGING LENDING: The central bank has– Singapore’s Temasek sovereign wealth fund, a sim- also been active in trying to boost lending throughilar Malaysian government holding company called means other than a reduction in the policy rate. InKhazanah and the Indonesian government itself. September 2010 BI introduced new rules that require a bank to keep its loan-to-deposit ratio (LDR) above Outstanding loans, Aug 2010-Jun 2011 (Rp trn) 78% and below 100%, although an LDR above the Working capital Investment Consumption maximum is allowed if the bank’s capital adequacy Aug-10 813 326 501 ratio (CAR) exceeds 14%. The minimum is designed Oct-10 820 333 523 to spur lending while the maximum helps to ensure Dec-10 880 349 537 that banks do not take on unnecessary risk. For those According to regulations Feb-11 858 357 559 banks that do not meet these requirements, they are that have been in place Apr-11 883 383 577 obligated to hold more reserves with BI. At the same since 1999, any entity, Jun-11 940 407 603 time, the central bank also raised the rupiah primary whether domestic or reserve requirement (for all banks, regardless of foreign, can own up to 99% SOURCE: Bank Indonesia of a bank’s shares. LDRs) from 5% to 8%, effective November 1, 2010. THE REPORT Indonesia 2012
  • 45. 62 BANKING OVERVIEW Rp1951trn ($234.1bn), representing 23% year-on- year (y-o-y) growth. Of this total, almost half was accounted for by working capital loans, with con- sumer lending the next largest category, at 31%. The balance, at 21%, was made up by investment loans. Finally, it is important to note that, when looking at the bigger picture, the sector’s LDR has increased over the past five years, with loans growing more quickly than deposits. In fact, looking ahead, it may be deposits that constrain local lending, rather than an unwillingness to lend on the part of banks. Also, because most deposits are short-term, it is difficult for banks to engage in long-term lending, such as is required for infrastructure projects. SMALL BUSINESS LOANS: Lending to the micro, small and medium-sized enterprise (MSME) seg- ment is an important part of Indonesian banks’ loan portfolios, accounting for Rp1035trn ($124.2bn), or 53.1% of total system lending as of June 2011. Loans to MSMEs grew more quickly than overall lend- Loans to SMEs grew at a CAGR of 21.1% between 2005 and 2010 ing between 2005 and 2010, increasing at a com-As of June 2011, total The LDR rule, which did not go into effect until pound average growth rate (CAGR) of 21.1%, com-outstanding loans March 2011, has met with some criticism. While the pared to 20.5% for all loans. Moreover, MSME lendingamounted to Rp1951trn policy appears to promote lending growth, in actu- is expected to be a driver of loan growth in the bank-($234.1bn), representing23% year-on-year growth. ality, it may not. For banks that fall below the mini- ing system going forward. According to a 2011 sur-Of this total, about 50% mum, they could find it more profitable to incur the vey by PwC, the global tax and advisory services firm,was accounted for by penalty rather than make loans that they perceive some 31% of Indonesian bankers surveyed expect-working capital loans. to be risky. At the other end of the spectrum, banks ed the MSME sector to achieve the highest growth may be unfairly penalised for LDRs that exceed 100%, in lending 2011. That said, MSME credit quality is rel- given that the rule does not take into account oth- atively weaker. In June 2011 the ratio of non-perform- er sources of funding, such as debt or equity ing loans (NPLs) for the MSME segment stood at issuances, although this could be offset somewhat 2.87%, compared to 2.74% for the overall sector (see by the fact that banks with CARs that exceed 14% analysis). For this reason, banks are likely to active- are not subject to the 100% maximum. ly manage their deployment of these loans and apply Setting aside the question of whether or not this credit analysis to keep NPLs at manageable levels. policy was effective, lending nonetheless grew dur- CONSUMER LENDING: While overall lending had ing the first half of 2011, despite the November grown by 23% y-o-y as of June 2011, the value of 2010 hike in reserve requirements and a February consumer loans increased more quickly over this 2011 increase in the policy rate to 6.75% from 6.5%, period, rising by 23.2%. This was apparently a cause the first change since July 2009. By June 2011 total for concern at BI, with local newspaper Jakarta Post outstanding commercial bank credit amounted to reporting in early August 2011 that the central bank
  • 46. BANKING OVERVIEW 63governor had said that it was keeping a close watchon growth in auto and housing loans. Through August and into early September, thecentral bank continued with this stance. In late August2011 Wimboh Santoso, the director for bankingresearch and regulation at BI, told local reporters that,although consumer loans had not exhibited thelargest y-o-y growth as of June 2011 – working cap-ital had increased by 23.8% – their growth hadreached the highest acceptable level set by BI. Henoted that the central bank had prepared measuresto slow the rise in consumer loans. In early September Wimboh again addressed thisissue, telling the local media that the central bankwould prefer that banks direct their lending towardsproductive investments rather than consumer pur-chases. “We aim for credit to be channelled to moreproductive purposes, instead of consumptive loans.Working capital and investment loans are the kindsof loans that will support growth, as they are close- BI lowered its policy interest rate in October and November 2011ly linked with job creation and multiplier effects,” hesaid. This opinion has been echoed by private sec- than 40 banks, and found that corporate loans were As of March 2011 thetor market participants as well. Kamal Osman, the offered at 11.01% in March and 11.03% in June. Hous- central bank has required that all lenders with assetspresident director of BNP Paribas Indonesia, told ing loan rates had dropped 20 basis points to 11.49% above $1.2bn disclose theirOBG that lending should be aimed at projects that and non-housing consumer loans slipped to 11.84% prime rates. The purpose ofstimulate new economic activity and not consumers. from 12.1%. Those rates compare with a cost of this policy is to increase the“The banking industry has a responsibility to ensure funds ranging from 6.18% to 6.59%, according to BI level of competition amongthat an adequate amount of capital is directed data. Central bank officials told the local media that banks, which could reduce net interest margins.towards financing projects that will create real eco- the plan to push rates lower through disclosure couldnomic growth and not simply be made available for require several months to take cards and consumer financing,” he said. OUTLOOK: While profits could be squeezed if net However, as of late 2011, the central bank had tak- interest margins fall in response to BI’s requirementen no steps to curb lending to consumers. On the that banks disclose their prime rates, such concernscontrary, while consumer spending, and private con- may be more than offset by opportunities. Thesumption more generally, remained strong entering December 2011 decision by ratings agency Fitch tointo the fourth quarter of 2011, BI lowered its pol- upgrade the country’s sovereign debt to investmenticy interest rate twice during the final months of grade is likely to reduce the cost of funds. At the same2011, to 6.5% in October and 6% in November. The time, the central bank’s October and Novembercentral bank cited a slowdown in global economic reductions in the policy rate could also boost the sec-activity and the easing of inflation as the main rea- tor. Finally, the development of infrastructure will sup-sons for this reduction (see Economy chapter). port bank growth, not only in terms of financingINTEREST MARGINS: While the central bank’s pol- opportunities but also as the multiplier effects oficy rate may be falling, Indonesia’s net interest mar- these projects attract new investors to the country.gin (i.e., the difference between lending and depositrates) is the highest in South-east Asia, perhaps Net interest margin, 2010-11 Q2because banks remain cautious lenders as a resultof the 1997-98 financial crisis. Moreover, the local 6.0capital markets remain relatively shallow, whichmeans that borrowers have few alternatives to thebanks when it comes to raising capital. Moreover, by 5.9regional standards, Indonesia’s inflation rates areboth high and volatile, so banks have a more diffi- 5.8 SOURCE: Bank Indonesiacult time in forecasting their future liabilities. However, the central bank has taken steps to 5.7address this issue. As of March 2011 BI has requiredthat all lenders with assets above Rp10trn ($1.2bn)publicly announce their prime rates – the rates with- 5.6out the risk component – for corporate, retail andconsumer credit. The idea was to foster competition, 5.5but BI data show that three months later rates were 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2holding at similar levels. BI tracked the rates of more THE REPORT Indonesia 2012
  • 47. 64 BANKING ANALYSIS Islamic banking in Indonesia is used mainly by individual consumers A rising star Sharia-compliant financing is an increasingly popular alternative Home to the world’s largest Muslim population, domestic consumers, and not necessarily as a tool Indonesia is in theory fertile territory for the devel- for large-scale finance, according to its 2002 Blue- opment of Islamic finance, the practice of lending, print of Islamic Banking Development in Indonesia. investment, finance and insurance without interest This position runs counter to the approach of many rates or speculation. Still, in the South-east Asian countries, where Islamic versions of bonds and loans region, it is neighbouring Muslim-majority Malaysia, have been a popular method for attracting foreign which is a fraction of the size of Indonesia, that has investment and financing large-scale developments historically been the market leader in this field. While such as real estate projects. In fact, it was in those sharia-compliant finance in Indonesia has to date areas – and not in deposit banking – that the Islam- been a lower priority for the government and reg- ic financial institutions of the Arabian Peninsula ulators than in Malaysia, the market continues to grow experienced difficulties in the wake of the global eco- as more consumers adopt these products. nomic slowdown in 2008 and 2009. ASSET GROWTH: In February 2011 Bank of Indone- For now, much of the market growth in Indonesia sia (BI), the country’s central bank and banking reg- is happening because locals are taking notice of the ulator, projected that assets held by Islamic banks Islamic banking alternative, and a small number of in the country would grow by 55% over the course them are choosing it. As of June 2011, outstanding of the year. Although this sounds like a significant financing at Indonesia’s 11 sharia banks and 23 jump, it represents an increase only slightly larger sharia units of other banks stood at Rp82.6trn than that registered in 2010. According to BI data, ($9.9bn), according to the central bank’s data. How- Indonesia’s Islamic banks, Islamic units of conven- ever, this activity is still relatively limited when viewed tional banks and Islamic rural banks held $11.2bn in in the context of the conventional banking system. assets at the end of 2010, up 47% on the year and Indeed, as of this same date, outstanding loans at accounting for approximately 5% of total banking sys- the country’s conventional commercial banks tem assets – as opposed to about 20% in Malaysia. amounted to Rp1951trn ($234.1bn). This difference may be due to the fact that the THE BENEFITS: While BI has not made growth in concept is not as heavily promoted by the state as Islamic finance an explicit aim, one expected bene- it is in Malaysia. Moreover, Indonesia is taking a dif- fit of the practice is that it will add stability to the ferent approach – BI’s board of sharia scholars has financial system. Islamic finance seeks to eliminate advocated and helped institute a more strict inter- high-risk financial instruments such as the credit- pretation of sharia law than has Malaysia’s regula- default swaps and other derivatives that helped tors, and one that is in line with the practices of cause the more recent financial crisis. It instead aims Islamic banks in the oil-rich countries of the Arabi- to ensure that every transaction is linked to the an Peninsula. It is expected that an increase in sharia- movement or production of goods in the real econ- compliant financial options should attract some of omy, and that characteristic has led advocates to that wealth to Indonesia, in the form of foreign direct claim that Islamic banking is inherently more stableAs of June 2011, the value investment. Even non-Muslim countries such as Aus- than conventional methods. The crisis’s aftermathof outstanding financing tralia, South Korea, the UK, Germany and Canada are in the Arabian Peninsula has cast doubt on that par-at Indonesia’s 11 shariabanks and 23 sharia units hoping to attract Gulf money in this way. ticular theory, but for BI, Islamic finance is a bene-of conventional banks A DIFFERENT APPROACH: However, the central ficial component of the broader banking system andstood at $9.9bn. bank views Islamic finance primarily as an option for can contribute to mid- to long-term price stability.
  • 48. BANKING INTERVIEW 65 Darmin Nasution, Governor, Bank IndonesiaA watchful eyeOBG talks to Darmin Nasution, Governor, Bank Indonesia (BI)How prepared is BI to tolerate the appreciation of macroprudential policy to manage domestic liquiditythe rupiah? What steps are you taking to maintain and another to handle foreign capital inflows.the balance between growth and inflation?NASUTION: Apart from conventional monetary policy, To what extent is it necessary for regulations to beBI has used rupiah appreciation to contain the infla- put in place that would encourage greater lendingtionary pressure, particularly imported inflation, which for projects related to infrastructure?results from rising international commodity prices. NASUTION: Our domestic banks currently have ampleMovement of the rupiah will be consistently aligned with liquidity to be channelled to infrastructure projects,the fundamentals of the economy and will be direct- but they still tend to be highly prudent in financing them.ed toward achieving of macroeconomic stability. Infrastructure projects are long term, while bank loans To maintain the competitiveness of Indonesian prod- are dominated by short-term funding needs. This pos-ucts in the international market, the movement of the es the risk of maturity mismatch.rupiah will also be aligned with that of currencies Until recently, the government has carried out infra-belonging to Indonesia’s trading partners. To bolster structure development in the country primarily throughmacroeconomic stability and achieve sustainable eco- state-owned enterprises (SOEs). From a financing stand-nomic growth, BI applies a mix of monetary and macro- point, the state-owned banks play a major role throughprudential policy instruments. The goal is to ensure their syndicated loans. In promoting infrastructureinternal and external balances through interest rates financing while keeping sound banking practices, BIand exchange rate policies, as well as capital inflow and has raised the legal lending limit from 25% of a bank’sexcess liquidity management. capital to 30%, applied only to loans to those SOEs engaged in development projects.As more consumer financing is made available, howconfident are you that a bubble is not forming and What is being done to increase the availability ofthat industry is not acting recklessly? more sophisticated structured products (SPs)?NASUTION: The role of credit in providing financing to NASUTION: SPs support the deepening of the finan-the economy is still limited. The ratio of credit to GDP cial market, but we have learned from the global eco-in Indonesia is relatively low compared to neighbour- nomic crisis that they can also lead to an increase ining countries. However, BI is closely monitoring the the instability of the financial system if they are not pru-influx of foreign funds into the economy, as this may dently managed. In this regard, BI regulates banks thatencourage excessively risky behaviour and create a are involved in dealing with market bubble, which could then lead to finan- Banks are only able to perform SP-related activitiescial instability. Were that to happen, monetary policy after they have obtained approval from BI. Also, for-could then be used to boost the stability of the finan- eign exchange banks can only conduct SP transactionscial system by influencing the pace of credit expansion that are linked to the basic variables of exchange rateand reducing excessive risk taking. and/or interest rates. With capital inflows remaining high, interest rates are Non-foreign-exchange banks are allowed to have SPnot sufficient as tools for shaping monetary policy and transactions linked to the basic variables of interest only.must be supplemented with other instruments. The Companies are also required to state their SP activitiescentral bank has thus adopted a mix of four policies: plan in their bank business plan and to implementan interest rate policy, an exchange rate policy, one effective risk management in conducting SP activities. THE REPORT Indonesia 2012
  • 49. 66 BANKING INTERVIEW Gatot M Suwondo, President Director, BNI Changing priorities OBG talks to Gatot M Suwondo, President Director, Bank Negara Indonesia (BNI) To what extent is lending still considered conser- As per capita income climbs and consumer needs vative? Are we likely to see loan-to-deposit ratios become more sophisticated, will customers increas- (LDRs) increase over the medium term? ingly choose to work with foreign banks? SUWONDO: Even though more than a decade has SUWONDO: We are confident local banks will contin- passed since the financial crisis of 1998, the banking ue to evolve and mature. I believe that, as the sector industry remains prudent when it comes to lending. Our progresses, more customers will opt to bank with domes- LDR is conservative compared to other countries in the tic institutions over foreign ones. A major factor will be region. However, most banks, including us, derive a sig- if banks can begin implementing some more customer- nificant portion of revenue from loan products and oriented approaches, rather than product-based ones. most of the industry is pursuing a strategy of trying to Before, the industry was more inclined to develop prod- increase loan portfolios. ucts and force them on customers. Nowadays, it is That said, financial institutions cannot be indiscrim- essential one identifies the customer’s specific needs inate in choosing to lend money. We feel there are a and then develops products to meet those needs. number of sectors which offer greater returns and The strategy of foreign banks is to have a presence more security. For instance, industry has tremendous in the country while the industry evolves. They can development potential. Risk for firms in this sector is offer more sophisticated products and have better often easier to measure by identifying and studying access to international markets. However, domestic cycles and trends. We also feel the country’s further banks differentiate themselves by giving clients per- industrialisation will occur not only in Java, but in many sonalised service. In the past, it was common to suffer other provinces. Therefore, it will be extremely impor- bureaucratic problems when dealing with state banks, tant for the banking sector to identify what the lead- but that is no longer the case. We now have the ing industrial segments in each region are going to dynamism and agility of foreign banks, complemented become over the next five years. by our understanding of local clients’ culture and needs. Additionally, over the medium term, there will be ample opportunities for the banking community to pro- How can banks capitalise on the growth of the small vide infrastructure financing. Currently, most projects and medium-sized enterprise (SME) sector? How are funded by large foreign intermediary banks. How- does BNI approach lending to this sector? ever, if a local bank has the expertise and ability to SUWONDO: We used to analyse SMEs by assessing analyse a project’s viability, then they bear a level of only the maximum loan they could receive. We would responsibility to ensure the correct projects are being consider both small companies (which can receive up developed. This applies not only in Java, but in Indone- to $1m in loans), and medium ones (credit between $10 sia’s eastern regions as well. and $15m). I suppose the concept of small and medi- It is essential that the government aggressively um companies varies from bank to bank. However, I think address a variety of infrastructure-related issues. If the overall there is too much emphasis placed on size. state can successfully assemble projects with clear and Over time, we have altered our approach to lending. bankable terms, we will happily provide the necessary We now try to focus on the leading industry sectors in funds. I think it would be safe to say that, so long as Indonesia and participating in financing companies macro-economic fundamentals remain strong, Indone- in these sectors, from upstream to downstream. One sian banks will begin to increase their LDRs in order example is the agro-based industry, where we encour- to capitalise on the economic growth of the country. age lending because we find this sector attractive.
  • 50. BANKING ANALYSIS 67 Three of the largest banks are at least partially owned by the stateA closer lookProfiles of the country’s leading banksAccording to the sector’s regulator, the Bank of became a state-owned bank in 1950. Thanks to theIndonesia, there are 120 commercial banks and 1681 rural units that the bank established in the 1970s,rural lenders in Indonesia. In reality, however, a small the lender has established an identity based on itsnumber of them are responsible for most of the national presence, microfinance, and loans to smalllending activity in the market, with 15 banks account- and medium-sized for about 70% of credit. As ranked by assets, the BRI has a large branch network through which itfollowing are the five largest banks in the country, offers microfinance products, and the bank claimsincluding three state-owned institutions. it has the world’s largest and most profitableBANK MANDIRI: The largest Indonesian bank by microlending operation. The bank has 325 branch-several measures, Bank Mandiri was set up by the es, 148 sub-branch offices and 4049 microfinancegovernment after the 1997-98 Asian financial cri- units, in addition to two foreign representativesis, the fusion of four failed banks that had required offices. For the first three quarters of 2011, BRIstate bailouts: Bank Bumi Daya, Bank Dagang Negar, reported net profit of Rp10.4trn ($1.3bn), up fromBank Ekspor Impor and Bank Pembangunan Indone- Rp6.7bn ($798.8m) for the same nine months insia. For the first nine months of 2011, the bank 2010. Similarly, net interest income for the first threereported net profit of Rp9.2trn ($1.1bn), an increase quarters increased from Rp20.8trn ($2.5bn) in 2010of 44% over the Rp6.4trn ($766.7m) in the corre- to Rp26.2trn ($3.1bn) in 2011.sponding period the prior year. For BRI, Bank Mandiri and the other state-owned The lender has five major financial services sub- banks, a major question looming in 2012 is that ofsidiaries: Bank Syariah Mandiri, the Islamic-banking the “single-presence policy” – a 2006 edict from theunit; Mandiri Sekuritas, its investment bank; Mandiri central bank mandating that no one shareholder orTunas Finance, a consumer auto-finance unit; AXA group can own a majority stake in more than oneMandiri, a bancassurance joint venture with the bank. That led to some mergers between privatelyFrench insurance giant; and Bank Sinar Harapan Bali, owned financial institutions, but Indonesia’s gov-a Balinese microfinance lender. ernment appealed to the central bank to exempt Mandiri also has a European subsidiary based in the state-owned banks until 2012. There have beenLondon and recently opened the first branch of an no announced plans for if, when and how the ruleIndonesian bank in Shanghai, China. The bank has might apply to the state-owned lenders.obtained a license to open operations in Malaysia, BANK CENTRAL ASIA (BCA): One of the two pri-although it has not done so yet, citing the high cap- vately owned lenders among the top five, BCA isital requirements in the neighbouring country. Indonesia’s third-largest bank by assets and biggestBANK RAKYAT INDONESIA (BRI): The second- by market value. The institution came under publiclargest bank, BRI held $45.02bn in assets as of the control after the 1997-98 Asian financial crisis, butend of 2010. BRI is a large bank even by regional stan- a quick recovery led to a government divestiture.dards, with an asset base that is substantial enough An initial public offering in 2000 reduced the gov-to rival those of major banks in Singapore, Malaysia ernment’s stake by about 20%, and then in 2002 aand the Philippines, all countries against which 51% stake was sold to FarIndo Investment of Mau-Indonesia benchmarks itself. ritius, a group whose principal investor was Indone-The firm was founded in 1895 as Priyayi Bank of sian tycoon Robert Hartono, who owns the world’sPurwokerto, gained its current name in 1946, and third-largest manufacturer of clove cigarettes, THE REPORT Indonesia 2012
  • 51. 68 BANKING ANALYSIS continued its fall over the first nine months of 2011, reaching 3.83% in the third quarter of the year. One of BNI’s main focuses for 2011 has been an improve- ment in asset quality, and therefore the percentage of soured loans is expected to continue falling. CIMB NIAGA: Founded in 1955 as Bank Niaga, since 2002 this lender has been majority-owned by CIMB, the Malaysian financial-services group. CIMB Niaga owes its status as the fifth-largest bank thanks to the government’s single-presence policy, which requires that no one owner can hold a majority stake in more than one bank. CIMB’s parent company Khaz- anah, the Malaysian government’s investment hold- ing company, had previously acquired Bank Lippo, another Indonesian lender that failed during the 1997-98 Asian financial crisis. Therefore, when the single-presence policy was implemented in 2006, the banks were combined to create CIMB Niaga. CIMB Niaga Syariah, the lender’s Islamic finance arm, has developed a strong reputation in line with BI had licensed 120 commercial banks as of August 2011 the company’s Malaysian roots – Malaysia was among Djarum. Parent company Djarum Group is the coun- the world’s first countries to embrace the concept try’s wealthiest conglomerate. BCA has the lowest of Islamic finance and the practice has been pushed cost of funds among Indonesia’s major banks and there by government and regulators. also has a history of spending on technology. It was CIMB Niaga’s profits in the first three quarters of the first Indonesian bank to have automated teller 2011 reached Rp2.3trn ($280.6m), a 35% jump from machines, for example. the Rp1.74trn ($208.4m) recorded during the first BCA reported a net profit of Rp7.7trn ($918.6m) nine months of 2010. CIMB is the largest foreign- for the first nine months of 2011, up 25% from owned bank in the country by assets, and therefore Rp6.1trn ($733.1m) earned during the correspon- could be among the institutions most affected by a ding period in 2010. At the time of the announce- potential plan to cap bank ownership at 50%. The ment of its third quarter 2011 financial results, the plan, which the governor of the central bank sug- bank noted that it plans to expand its housing loan gested was under consideration in 2011, would and securities businesses. change the maximum any one shareholder can own According to the global ratings agency Fitch, the from 99% to 50%. But the difficulty in applying such strengths of BCA include the bank’s substantial a change, including the potential stock market chaos, deposit base and high quality assets. has led some in the country to doubt its feasibility. BANK NEGARA INDONESIA (BNI): Formed in 1946. Others suspect that it may be a method to reduce BNI was, for a period, the country’s central bank, and the foreign presence in the sector, as about a third the government currently owns a 60% stake in the of the country’s 120 banks are foreign, or local organisation. BNI has been publicly traded since lenders with foreigners holding a controlling stake. 1996 and has close to 1670 domestic branches. Its overseas branches are in Singapore, Hong Kong, Tokyo, London and New York. As with Bank Mandiri and BRI, it is unclear how potential enforcement of the single-ownership policy for government banks would affect BNI. The bank has four subsidiaries where BNI has majority ownership : BNI Multifinance, BNI Securities, BNI Life Insurance and BNI Sharia. BNI has been aggressive in restructuring the busi- ness in 2011, publicly stating that it was seeking strategic partners for each of these four units. In April 2011 it was announced that a 25% share of BNI Securities would be sold to SBI Securities Company of Japan, with the expectation that the bank’s new minority investor would be able to strengthen exist- ing investment banking activities. For the first three quarters of 2011, BNI reported net profit of Rp4.1trn ($487m), up 37% from the same period in 2010. The non-performing loan ratio at BNI, which has steadily declined in recent years, Some 15 banks account for approximately 70% of lending
  • 52. 70 BANKING ROUNDTABLE Jahja Setiaatmadja, President Director, BCA Keeping it local OBG talks to Jahja Setiaatmadja, President Director, BCA; Michael Young, President Director, HSBC; Zulkifli Zaini, President Director, Bank Mandiri; and David Fletcher, President Director, Permata Bank To what extent will the industry be able to main- As a result, we fall just shy of meeting the requirements tain current increases in loan-to-deposit (LDR) of BI and thus are required to lend more. However, ratios while ensuring adequate risk management? based on our internal controls we think we are not liq- SETIAATMADJA: Bank Indonesia’s (BI) policies on LDRs uid enough. If we were to maintain our internal con- and declining BI rates are a clear indication of its deter- trols and calculate LDR on core deposits while meet- mination to increase lending and lower interest mar- ing BI requirements, we would have an LDR of 150%. gins to facilitate intermediary function. While we and We think high-risk flight capital should not be includ- the banking industry are committed to support BI reg- ed as part of our LDR calculations. This refers to mon- ulations for achieving a minimum 78% ratio requirement. ey that would leave the country at the onset of any The increase should be reached gradually over time on potential crisis. Admittedly, this is a conservative the basis of solid loan demand – rather than aggres- approach, but we feel it is prudent. There is a concern sively pursued – in order to mitigate risk. Therefore, many that some banks have not adopted a sufficiently con- banks are prepared to pay the necessary fines to a cer- servative approach to lending. There are two systemic tain extent to avoid lending on poor-quality assets, issues when evaluating the money market. First, deposits which would trigger a rise in non-performing loans tend to flee the country as it is a fairly convertible mar- (NPLs). We have to act prudently and continue to ensure ket and people can take their money to Singapore very that proper risk management controls are in place. easily. The deposit-to-GDP ratio is less than 40%. That being said, strong domestic demand for commer- Measures should be employed so that deposits are cial and consumer loans has allowed us – and the indus- encouraged to stay in Indonesia to foster improved try as a whole – to increase our LDRs without compro- credit growth. Second, the largest four banks tend to mising our NPL ratio. The commercial and small and control a major portion of the liquidity in the country. medium-sized enterprise (SME) segments have achieved As a result of a lack of a well-developed interbank mar- over 33% growth for the first nine months in 2011 as ket, liquidity does not tend to be intermediated. BI is compared to that period in 2010, while the consumer aware of this issue and they have been trying to devel- segment increased over 28% year-on-year for the same op a better functioning repo market to intermediate period, driven by mortgage and vehicle loans. that liquidity, but in the absence of that, and given the Based on the country’s economic trajectory, it is like- high credit growth the industry has experienced, banks ly that these trends will continue and LDRs will climb need to be prudent about liquidity in the coming months. towards meeting the targets set by BI eventually. How- The 78% minimum is understandable, but allowing a ever, given the uncertain international financial situa- 100% maximum may need re-examining. tion (particularly global liquidity issues), we must care- ZAINI: The enactment of the new regulation demon- fully monitor the risk associated with capital flight and strates that Indonesian banks can improve their inter- consider the impact it could have. mediation role, as the industry LDR has gradually YOUNG: BI has implemented a strategy to encourage increased over the course of 2011. lending, and as part of that strategy it requires banks In fact, the industry LDR exceeds the 78% minimum to maintain an LDR between 78% and 100%. However, requirement of BI. As an intermediary, the banking to mitigate the risks, we have adopted a methodology industry continues to apply prudent principles along which calculates our LDR based only on core deposits. with strict regulations on risk management through the From our perspective, a more conservative approach implementation of Basel policies including operational – one only including core deposits – would be prudent. risk, credit risk and market risk in calculating the
  • 53. BANKING ROUNDTABLE 71 Michael Young, President Director, HSBCcapital adequacy ratio. Over the past six years the means that you need to have a bit of caution frombanking industry, including us, has taken steps to ensure a liquidity point of view. That being said, risk manage-adequate risk management. We personally have imple- ment seems to be adequate and there is no real causemented sound credit scoring and monitoring policies, for alarm. It is just something you need to take intowith centralised credit analysis. This has led to our NPL account, particularly when you have an economyratio decreasing to under 3%, representing one of the that’s doing well and credit-quality levels in the Indonesian banking sec- We have, and rightly so, a regulator who wants to seetor. That said, threats of foreign capital outflows from lending increase to support economic expansion, whichIndonesia will continue to remain a concern as is all very good, but it’s important that it is not done atsignificant outflows could interfere with the nation’s the expense of certain basic disciplines. However,economic stability. Steps are being implemented at this point I have no reason to believe that the indus-to anticipate and secure Indonesia’s economy to off- try is beginning to lose that discipline.set the risk of capital flight. One tool is BI’s planto repatriate funds from exports that settle in To what extent should commercial banks increaseaccounts overseas, an act that could bring billions of the amount of project financing made available asdollars in liquidity back on shore. a means to encourage infrastructure development? In addition, raising the LDR regulation and requiring FLETCHER: I personally do not believe in what I woulda minimum LDR for each bank with the intention of call “managed lending”. If the projects are right and theincreasing the bank’s penetration into the real sector terms are right, then the financing will be there. I thinkwill support the development of this sector as a major what does need to happen, and it would certainly bedriver of economic growth, thereby implying a greater valuable for infrastructure as well as mortgages, is thatdomestic focus to lending. The recent rise in foreign the capital markets become more developed in regardsdirect investment implies that more funds from to term structures, both term liability structures and theoverseas are willing to invest in long-term projects in ability for more term assets. That should evolve in time,Indonesia, a sign that outflows might be less volatile but to force institutions to finance infrastructure with-than they have been in the past. out better developed term structures is getting aheadFLETCHER: I think the LDR ratio is quite interesting; BI of the game. If the right project has the right legalproscribes that banks should operate between 78% structures and has the right commerciality, then it willand 100%. Currently, the industry as a whole is running receive adequate financing. If the correct commercialat a low 70s average, but it you remove the “big four” structure does not exist, then I would argue that it isit is probably running at over 90%. So, with LDRs one not appropriate for commercial entities to finance andhas to be careful not to gauge it from only an industry the government, which has other means to acquireaverage perspective. In terms of risk management, the necessary capital, should do so.what it does highlight – and what should be at the fore- Retail lending does contribute to the real economy.front of everybody’s minds – is how the competition It helps to drive consumer demand, which has a directfor deposits affects liquidity at individual banks. impact on the domestic economy. What it demon- The vast majority of basic deposits are onshore so strates is that you need a more liquid capital marketthere is not much of a risk that a large portion could structure that will enable longer-term financing. Thetake flight. When you have LDRs that are around 90% reality is that if you look at government budgets andon average for the industry, excluding the big four, it government budget deficits, they are not spending all THE REPORT Indonesia 2012
  • 54. 72 BANKING ROUNDTABLE Zulkifli Zaini, President Director, Bank Mandiri of the money they have available to them. The legal system and resolve problems surrounding land government has the ability to fund a lot more infrastruc- acquisition should it be able to provide banks with the ture projects than it currently does. Additionally, the confidence and security to finance longer-term proj- public-private partnership (PPP) model needs to be ects. HSBC has played a role in financing major infra- developed further, and the country needs to resolve structure projects in other countries but those coun- issues related to land acquisition. This will create a far tries do not rely on only commercial banks to finance more conducive environment for project financing. It such large-scale projects. To finance a five-year proj- is easy to say that banks have a responsibility to pro- ect, you cannot finance it with it one-month deposits. vide infrastructure financing, however, their interme- Therefore, to bridge that gap it requires some sort of diary role with SMEs is equally important. What many PPP model and the need for some sort of infrastruc- studies have shown is that SMEs tend to be the back- ture-financing arm of the government. Commercial bone of an economy. They provide the majority of banks are limited by the size and scope of their bal- employment and, along with micro-financing, play a piv- ance sheets in financing major infrastructure projects. otal role in the development of the real economy. ZAINI: The government has targeted 7.7% economic How would you respond to those that claim that growth by 2014. To do so requires more than Rp2000trn as Indonesia improves economically, customers will ($240bn) per year until 2014. This will require private move their business to foreign banks? investment and long-term bank financing, each con- YOUNG: As the economy improves and the competi- tributing 50% of the total investment. In connection tiveness of the banking industry continues to intensi- with the government’s targets, the national banks – fy, local banks will improve their systems and be able including the state banks – will support the develop- to offer closely competitive services and products with ment of infrastructure improvement programmes those of foreign banks. Therefore, it is quite possible through lending (both syndicated as well as individu- that locals may begin to move their business to local ally) to major projects. State-owned banks represent financial institutions. Moving forward, a core group of three of the four largest banks in Indonesia and if the local and international banks will emerge that will dom- environment from a regulatory point of view is attrac- inate the industry. Local banks are becoming more pro- tive, we would definitely be the major lenders for bank fessional and are better managed. Today’s trends indi- loans and through syndications for project finance. For cate that in numerous instances local institutions are power generation, development is being driven by the taking talent away from foreign banks, where the dra- presence of government programmes focused on matic increase in salary levels has become the main expansion of new facilities along with a shift of ener- source of employment attractiveness. gy policy to renewable sources. SETIAATMADJA: Over the past several years the intense YOUNG: Infrastructure financing is purely based on nature of the banking industry has forced domestic market factors. Confidence is key and right now. There banks to improve the quality and sophistication of their is too much risk involved and that is why we are not products and services. Foreign banks may still have a seeing major project financing. Tenders need to be competitive advantage in regards to the depth of their offered beyond the current average of seven years in products, but that gap is rapidly deteriorating and the order to be more attractive. Additionally, the govern- distinction between local and international is eroding. ment needs to develop a more cohesive climate from The international financial crisis did not help the situ- the regulatory point of view, address issues within the ation for foreign banks either. In fact, it exacerbated a
  • 55. BANKING ROUNDTABLE 73 David Fletcher, President Director, Permata Bankgrowing mistrust of foreign banks among the local pop- age their deployment of these loans and apply strongulation. As a result of the improved performance of credit analysis to keep NPLs at manageable levels.domestic financial institutions, it has been easier to FLETCHER: I think it is very important across the coun-recruit talent. It used to be that the best recruits would try, but I would say it is particularly important outsideautomatically take up offers from foreign institutions of Jakarta and in other large cities. It is a sector in whichbefore even considering an offer from a local bank, it is difficult to take a programme lending approach andbut this is not the case anymore. it is a business which requires you to be close to theZAINI: The attractive picture of Indonesia’s national customer as you need to build relationships with them.economy and banking industry has encouraged exist- Therefore, for banks that have historically done that,ing players and newcomers to supply Indonesian cus- have a network and are prepared to invest in their net-tomer demands in term of banking products to run work, it is a very good business. The SME industry willtheir businesses. With our open banking system, it has continue to grow and so will the banks. For Permatabecome vital to maintain high customer loyalty. Domes- we have historic strength in the SME sector and ittic banks have been focusing on offering fee-based prod- remains a major focus for us.ucts and services that are on par with foreign banks. SETIAATMADJA: The SME segment will continue to beThe focus that banks place on improving transaction a major driver of growth within the Indonesian bank-services will be a vital in attracting new customers. ing industry. Foreign banks are less likely to focus their attention in this area, especially in the lower end of theTo what extent will SME lending be a major focus SME business. Success requires an intimate knowledgein terms of growth for the banking industry? of your customers and a much more hands-on approachZAINI: Competition in the banking sector remains tight, – evaluating SMEs through documents such as audit-especially in the retail and SME segments, as many ed financial statements and tax returns. An emphasisfinancial institutions have engaged in these segments therefore must be placed on knowing your client anddue to their strong resistance to the financial crisis, as relationship banking, which provides a competitivewell as attractive margins. Overall, the industry contin- advantage for domestic financial institutions. With theues to be driven by the six largest lenders. During 2011, sector expected to reach between 80 and 100mworking capital loans represented just under half of the accounts within the next five years, combined with thetotal national banking credit. The increase in the num- fact that it achieves higher-than-average netber of SME loans, which reached Rp1035trn ($124.2bn) interest margins, it is an area that banks must focusand which rose 210 basis points compared to 2005, on to fuel their internal growth.implies that SME loans are already – and will continue As a result, the competition to secure new businessto be – a driver of loan growth in the system. Over the has intensified quite dramatically over the past couplelast five-years SME loans have grown on an annually years and this is likely to continue for the foreseeableby 60 basis points more than overall loans. future. Those who can capitalise will be the banks that Though SME credit growth was well ahead of the can provide solutions and products that will help theirnational bank credit expansion of 23% year-on-year, SME customers grow. They have to reach out to the low-credit quality is relatively weaker than that of the over- to-middle-income population. Having an extensiveall industry. In 2011 SME NPLs increased to a level operational branch network will be vital in doing so.above the overall industry NPLs. With the trend of high- Indonesians are becoming more aware of the bene-er SME NPLs it is imperative that banks actively man- fits of innovation, such as increased competitiveness. THE REPORT Indonesia 2012
  • 56. 74 BANKING ANALYSIS The NPL ratio for the sector has dropped over the last few years Managing downside The rate of loan defaults declines as bankers grow more cautious The local banking sector has undergone many shouldering the burden of the extra operating improvements since the 1997-98 Asian financial cri- expense. Bank Negara Indonesia (BNI), for example, sis. Risks are now being more carefully managed at wrote off 0.4% of its total loan portfolio during the the regulatory and individual bank levels, with strong first half of 2011, while also auctioning off the col- incentives to manage credit portfolio losses. Perhaps lateral of some bad debtors. This brought the bank’s as a result of these changes, the ratio of non-per- gross NPL ratio down from 4.27% at the end of 2010 forming loans (NPLs) has declined over the last few to 3.64% in June 2011. years, although banks with high exposure to small The sector has also improved its asset recovery lev- business loans have continued to face higher ratios. el, with the recovery ratio against write-offs rising LONG-TERM TREND: Data from Bank Indonesia (BI) from 21% in 2008 to 37% in 2010. Another sign of released in September 2011 showed that overall, the improving risk management was a rise in the sec- NPL ratio for the banking sector had declined from tor-wide pre-provision operating profit ratio, which 2.98% in June 2010 to 2.74% in June 2011. This drop increased from 0.7 in 2008 to 3 in 2010. is part of a longer-term trend, with BI figures show- SMALL BUSINESS LOANS: Banks have also taken a ing a general decline in the NPL ratio over the last tougher view on loan applications, to keep new NPLs five years, from 6.07% at the end of 2006, to 4.07% from adding to the burden. This is largely coming at a year later, then 3.2% in 2008 and 3.31% in 2009. the expense of loans to the micro, small and medi- The big achievers in the 2010-11 period were the um-sized enterprise (MSME) segment, where the foreign banks, whose average NPL ratio fell 217 basis NPL ratio is higher than the sector average. points for the year ending June 2011, to 3.1%, while Indeed, BI figures show the MSME segment had joint venture banks saw this ratio fall by 60 basis an average NPL of 2.87% as of June 2011. The NPL points to 2.34%. This figure for private foreign ratio for this segment was highest at the joint ven- exchange commercial banks declined by 43 basis ture and foreign-owned banks, at 3.63%, followed by points to a ratio of 2.35%, year-on-year, and private state lenders, at 3.59%. Regional development banks non-foreign exchange banks saw a 29 basis point meanwhile recorded a NPL ratio of 2.2% for the drop to 2.29% for the same period. MSME segment, while this figure reached 2.4% for POSSIBLE REASONS: Behind these encouraging foreign exchange commercial banks. At rural banks, results lies a combination of new bank strategies and which focus on loans to MSMEs, the overall NPL ratio the general economic climate. With GDP growth amounted to 6.21% as of June 2011. exceeding 6% for 2010 and like to do so again in 2011, Behind this poor performance are a variety of fac- per capita incomes are rising and business revenues tors, from fraud to natural disasters. The higher NPL are expanding. Unemployment during the final ratio for MSMEs has also played into higher inter- months of 2011 was also at a 10-year low, at 6.3%, est rates for this type of loan. BI has been urging banksAs of June 2011, the NPL meaning that more Indonesians are in a position to to cut these rates by reducing overheads, via meth-ratio for the banking sector repay their outstanding debts. At the same time, BI ods such as sharing infrastructure with other banksstood at 2.74%, down from has maintained a relatively stable interest rate dur- and taking advantage of a regional credit guaran-2.98% in June 2010. Foreign ing the year, keeping debt servicing costs down. tee programme. Meanwhile, the decline in overallbanks experienced thegreatest decline, falling At the same time, some lenders have restructured NPLs has freed up resources to place into more pro-by 217 basis points their NPL portfolios. Many banks, including those that ductive areas. The result has been a healthier sys-over this period. are owned by the state, have been writing off NPLs, tem, further underpinning recent economic growth.
  • 57. 75Capital MarketsIDX Composite Index reaches an all-time highSovereign debt raised to investment gradeNew measures to strengthen the regulatory frameworkIndonesian bonds a significant attraction for investors
  • 58. 76 CAPITAL MARKETS OVERVIEW The sovereign debt rating was raised to investment grade in 2011 New heights The IDX rallies while the regulator works to increase options for investors and boost transparencyThe IDX’s development Since the global financial crisis hit in late 2007, port- came up with some ambitious targets in 2009, whichtargets for 2012 include folio investors worldwide have cast a wider net, look- included boosting market capitalisation by 50%;raising market ing for capital gains in a world where economic increasing the non-bank financial institutions’ sharecapitalisation by 50% anddoubling the number of growth is far from certain. In their search for mar- of total financial sector assets to 25-28% by 2012;individual holders of kets that have shown resilience, many have turned and doubling the number of individual holders ofequities and bonds. to the countries of South-east Asia. market securities, equities and government bonds, Although in the past, a crisis elsewhere could hurt including through mutual funds. the region’s export-dependent economies, these The ADB has also worked alongside the IDX and countries are increasingly trading with each other the Capital Market and Financial Institution Super- and are less reliant on Europeans and Americans to visory Agency (known by its Indonesian acronym, buy their cars, televisions, computers and other Bapepam) to develop the 2010-14 master plan, which goods. Asian consumers can increasingly afford these identifies multiple reforms and capacity-boosting products, and in no country in the ASEAN trading bloc plans, sorting them into five main goals, each with are there more of these newly middle-class con- several strategies for realisation (see analysis). sumers than in Indonesia. STATUS UPGRADE: While the institutional and reg- The consumer demand narrative has pushed stocks ulatory changes that are being developed and car- in Indonesia to new heights. At this point many have ried out are important, the most high-profile event noted that the market’s valuations seem a little high, for the capital markets in 2011 was the ratings and a drop in value would be no surprise. Beyond upgrade for the country. Global ratings agency Fitch short-term performance, however, it appears that raised Indonesia’s sovereign debt to investment Indonesia now has a chance to strengthen its capi- grade in December 2011. Moody’s and Standard & tal markets’ offerings, by broadening the options Poor’s, which currently rate the country’s sovereign available, fostering a bigger roster of investors and bonds one notch below investment grade, are expect- smoothing operations at the country’s exchanges. ed to follow suit in 2012, particularly since their cur- AIMING HIGHER: Both in terms of size (as meas- rent ratings are accompanied by positive outlooks. ured by equity market capitalisation as a percent- Receiving investment grade could have a profound age of GDP) and liquidity, the Indonesia Stock effect on the Indonesian economy in 2012 and Exchange (IDX) has lagged the development of oth- beyond. The upgrade has underscored positive er markets in the region. Increasing activity on the investor sentiment and provided a reason for the country’s capital markets could bring substantial stock market rally to continue. An extended rally benefits, not least by providing domestic compa- would make Indonesia more than just the flavour of nies with access to alternative sources of finance to the month among emerging markets followers in supplement the banking sector. New York, London or Hong Kong; it would keep the For this reason, the IDX has turned to the Asian country at the forefront of those investors’ minds Development Bank (ADB) to create a plan for mar- for long enough to make the argument that Indone- ket development. The goal is to attain more liquid sia should be counted among the BRIC countries of capital markets, improve market supervision, and Brazil, Russia, India and China, as the largest and increase the resources and capacity of the regula- most important developing economies in the world. tors, with the aim of providing greater investor pro- With the fourth-biggest population, investment- tection. Working together, the two organisations grade debt and, if all goes according to plan, an
  • 59. CAPITAL MARKETS OVERVIEW 77infrastructure building surge, the case could cer-tainly be made. Merely having a debate aboutwhether or not Indonesia belongs in the same cat-egory as the BRIC countries is itself a good sign forthe nation’s capital markets.SIZE & SCOPE: Capital markets activity began a cen-tury ago in Indonesia, established when Jakarta wasknown as Batavia and the Dutch were the rulingpower. Trading stopped several times during the Firstand Second World Wars and during the transitionto independence. The market reopened in 1951 butwas largely inactive until 1977. Activity picked up in1989, when a second bourse was established inSurabaya, a port city at the eastern end of Java thatis now the second-largest in the country. Thisexchange focused on bonds and derivatives. Thetwo were merged in 2007. The resulting exchange, now called the IDX, is stillconsidered shallow and small for a country its size.The bourse hosts the trading of 423 equities and 719 The IDX aims to boost market capitalisation by 50% by 2012bonds and sukuks, a type of hybrid security that issharia-compliant. The list of the biggest and blue- ical barrier of 4000 points. After surging close to 4200 After hitting an historicchip stocks is dominated by commodity, financial points later in the month, the market has cooled high of 3786.097 points on December 9, 2010, the IDXand manufacturing firms, along with a telecommu- somewhat, and as of late September was trading Composite Index surged tonications company, a familiar mix in many resource- around the 3900-point level. 4200 points in July 2011,rich countries. There are 128 licensed brokers. The top stocks are a list dominated by financial before falling slightly later Market capitalisation surged in 2010 to services, energy, commodities and manufacturing in the year. It was tradingRp3247.1trn ($389.7bn), up 62.1% from Rp2019.4trn companies. Three banks are among the top-10 largest around 3900 points as of late September 2011.($242.3bn) in 2009. This figure increased slightly in shares by market capitalisation, including Bankthe first half of the year, ending the second quarter Mandiri, the country’s largest lender; Bank Rakyatat Rp3498.1trn ($419.8bn). As of the end of Sep- Indonesia, another sector leader with strength intember 2011, market capitalisation stood at microfinance; and Bank Central Asia, which is theRp3210.8trn ($385.3bn). The average daily value of largest privately owned lender in the country.stocks traded saw a major gain in 2010 – an aver- While the exact number fluctuates daily, overallage of Rp4.8trn ($576m) changed hands daily, against approximately two-thirds of free-floating shares onRp4.05trn ($486m) in 2009. By the third quarter of the IDX are owned by foreigners. This reflects not2011, this figure had risen to Rp5.9trn ($703.8m). only the international view of Indonesia as a majorDEBT: Growth in the bond market is the responsi- economic force in the future, but also a relative lackbility of the Government Debt Management Office, of sophistication on the part of Indonesian investors.whose brief includes fostering a deeper and wider Indeed, the majority of citizens are too poor to par-bond market, both primary and secondary, and pro- ticipate in the stock market, but for the millions ofmoting domestic participation in order to lessen the Indonesians moving into the middle class – the peo-country’s reliance on foreign investment. ple whose daily consumption habits and economic Sovereign debt has been issued on a regular basissince 2002 after a hiatus caused by the Asian finan- IDX performance, 2011*cial crisis several years earlier. Debt denominated in Closing valueforeign currency was at about 15% of the total out- 4200 *Frst trading day of the monthstanding as of late summer 2011. Contributing tothis, a dollar-denominated sale in January 2010 raised 4100$2bn in 10-year debt, with an annual interest rate 4000of 5.875% – about 2.3% higher than the yield at thetime for US Treasury bills, the standard against which 3900bond prices worldwide are measured. Corporate debt 3800issuers are more likely to tap international marketsif they are qualified to do so, as typically the cost of 3700 SOURCE: IDXissuing and the yields are lower (see analysis). 3600A MARKET HIGH: The benchmark stock index is theIDX Composite Index. The measure hit an historic high 3500on December 9, 2010, reaching 3786.097, a notable 3400moment for Indonesia’s post-crisis development. It Jan. 11 Feb. 11 Mar. 11 Apr. 11 May 11 June 11 July 11 Aug. 11 Sept. 11pushed on and in July 2011 it passed the psycholog- THE REPORT Indonesia 2012
  • 60. 78 CAPITAL MARKETS OVERVIEWThe IDX is looking at ways outlooks form the global investment backbone for clients that we have. Maintaining and developingto address the current Indonesia – the market’s leaders say it is time to relationships with commercial banks will be a key fac-shortage of institutional start paying closer attention. tor in order to further penetrate those markets,”investors, which canprovide stability and add To this end, the IDX has been building capital mar- LACK OF INSTITUTIONAL INVESTORS: What is miss-depth to the bond market. ket information centres across the archipelago, which ing in the community of domestic investors is a are facilities aimed at introducing the concept of strong institutional presence. Indonesia has pension stock market investing to a wider portion of the pop- funds, asset managers, mutual funds and insurance ulation. This move has could also help coax brokers companies, but these investors are not playing the to move beyond Java when looking for customers. role they commonly do in developed capital markets. In each centre two brokers are promoted to poten- Typically these actors are the biggest shareholders tial clients, and the brokers that send representa- in any market, and often are a source of price sta- tives receive financial assistance from the IDX to bility. They buy and hold large blocks of shares, and help defray the costs of travel and recruitment. as they are conservative by nature, aiming for cap- As Michael Tjoajadi, the president director at ital preservation before capital gains, they tend Schroder Investment Management Indonesia, the to gravitate toward the blue-chip stocks. They are country’s largest mutual fund, told OBG, “Educating unlikely to trade frequently, or based on rumours or the public about the types of investment instru- emotional reactions as individuals and day traders ments available will be vital to the growth of the asset sometimes do. This approach is good for the coun- management industry. Second-tier cities will be the try’s future pensioners and insurance claimants, as focus for companies like us as we attempt grow our they have the security that the capital they may domestic market by increasing the number of retail want to access will be deployed more deliberately. ADDED LIQUIDITY Despite its current status as one of global grade by Moody’s and Standard & Poor’s, but these investors’ market darlings, Indonesia’s capital two agencies are widely expected to follow suit and markets still require development. One of the award an upgrade in 2012. important current issues is a lack of liquidity – In terms of aiding the market, the increased rat- the market term describing the ease of buying ing will draw attention and additional investors, as and selling securities without dramatically influ- the positive sentiment reinforces Indonesia’s current encing their prices in the process. Liquidity pro- investment thesis that consumer-driven growth will vides investors the comfort they need to focus keep the economy growing at a high rate. The rat- on macroeconomics and company outlooks. ings upgrade could also provide a significant boost Offering a liquid market means, in most cas- to liquidity for the market because it could create a es, volume: a long list of stocks and bonds to trade sudden increase in the number of potential buyers in, enough investors to ensure that whether for of government bonds. Mutual funds and other struc- small shares or large blocks, buyers and sellers tured investment vehicles have rules for investing, that can easily find each other, and institution- and in many cases these rules stipulate that any al investors to hold large blocks of shares in the bonds must be rated investment grade. market’s safer bets, to add price stability. That might not be enough for Indonesian funds. Indonesia is working on a host of reforms that Many of the country’s big institutional investors, could help boost liquidity, such as encouraging such as its pension funds and insurance companies, companies to sell shares on the market and often require bonds at an A rating or above, which increase their corporate bond offerings (see is two notches higher. It would take a regulatory overview). One significant event that took place change in some cases to allow funds to buy bonds in 2011 was the classification of its sovereign rated lower than A, but even still, bonds have com- debt as investment grade by Fitch, the global petition from the high-yield, short-term time deposits ratings agency. In its announcement, Fitch said that banks have on offer. This has unwanted effects that it was raising the rating from BB+ to BBB-, for the bond market. “That constrains the develop- citing steady economic growth, declining debt ment of the capital market,’’ Katoppo said. “The banks and general macroeconomic stability. offer much more attractive and flexible debt alter- An upgrade was widely expected. Indeed, in natives. If the relevant regulators are willing to reduce mid-2011, Baradita Katoppo, Fitch’s country direc- the investment threshold from A to BBB, that would tor for Indonesia, told OBG that his agency’s really help develop the local bond market.’’ upgrading of the outlook for Indonesia to posi- Before the ratings agencies provide the upgrade,The sovereign bond ratings tive in February 2011 signalled that a review they are looking for reassurance on a few key issuesupgrade could boost and potential upgrade were likely within 12 termed Indonesia’s structural weaknesses, suchmarket liquidity by creatingan increase in the number to 18 months. The country’s government bonds as its infrastructure bottlenecks, concerns aboutof potential buyers of are currently rated one notch below investment inflation, foreign-investor sentiment and corruption.government debt.
  • 61. CAPITAL MARKETS OVERVIEW 79 For the markets in general, the benefit is a checkagainst volatility from price swings and sentiment-based trading. It is a particularly important role onexchanges that do not use a market-maker system,in which brokers are assigned stocks that they arerequired to “make a market” in, meaning they muststep in to buy or sell when bids and offers do notline up – another way to tamp down volatility. Insti-tutional investors can also play an important role inbuilding a bond market, as their large pools of cashand conservative orientation make them a naturalfit to buy big stakes in bonds. However, Indonesia lacks the market dynamicsand legal framework to enlist these market partici-pants in this way. Pension funds are not organised.There are few incentive schemes to encourageIndonesians to put savings into funds, which can bean important tool in an immature economy to buildliquidity for an exchange, as well as to encourage sav-ings and investment. IDX officials have said they are Top stocks include financial services, energy and manufacturing firmsworking on reforms to leverage the potential pow-er of institutional investors, which would likely require stake in an IPO worth $40m is not enough to make Though most initial publiclegal changes in addition to regulatory ones. an impact in a fund’s performance, even for the offerings are small in size – their share sales are worthINITIAL PUBLIC OFFERINGS: Indonesia suffers no smaller funds, which might have $50m to $200m in around $30m-40m – manyshortage of initial public offerings (IPOs) – a listing assets under management. listings take place. A totalconfers prestige and is a path to a lower cost of In the country’s small but growing bond market, of 23 new stocks werefunds elsewhere, whether from bonds or increased secondary trading is not the focus, although some floated in 2010.access to foreign-currency debt markets. A total of activity goes through the IDX. In some cases, sec-23 new stocks hit the market in 2010, according to ondary trading in the most active issues is restrict-the IDX. Many state-owned firms have also floated ed, such as the short-term instruments called SBIs,a minority stake on the exchange, and in the past which are the Indonesian equivalent of a US Treas-these companies have been seen as a potential ury bill. These are often the vehicle of choice forsource of new listings – there are about 20 listed investors looking to make short-term bets on the rupi-now, but more than 100 of these companies in total. ah and the overall Indonesian economy without hav- Still, most IPOs are small, with sales worth about ing to trade currencies. Because there is so much$30m-40m. Companies are selling just a small por- activity, and as Indonesia’s history has taught itstion of their equity – often about 20% of the total. economic players to fear heavy inflows and outflowsLarger share sales are associated with a potential of hot money from foreign investors, SBIs andloss of corporate control. For now, most share buy- other short-term instruments come with a manda-ers for IPOs are coming from abroad, including emerg- tory hold period before they can be traded. In theing-market funds. Because these deals are small, a case of SBIs, that period is one month (see analysis).
  • 62. 80 CAPITAL MARKETS OVERVIEW in October 2011, the IMF said that transitioning to IFRS is a “positive move” for the development of the coun- try’s capital markets and could diversify funding sources. Bapepam has also issued a regulation that will require every investor who trades Indonesian securities via a local broker to acquire a Single Investor Identification (SID). This identity will then be used for the trading process in the stock exchange, from the order entry through to settlement. The SID is expected to facil- itate monitoring of the market by Bapepam and reduce the possibility of market manipulation. Investors must comply with the new rule, which was issued in December 2010, by February 2012. As of late 2011, about 80-85% of investors had a SID, according to Nurhaida, the chairman of Bapepam. DERIVATIVES: As part of its ongoing development efforts, the IDX and others in the capital markets sec- tor are promoting derivatives trading. Options are limited at this point, as is investor appetite for them. Derivatives are commonly misunderstood as com- Two derivatives exchanges have been set up recently plex tools for speculation and are sometimes asso-Bapepam, the capital REGULATION: The market regulator, Bapepam, was ciated with the global financial regulator, is established in 1976 as part of a larger effort at the However, concepts such as hedging on commodi-working to adopt best time to revive the country’s dormant capital mar- ties prices and currency values are a natural needpractices and introducenew rules that could kets. It has been working in recent years to adopt for many Indonesian firms, and many companiesreduce market global best practices and implement reforms to boost have shown that they understand this. Large crudemanipulation. the role of capital markets in the country. palm oil businesses, for example, often dispatch a For example, Bapepam has been pushing for trader to Kuala Lumpur to manage a hedging strat- Indonesian accounting standards to converge with egy for palm oil futures on its bourse, Bursa Malaysia. international financial reporting standards (IFRS). This Two derivatives exchanges have set up in Indone- could strengthen investor confidence by ensuring sia in recent years, the Jakarta Futures Exchange that listed companies make high-quality financial (JFX) and the Indonesia Commodity and Derivatives information available to potential investors. Exchange (ICDX), perhaps in response to demand Officials from the regulatory agency have publicly stat- from Indonesian companies for more local hedging ed that both listed and unlisted businesses will be options. The JFX was established in 1999, but trad- required to fully implement IFRS in their financial reports ing only began in 2011, as the exchange – which at by January 2012. Companies that are publicly traded present operates as non-profit organisation – did not and fail to comply with the new standards will be either get the financial and technical support that it had fined or will face administrative sanctions. In its most hoped for. Trading is limited, with just two contracts recent Article IV staff report for Indonesia, published available, but the plan is to introduce them for com- modities such as cocoa, rubber and plywood, and then IPOs, 2011 expand further into finance-based derivatives. The Code Name Listing date Shares (m) Listing board exchange’s five-year aim is to demutualise, incorpo- SUPR Solusi Tunas Pratama 11-Oct-11 600 Pengembangan rate and sell shares on the IDX. SMRU SMR Utama 10-Oct-11 1500 Pengembangan One of the challenges has been overcoming inac- STAR Star Petrochem 13-Jul-11 4800 Utama curate perceptions about derivatives, said Arifin ALDO Alkindo Naratama 12-Jul-11 550 Pengembangan Lumban Gaol, the JFX’s president. “There is a per- PTIS Indo Straits 12-Jul-11 550 Utama ception issue that has to be overcome in regards to SDMU Sidomulyo Selaras 12-Jul-11 901 Pengembangan hedging products. They are often viewed as gambling, TIFA Tifa Finance 8-Jul-11 1080 Pengembangan when in fact they offer companies an opportunity MTLA Metropolitan Land 20-Jun-11 7579 Utama to mitigate their risk in the event that major swings SIMP Salim Ivomas Pratama 9-Jun-11 15,816 Utama in commodity prices should occur.” JAWA Jaya Agra Wattie 30-May-11 3775 Utama The JFX is in direct competition with the ICDX, BULL Buana Listya Tama 23-May-11 17,650 Utama which was licensed in 2009 and has 12 founding HDFA HD Finance 10-May-11 1540 Utama shareholders, each of which hold an 8.33% stake in SRAJ Sejahteraraya Anugrahjaya 11-Apr-11 5535 Utama the bourse. Owners include physical commodity busi- MBSS Mitrabahtera Segara Sejati 6-Apr-11 1750 Utama nesses, futures brokerage houses and strategic tech- GIAA Garuda Indonesia (Persero) 11-Feb-11 22,640 Utama nology providers. The ICDX market is in many respects MBTO Martina Berto 13-Jan-11 1070 Pengembangan similar to that of the JFX. Because Indonesia is a commodity-rich country, and is affected by com- SOURCE: IDX modity futures trading, it would like to host most of
  • 63. CAPITAL MARKETS OVERVIEW 81the trading within the region, meaning contracts forindigenous resources such as crude palm oil, tin, IDX equity trading, volume & value, 2011*coal, natural gas, cocoa and coffee. The ICDX would Volume (bn) Value (Rp trn)not aim to compete with giant global commodity January 4.37 4.97exchanges, but instead to provide the main outlet February 2.99 4.85for these deals within the South-east Asian region. March 3.07 3.71REGIONAL ROLES: The big attraction is crude palm April 3.04 4.51oil futures. Indonesia is the world’s biggest produc- May 5.06 3.82er of crude palm oil, and companies with exposure June 12.56 4.56to the fluctuating price of the commodity general- July 5.05 6.5ly hedge that risk with futures contracts. But Bursa August 5.13 5.66Malaysia has become the market with the most activ- September 3.15 5.9ity in palm futures, and several large-scale Indone- SOURCE: IDX *First trading day of the monthsian traders do their buying and selling there. The ICDX’s main task is a head-to-head competi- bility. The momentum is in the right direction, and it As the biggest producer oftion with the neighbouring exchange. The benefit will be the job of the government, regulators and crude palm oil in the world,to Indonesia would be less currency risk and increased market executives to, at the very least, stay out of futures for this commodity are very attractive. Thetransparency on prices. “It is a natural selection for the path of progress. A mature capital market will Indonesia Commodity andIndonesian companies, who are already trading in come about faster if they are able to play a construc- Derivatives Exchange isMalaysia, to repatriate themselves because their tive role, pushing for reforms, new participants and looking to challenge Bursacontracts are in rupiah,’’ said Megain Widjaja, the CEO transparency, all of which would help the market to Malaysia as the marketof the ICDX. “Therefore, they will want to avoid addi- cope with a potential influx of interest. with most activity in palm futures.tional risk as a result of being exposed to currency If Indonesia can overcome the familiar public sec-fluctuations.” The ICDX is not regulated by Bapepam tor challenges, the country’s sovereign debt ratingsbut by the Commodities Futures Trading Agency. upgrade and plans for an infrastructure expansionOUTLOOK: No matter whether the stock market ral- programme in the coming years are almost certainly tails off in 2012 or if it continues to be foreign to attract more investors to the capital markets –investors who comprise the bulk of activity, Indone- selling bonds to build roads, establishing invest-sia’s capital markets are increasing in size and visi- ment funds, and hedging on currency and other risks.
  • 64. 82 CAPITAL MARKETS ANALYSIS The regulator’s plan will guide the development of financial platforms Clear targets A stronger regulatory framework will promote a stable financial system The country’s regulator for the capital markets, concert with the Asian Development Bank (ADB), Bapepam, has developed and carried out a series of which provided technical assistance. The ADB will also master plans that will guide and pace the develop- provide support in implementing the programme. ment of the Indonesia Stock Exchange (IDX) and MEETING OBJECTIVES: To meet the first target, the other local financial platforms. The current master plan outlines reduced constraints, with programmes plan, which was introduced in October 2010 and that will simplify the listing process, streamline report- addresses 2010-14 period, begins with a reflection ing requirements and make electronic reporting eas- on the financial crisis and how it has served as a ier. Other strategies include increasing public access reminder of the importance of market regulation and to finance and guarantee companies and boosting supervision. “The first line of defence in preventing professionalism among financial-services firms. instability in the financial system is to have sound To reach the goal of a conducive investment cli- regulations and strong law enforcements,’’ accord- mate with reliable risk management, the plan ing to the executive summary of the master plan. It describes 22 programmes that are divided into six continues, “Recent events have clearly demonstrat- strategies. Highlights include amendments to laws ed that weaknesses in regulations and supervision on pension funds to make these schemes more pop- of the global financial system fuelled the current ular, using insurance products to promote financial crisis. Strengthening the regulatory framework and planning, having microfinance encourage the pur- improving the micro- and macro-prudential regula- chase of insurance policies, facilitating more hedg- tions are essential in order to promote a financial ing opportunities, introducing more products for system that is sound, stable and resilient.’’ small and medium-sized enterprises, developing CREDIBILITY ISSUES: Although Indonesia’s capital sharia-compliant alternatives, establishing an markets have largely shaken off any of the negative investor protection fund and fostering more trad- impacts of the financial crisis, it is also clear that ing volume in the secondary market for bonds. domestic factors, such as allegations of market For stability, resilience and liquidity, planned pro- manipulation in the case of the 2010 initial public grammes include clarifying corporate governance offering of Krakatau Steel, can also have an impact guidelines, pushing risk management and crisis on the credibility of capital markets. Regardless of preparation plans and developing a deeper pool of whether these types of allegations are true or com- supervision-related financial professionals. That mon, they can hurt the long-term aim of a wider, means support for accountancy and ratings firms, deeper, more mature capital market. which are crucial to healthy market performance. To overcome these issues and meet its targets, Under the category of fairness, transparency, legalThe capital markets master Bapepam’s master plan outlines five main objec- certainty and regulations, the first strategy is toplan aims to establish aneasily accessible, efficient tives: a capital market that is an easily accessible, effi- improve enforcement. Bapepam plans to seek legaland competitive source of cient and competitive source of funds; one that reforms that will give it more authority to investi-funds that has an attractive offers a conducive and attractive investment cli- gate problems and access information, as well as toinvestment climate marked mate as well as reliable risk management; stability, increase penalties for non-compliance. For the fifthby stability and liquidity, as resilience and liquidity; a fair and transparent regu- and final objective – infrastructure that is credible,well as a transparentregulatory framework and latory framework that guarantees legal certainty; reliable and meets international standards – thecredible and reliable and infrastructure that is credible, reliable and to plan includes improving the trading platform,infrastructure. international standards. The plan was developed in settlement and clearing systems, and data access.
  • 65. CAPITAL MARKETS INTERVIEW 83 Nurhaida, Chairman, BapepamMarket prioritiesOBG talks to Nurhaida, Chairman, BapepamWhat priorities are outlined in the 2010-14 master the keys to increasing domestic involvement. Howev-plan to help Indonesia sustain development? er, this does not mean we do not care about the par-NURHAIDA: Our five-year plan gives us the opportu- ticipation of foreign investors in our capital market –nity to embark on long-term strategies and ambitious indeed, they are critical to our success. Fortunately,projects. We have identified five major goals as part of now that all the fundamentals of our economy are pos-our capital market blueprint. One of the main priori- itive, we are very much at the forefront of the interna-ties is to see straight-through processing implement- tional investment community. To meet the demand ofed as one of our business process reforms in the Indone- foreign investors in the future we will encourage thesian capital market by the end of 2011. development of derivative products. These products, We would like to see all systems integrated into this given the right conditions, will grow naturally in con-technology, along with Single Investor Identity (SID). The junction with our capital market.implementation of SID will give us access to Know YourCustomer (KYC) forms and will avoid market manipu- Should investment move from the capital marketlation by providing a single identity for every transac- to the real sector and infrastructure development?tion done by investors. We are also looking at options NURHAIDA: Despite what many people have said, theto increase our monitoring capacity through the devel- capital market does contribute to the real sector. Inopment of a data warehouse. Every individual and cor- early December 2011 Indonesian-listed companiesporation would have its information registered in this raised a record $2.45bn through initial public offeringsdata warehouse, allowing us to better monitor the of equity and bonds, and much of this will be allocat-operations by having every player in the market linked ed to, among others, capital expenditure in 2012. Thisunder the same platform. This not only contributes to benefits both the country and the real economy. Inour ability to monitor the market, but also helps to more developed countries the role of the capital mar-avoid manipulations, which will remain one of our main ket – as compared to the banking sector – tends to bechallenges over the next few years. Furthermore, as of more balanced. We must therefore protect and devel-February 2012, SID implementation – as provisioned op our capital market as it is a crucial instrument toin our regulations – will require investors to operate sustain and even boost economic growth.under an SID to make transactions in capital markets. In what ways do you intend to improve and enforceHow can the capital market be further expanded reporting standards in the market?and the sophistication of its products increased? NURHAIDA: Starting in January 2012, all listed com-NURHAIDA: First of all, we should increase the num- panies will be required to fully implement Indonesia-ber of domestic investors and find an optimal balance based international financial reporting standards (IFRS).with foreign investors. Our data shows the volume of Under the new regulation, the periodic financial reporttransactions done by domestic investors until the end will be a complete report consisting of a balance sheet,of November 2011 reached approximately 82% of the a comprehensive income statement, an equity changetotal volume, while foreign investors accounted for the report, a cash flow statement, notes of financial state-remaining 18%. This is healthy, but we still see room for ments and a financial position report on the initial com-more domestic investors to enter the capital market. parative period. In the last two years we have adaptedEnhancing communications infrastructure and poten- over 30 IFRS and we expect the national accountingtial domestic investor awareness on capital markets are standards to be 95% compliant with the IFRS by 2012. THE REPORT Indonesia 2012
  • 66. CAPITAL MARKETS ANALYSIS 85 Foreigners owned 34% of government bonds as of March 2011In the mixInvestor appetite for Indonesian bonds continuesAt the forefront of a regional wave of bond sales in mature in three months, are used as an instrument2010, Indonesia continued to enjoy a similar trend for speculation on the rupiah. To reduce this kind ofin 2011, with several major sales during the year. activity, in July 2010 the government required thatMoreover, Indonesia’s sovereign debt rating was SBIs be held for at least a month by the primary buy-increased to investment grade in December 2011, er and then in November 2010 took a further stepwhich could lower the cost of funds. That should be of temporarily ceasing sales. As of the summer ofthe catalyst needed to deepen markets for primary 2011 a plan was under consideration to replace SBIscorporate debt sales, secondary trading and sub- with a nine-month note and perhaps to require a min-regional government issuances. imum holding period of six months.STRONG DEMAND: While in the past there have INVESTMENT GRADE: Perhaps the biggest poten-been concerns about an oversupply of Indonesian tial boost to the market in 2012 will be the effectbonds, by late 2011 it appeared that investor sen- of the credit ratings upgrade by Fitch in Decembertiment toward them had not cooled. One of the main 2011. Fitch had already boosted its outlook ondebt sales in 2011 was a 10-year sovereign bond in Indonesia’s long-term sovereign bonds to positive inUS dollars sold in late April. The goal was to sell February 2011, which in the regimented nomencla-$2.5bn in new debt, and $6.9bn in offers were field- ture of ratings, signalled that a review within 12 toed at a 5.1% yield – a premium of 1.74% or 174 basis 18 months was likely. Indeed, according to Baraditapoints over the yield for US Treasuries, which serve Katoppo, Fitch’s country director for Indonesia, theas a benchmark for the bonds of other countries. market could have already factored in an upgrade.The government had previously gone to the dollar- “Government bonds are trading as if they are invest-denominated bond market in January 2010, when it ment grade already,’’ Katoppo said in mid-2011.sold $2bn in 10-year bonds for 5.875%, or 227.9 Although in the case of many emerging markets,basis points above US Treasuries. The relatively low- receiving investment grade means attracting moreer yield for the April 2011 bond was considered a foreign interest, in the case of Indonesia the impactvote of confidence for Indonesia. The external fac- is instead likely to come from domestic investors. For-tors influencing that difference make the compari- eigners are already invested in the market, althoughson somewhat difficult to make, however. additional interest could come from mutual fundsFOREIGN OWNERSHIP: Foreigners owned 34% of and other vehicles whose rules for investing preventoutstanding Indonesian government bonds as of the the purchase of sub-investment-grade debt.end of March 2011 – a higher proportion than any- In addition, there are plenty of domestic fundswhere else in South-east Asia, and up from 30.5% at that operate by the same rules. Pension funds, insur-the end of 2010. The next-largest concentrations ance companies and other large-scale institutionalwere in Malaysia, at 22%, and South Korea’s 10%. investors have, relative to those in other countries, Those figures pale in comparison to the figure for shied away from the domestic bond market. Indeed,US bonds, which are usually about 50% owned by for- Katoppo told OBG that many want at least an A rat- In April 2011 theeigners, but foreign ownership remains a concern ing on a bond before they invest. Should these government sold $2.5bn of 10-year dollar-in Indonesia, where flows of “hot money” have had investors decide to participate in Indonesia’s bond denominated bonds at aa destabilising effect in the past. In recent years, market in a more meaningful way, the result could yield of 5.1%. Bids totalledinvestors have flocked to short-term bonds known be a needed deepening of the country’s capital mar- nearly three times theas SBIs, the equivalent to a US Treasury bill. SBIs, which kets as well as increased ease of buying and selling. amount offered. THE REPORT Indonesia 2012
  • 67. CAPITAL MARKETS SHARE ANALYSIS 87 Share analysis & data provided by Bank Negara Indonesia Aneka Tambang price & index relative performance Aneka Tambang market ratios JCI code: ANTM PERFORMANCE Data as of September 2011 4400 Index Price 2750 Price (Rp) 1500 4200 2525 12M high (Rp) 1970 4000 2300 12M low (Rp) 1400 3800 2075 Market cap (Rp m) 14.31 MARKET RATIOS 3600 1850 1M 3M 12M 3400 1625 Avg daily price (Rp) 2236.76 2445.34 2220.99 3200 1400 Avg daily vol (Rp m) 34.5 32.62 18.48 Sept-10 Jan-11 Jun-11 Oct-11Aneka TambangMining & metalsTHE COMPANY: Aneka Tambang (ANTM) is a vertical- from 20.9% to 23.6%. Meanwhile, the firm’s net profitly integrated, export-oriented, diversified mining and margin rose from 12.2% to 17.4%.metal company in Indonesia. It is a state-owned enter- ANTM has consistently performed well in recentprise in which the government is a majority sharehold- years, due to strong financial results. ANTM is project-er, with 65% of the shares. The remaining 35% shares ed to reach revenues of Rp9.10trn ($1.05bn) in 2011belong to public investors. The company does explo- and Rp13.59trn ($1.58bn) in 2012, based on the pro-ration, exploitation, production and trading for its main jected increase of metals prices due to rising globalmetal products. The company has a mining operation demand. As a respected public company, ANTM aimsspread throughout the Indonesian archipelago. to increase its corporate value through a variety of cor- ANTM produces metal products composed of high- porate strategies. Firstly, the company will focus on thegrade nickel ore, known as saprolite, low-grade nickel increasing value of core commodities and introduceore, also known as limonite, ferronickel, gold, silver and modernisation and optimisation strategies with thebauxite. In addition, the company has precious metal aim of improving its efficiency and productivity. Sec-refining and geological services. As of 2010 ANTM had ondly, ANTM will maintain its solid financial strength byreached revenues of Rp8.70trn ($1.01bn) with total considering the development of coal-fired power plantsequity and total assets of Rp9.58trn ($1.12bn) and to reduce its ferronickel costs. ANTM’s acquisition ofRp12.31trn ($1.44bn), respectively. Revenue contribu- the Sarolangun coal mine, which cost Rp92.5bntions were composed of ferronickel (42.3%), nickel ore ($10.78m), is expected to produce some 700,000 tonnes(27.2%), gold (22%), gold trading (5%), silver (2.2%), sil- of coal in 2011. In addition, ANTM should diversify itsver trading (0.6%), bauxite ore (0.4%), coal (0.3%) and financing sources, such as bilateral loans, bonds andothers precious metals (0.1%) in the same period. Most equities in order to optimise its capital structure.of ANTM’s metals products are exported to Europe and OUTLOOK: ANTM will also maintain its sustainable busi-Asia. As a result, the company’s revenues are sensitive ness growth through a variety of development global commodities prices of metals and coal. As of At the moment, ANTM has a plan that includes five key2010 ANTM recorded mineral and ore resources of projects that should serve to increase its corporate val-371.4m wet metric tonnes of saprolite nickel, 400.3m ue in the long run. These five projects are: the Tayanwet metric tonnes of limonite nickel, 369.5m wet met- Chemical Grade Alumina project, with an estimatedric tonnes of bauxite and 2m ounces of gold. cost of $450m; the Feni Halmahera project, which willDEVELOPMENT STRATEGY: During first quarter of include a power plant and is expected to cost $1.6bn;2011, ANTM recorded improving revenues of Rp1.99trn the modernisation and optimisation of ANTM’s fer-($232.05m) compared to Rp1.66trn ($192.89m) in the ronickel smelters, with the aim of improving efficien-first quarter of 2010. Gross profit rose by 32% year-on- cies, is expected to cost between $450m and $500m;year (y-o-y) to Rp625.86bn ($72.95m) and operating the Mandiodo Nickel Pig Iron (NPI) project, with an esti-profit increased by 36% y-o-y to Rp470.07bn ($54.79m) mated cost of $350m-400m; and the Mempawahon the back of rising ferronickel sales volume and com- Smelter Grade Alumina project, which is expected tomodities prices. As a result, ANTM’s net profit jumped cost around $1bn. ANTM’s continued plan of value cre-by 72% y-o-y to Rp346.56bn ($40.39m) in the same peri- ation through its various development projects willod of comparison. Furthermore, gross margins soared positively impact its stock price appreciation, which infrom 28.7% in the first quarter of 2010 to 31.4% in the turn will benefit its shareholders. Thus, ANTM is con-first quarter of 2011. Operating margins also improved sidered to be a valuable investment for the long term. THE REPORT Indonesia 2012
  • 68. 88 CAPITAL MARKETS SHARE ANALYSIS Share analysis & data provided by Bank Negara Indonesia XL Axiata price & index relative performance XL Axiata market ratios JCI code: EXCL PERFORMANCE Data as of September 2011 4400 Index Price 6850 Price (Rp) 4975 4200 6375 12M high (Rp) 5650 4000 5900 12M low (Rp) 3675 3800 5425 Market cap (Rp m) 42.38 MARKET RATIOS 3600 4950 1M 3M 12M 3400 4475 Avg daily price (Rp) 5313.24 5552.97 5654.87 3200 4000 Avg daily vol (Rp m) 1.93 2.13 1.72 Sept-10 Jan-11 Jun-11 Oct-11 XL Axiata Telecommunications THE COMPANY: The Report: Indonesia 2010 indicat- Moving forward, voice business will continue to ed that XL Axiata’s (EXCL) positive growth in the first become the firm’s major growth driver. With the steady half of 2010 would provide a clear picture of the com- growth of non-voice business, particularly from data pany’s future. On the back of strategic initiatives, EXCL and value-added services, total cellular business could recorded revenue increases in 2010, which helped to potentially record an upside revenue of 11.69% y-o-y improve share values. EXCL’s total revenues for 2011 to Rp16.15trn ($1.98bn). grew 27.1% year-on-year (y-o-y) to Rp17.63trn Historically, non-voice revenue has played an impor- ($2.12bn) compared to 2010. Voice calls contributed tant role in mobile revenue growth. In the past five years 47.95% to total revenue, equalling Rp8.45trn ($1.01bn). non-voice has registered a compound annual growth SMS revenue was 19.71% of EXCL’s total, earning rate (CAGR) of 27.75%, from around Rp2.24trn Rp3.47trn ($416.4m). Promotional tariff plans, tariff ($268.8m) to around Rp5.96trn ($715.2m) by the end optimisation and a number of SMS promotional pro- of 2010. The business segment is seeing excellent grammes helped increase EXCL’s total cellular revenue growth and contributes more to non-voice profit each by 26.47% to Rp16.15trn ($1.94bn). The development year. In 2008 business contributed 27.82% to profits, of social networking applications, such as Facebook rising to 36.94% by 2010. With strong promotions and and other instant messaging services, served to product bundling packages, it is estimated that 2011 increase data revenues by approximately 4.15% y-o-y. will finish stronger than 2010. The business segment DEVELOPMENT STRATEGY: The continued develop- has been projected to potentially record growth of ment of business strategies has allowed EXCL to main- 23.55% y-o-y to Rp6.75trn ($810m). tain its positive growth into 2011. A key contributor OUTLOOK: EXCL’s delivery of promotions, continuing to this has been EXCL’s efforts to maintain market rel- cost-efficiency implementation and network expan- evance. The company launched a programme called sion should contribute to further mobile business XLgo! — a portal for mobile internet access — in 2010. growth in 2011. EXCL’s lower debt-to-equity ratio Data and value-added services increased by 85% y-o- should ease pressure on the company’s interest y to around Rp2.33trn ($279.6m). expense payments. Additionally, EXCL’s strong brand New services have been introduced to attract new equity will help the company maintain its market share customers, as well as retain their existing customers, and increase its revenue and customer base. by providing services such as music downloads. XL Forecasts indicate EXCL should record at least a low Music Live and XL Cuaps are two of the products that double-digit growth by the end of 2011, to Rp19.56trn offer a new mobile internet experience. One of EXCL’s ($2.35bn), in line with the consensus expectation of most popular value-added services is XL RBT, which Rp19.77trn ($2.37bn), with a growing bottom line of won an award from Sony Music in the category for most around 20.16% to Rp3.68trn ($441.6m). With such his- downloaded ringback tones. torical growth — a registered net revenue CAGR of Another popular programme introduced by EXCL 22.99% and a net profit CAGR of 23.03% — it is expect- has been free international roaming for its Blackber- ed that EXCL’s shares will be traded at a premium. With ry services in seven countries, such as Japan, Hong Kong the increasing number of subscriber applications, such and Singapore. This service allows EXCL’s existing Black- as Twitter, online games and ringback tone downloads, berry users to automatically use their devices in the as well as the latest developments in technology that seven destination countries without the interruption drive data consumption demand, the future of EXCL’s of having to make changes to complicated settings. non-voice business and revenue growth looks bright.
  • 69. CAPITAL MARKETS SHARE ANALYSIS 89 Share analysis & data provided by Bank Negara Indonesia Kalbe Farma price & index relative performance Kalbe Farma market ratios JCI code: KLBF PERFORMANCE Data as of September 2011 4400 Index Price 3900 Price (Rp) 3250 4200 3650 12M high (Rp) 3725 4000 3400 12M low (Rp) 2650 3800 3150 Market cap (Rp m) 33.01 MARKET RATIOS 3600 2900 1M 3M 12M 3400 2650 Avg daily price (Rp) 2527.94 2772.46 3181.49 3200 2400 Avg daily vol (Rp m) 20.8 29.03 18.48 Sept-10 Jan-11 Jun-11 Oct-11Kalbe FarmaPharmaceuticalsTHE COMPANY: In line with expectations, Kalbe Far- ed a debt of around Rp1.01trn ($121.2m). Since thatma (KLBF) reported increased earnings in the first half time, however, the KLBF’s total debt has steadily declined.of 2011. Sales grew approximately 5.14% year-on-year Assisted by strong internal cash, KLBF reported its debt(y-o-y) to Rp4.94trn ($592.8m). This figure is equal to had dropped 62.6% by 2006. With such declining debtaround 44.07% of the full-year projection of Rp11.22trn and steady cash equivalent growth, KLBF is well posi-($2.38bn). Pharmaceutical packaging and distribution tioned for the future.remained the major contributor to revenue, making up OUTLOOK: As a result of KLBF’s strong business strat-30.31% of KLBF’s total revenue in the first half of 2011. egy, combined with its rapid product development andPrescription pharmaceuticals followed close behind, consistent acquisitions, it is estimated that the com-contributing around 28.02%, equal to Rp1.38trn pany’s sales could reach Rp11.22trn ($1.35bn) — 1.54%($165.6m). Rounding out the list, nutritionals were above the company’s forecast.22.84 % of total revenue in the same period, and the Additionally, the announcement that KLBF plans toconsumer health division contributed around 18.83%. launch between 10 and 15 new products, the con- The prescription pharmaceuticals division continues struction of three new factories and the news that eth-to maintain its solid performance. In first-half 2011, ical drug sales grew 10% y-o-y, should further supportKLBF’s prescription sales rose by 10.42% y-o-y to the numbers forecasted for KLBF in 2011.Rp1.38trn ($165.6m). On the back of consistent prod- Indonesia’s domestic energy drink association hasuct diversification and further expansion in the com- recently provided a positive outlook on the energy drinking years, KLBF’s prescription division should be able market. It expects the energy drink market to growto preserve its significant contribution to the compa- between 10% and 12% in 2011. This news can onlyny’s total consolidated sales. benefit KLBF’s Extra Joss energy drink, which leads the The consumer health division reported better growth energy drink market with 26% of market the first half of 2011. The division’s revenue grew by Another positive indicator for KLBF, and indeed theapproximately 12.87% y-o-y to Rp931.86bn ($111.8m). sector as a whole, is that due to increased health spend-KLBF’s strong brand equity and its significant market ing in the country, the import of raw materials for phar-share are major contributing factors to the company’s maceuticals production will grow between 12% andcontinued positive growth in the sector. 13%, approximately Rp10.6trn ($1.27bn) — Rp10.7trnDEVELOPMENT STRATEGY: KLBF’s continued inno- ($1.28bn), according to the Pharma Materials Man-vation will also bring additional value. For example, agement Club, a company that contributes to the devel-Fatigon Hydro, an isotonic drink made from coconut opment of Indonesia’s pharmaceuticals industry.water, has been well received in recent years, particu- With such a positive outlook for the industry andlarly within the natural foods market. KLBF’s consumer KLBF’s strong presence in the domestic pharmaceuti-health division has launched several products in the past, cals market, the pharmaceuticals entity is expected toas well as rejuvenated many of its existing products. continue its positive and steady growth in the years toMoving forward, KLBF’s continuous and consistent come. Supported by its plan to strengthen its distribu-product diversification will serve to enrich the compa- tion network coverage and further develop its existingny’s product portfolio, potentially prompt further growth logistics infrastructure, as well as its continued effortsand strengthen its position in the market. to diversify its products and enrich its total product In recent years, the company has successfully man- portfolio, KLBF has positioned itself to remain high-aged its debt ratio. At the end of 2002 the firm post- ly profitable in the various segments of the industry. THE REPORT Indonesia 2012
  • 70. 90 CAPITAL MARKETS SHARE ANALYSIS Share analysis & data provided by Bank Negara Indonesia Agung Podomoro price & index relative performance Agung Podomoro Land market ratios JCI code: APLN PERFORMANCE Data as of September 2011 4400 Index Price 430 Price (Rp) 320 4200 405 12M high (Rp) 375 4000 380 12M low (Rp) 270 3800 355 Market cap (Rp m) 6.56 MARKET RATIOS 3600 330 1M 3M 12M 3400 305 Avg daily price (Rp) 403.93 384.73 352.67 3200 280 Avg daily vol (Rp m) 223.9 85.79 38.46 Nov-10 Mar-11 Jul-11 Oct-11 Agung Podomoro Land Real estate THE COMPANY: Agung Podomoro Land develops, man- ants. Agung Podomoro’s launch of its Kuningan City ages and rents integrated properties, which include apartments was largely successful, with 90% of units apartments, houses, hotels, offices, stores, shopping already sold out, although construction is not expect- centres and entertainment centres, supported by its ed to be complete until 2012. The company expects facilities through the company and its subsidiaries. The the offices in Kuningan City to be completed in 2012. company carries a bond issuance worth approximate- The location of both projects, Central Park and ly Rp1.2trn ($144m). This bond is divided at Rp325bn Kuningan City, are strategic, particularly in business ($39m) and Rp875bn ($105m), respectively. All of the areas. Prices at the moment are profitable but are proceeds will be used for Agung Podomoro’s business expected to rise still further in the coming years. expansion through the acquisition of property compa- Agung Podomoro is also developing Green Bay Pluit, nies located in Jakarta, Bali and possibly Bogor. Agung located in Pluit Penjaringan, North Jakarta. The Podomoro is looking to acquire property companies that superblock consists of Green Bay Pluit mall, apart- are selling or managing apartments, hotels, offices, ments, condominiums and shops. The area will also be shopping centres, stores, entertainment centres and/or home to a school. The company expects the project to landed houses. The company is in the process of nego- be completely developed by 2014. The development tiating with companies that meet this requirement. will be divided into two stages. The first stage will con- DEVELOPMENT STRATEGY: Agung Podomoro plans to sist of the development of shops and residences. Agung develop residential and commercial properties found Podomoro has already sold 3706 units of the 6734 in inner-city districts of populous areas. In West Jakar- apartments that will be available upon completion, ta, the company is currently developing Podomoro City, which is due to happen in 2012. Each unit has an aver- which will consist of the Central Park superblock, the age area of 33 sq metres. The second stage will see the Garden Shopping Arcade, the Royal Mediterania Gar- completion of the mall, school and further residences. den and the Mediterania Garden Residence 2. Once Agung Podomoro will develop four condominium tow- completed, Podomoro City will be more than 210,000 ers, with each tower housing 502 units. The condomini- sq m. The Central Park superblock consists of office ums are expected to be completed by 2013. space, housed at the Central Park Office; the Central In the main business district area of Jakarta, Agung Park Hotel; and residential property called Central Park Podomoro manages Senayan City Mall, as well as apart- Apartments. The area will also be supported by Cen- ments. The area is targeting the middle and upper mar- tral Park Mall, which will be a lifestyle centre. There will ket segments. Although the location of Senayan City also be green areas and outdoor entertainment, known mall is close to other malls with the same market seg- as Tribeca Park, which will be connected to the mall, ment, the occupancy rate is almost 100%. and apartments, offices, hotels, restaurants and cafes. The company focuses on developing properties in Construction of the mall has already been completed, strategic areas, mainly in attractive business districts. while the hotel and office is expected to be finished in In almost all of the areas that Agung Podomoro man- 2011. The apartments will be completed in 2012. ages, it focuses on several types of property, rather HEADING SOUTH: In South Jakarta, Agung Podomoro than just one. Most areas have residential property, is developing Kuningan City, which has a mall, offices office space and malls. To use the land optimally, most and apartments. Agung Podomoro will launch Kuningan of the projects are high-rise buildings. In 2011 it is esti- City Mall in November 2011. The mall has already mated the company will book sales and revenue of reached more than 50% occupancy of committed ten- Rp3.2trn ($373m), with net profit of Rp525bn ($61.2m).
  • 71. CAPITAL MARKETS SHARE ANALYSIS 91 Share analysis & data provided by Bank Negara Indonesia AKR Corporindo price & index relative performance AKR CORPORINDO market ratios JCI code: AKRA PERFORMANCE Data as of September 2011 4400 Index Price 3700 Price (Rp) 2400 4200 3250 12M high (Rp) 2775 4000 2800 12M low (Rp) 2150 3800 2350 Market cap (Rp m) 9.17 MARKET RATIOS 3600 1900 1M 3M 12M 3400 1450 Avg daily price (Rp) 1386.47 1489.83 1820.61 3200 1000 Avg daily vol (Rp m) 20.1 21.1 17.72 Sept-10 Jan-11 Jun-11 Oct-11AKR CorporindoDistributionTHE COMPANY: AKR Corporindo (AKRA) is the largest A contractor to mine the coal has already been appoint-private distributor of petroleum products and basic ed. PT Karunia Bumi Katulistiwa, the new contractor, haschemicals in Indonesia, with an extensive logistics and already obtained the necessary licences. By contract-supply network, covering 15 sea and river ports. Five ing the mining process out, AKRA will be able to con-of the river ports have storage tank terminals with centrate on distributing its product more efficiently. Asmore than 543.14 kl. AKRA serves customers in the a result of AKRA’s preparedness, the majority of the infra-mining, power plant, industrial and bunker sectors. In structure is in place to support distribution. A road forJanuary 2011 AKRA succeeded in divesting all of its hauling the coal from the mine site to the terminalshares in Sorini Agro, totalling around Rp2.2trn ($264m). already exists, which will further reduce the cost of infra-As a result of the divestment, AKRA has placed itself in structure development.a net cash position. Additionally, AKRA’s total amount OUTLOOK: AKRA continually seeks out new opportu-of interest-bearing debt reduced significantly. nities to expand its business and performance. After With the influx of funds, AKRA will now have more positioning itself in the petroleum business, the com-opportunities to expand their operations. In February pany also plans to expand its operations by investing2011 AKRA completed six petroleum tanks, each with further in the coal segment. AKRA’s existing infrastruc-a capacity of approximately 30,000 kl, which are locat- ture in both the coal and petroleum segments will allowed at the Stagen terminal, in south Kalimantan. Prior the company to better position itself when the timeto the construction of the six new tanks, AKRA’s petro- comes for further expansion.leum tank terminal capacity at the Stagen terminal site AKRA’s existing petroleum business is currently expe-stood at 80,000 kl. The company is also planning to invest riencing positive, steady growth, which is supported byRp1.1trn ($132m) in several projects that will update high oil prices and increasing sales volume. AKRA hasits existing infrastructure. also seen its customer base significantly increase in AKRA has also shown a strong commitment to its recent years. As a result, it is expected that AKRA’s rev-investors. After receiving the money from the divest- enue will continue to increase through 2011 and 2012.ment of its Sorini Agro shares, AKRA distributed approx- AKRA also plans to use the newly secured funds fromimately 30.5% of the profit to each of the investors. This the divestment of its Sorini Agro shares by furtherfigure totalled around Rp512bn ($61.4m). expanding its core businesses, such as petroleum dis-DEVELOPMENT STRATEGY: The company has also tribution and basic chemicals. The divestment has alsobeen expanding its business through coal mining and resulted in a reduction in its liabilities. In terms of itsthe development of its supporting infrastructure in logistics operations, AKRA currently has the largest pri-recent years. In 2009 AKRA successfully obtained a vate sector petroleum terminal. The PT Jakarta Tankconcession for a mining area located in Muaratawe, Cen- Terminal (JTT) is located at the Jakarta port. The JTT hastral Kalimantan. The total area for this concession is a capacity of 250,000 kl. Currently, the JTT is only oper-approximately 24,388 ha. In 2011 AKRA expects to pro- ating at 40% capacity, but this is expected to improveduce 300,000 tonnes of coal, which it expects to increase as a result of increasing the coming years. In 2011 AKRA’s projected revenue is around Rp16.2trn AKRA has estimated that production output of its ($1.94bn), with a net profit of Rp2.1trn ($252m). Thismines will reach some 5m tonnes by 2015. In prepara- includes funds from its Sorini Agro divestment. If thetion for this, AKRA has already built a coal terminal in gain is excluded, AKRA is expected to record a core netMuaratawe, which will help support the delivery process. profit of Rp437bn ($52.4m), an increase over 2010. THE REPORT Indonesia 2012
  • 72. 92 CAPITAL MARKETS SHARE ANALYSIS Share analysis & data provided by Bank Negara Indonesia Jasa Marga price & index relative performance JASA MARGA market ratios JCI code: JSMR PERFORMANCE Data as of September 2011 4400 Index Price 4500 Price (Rp) 3975 4200 4250 12M high (Rp) 4275 4000 4000 12M low (Rp) 3400 3800 3750 Market cap (Rp m) 27.03 MARKET RATIOS 3600 3500 1M 3M 12M 3400 3250 Avg daily price (Rp) 3107.35 3411.44 3471.18 3200 3000 Avg daily vol (Rp m) 8.81 9.6 8.65 Sept-10 Jan-11 Jun-11 Oct-11 Jasa Marga Toll roads THE COMPANY: Jasa Marga, established in 1978, was Once the land has been acquired and paid for, Jasa the first toll-road operator in Indonesia. The company Marga can begin construction of the toll road. It will is the market leader of toll road operators, managing then assume the remaining development costs. approximately 532 km, or 72%, of toll roads in the coun- To acquire just one section of the Bogor Ring Road, try. Jasa Marga is currently in the process of develop- Jasa Marga had a concession agreement that cost ing another 200 km of toll roads. Operations are expect- Rp57.5bn ($6.9m), followed by the additional 10%, at ed to begin gradually between 2011 and 2014. R5.7bn ($684,000). The total realisation cost was DEVELOPMENT STRATEGY: At present Jasa Marga’s Rp126.9bn ($15.23m). Thus, the remaining Rp63.7bn development plans are in the land acquisition phase. ($7.64m) became the responsibility of the government. Jasa Marga has already completed the construction of The concession agreement fee and additional 10% the Semarang to Ungaran phase, which will be the first that was paid to the government will then be used as section of the Semarang-Bawen toll road. Jasa Marga a revolving fund. The fund will be used for future land has also completed the construction of the Waru to acquisition in order to build another toll road. Sepanjang phase, which is the first section of the OUTLOOK: Jasa Marga’s capital expenditure budget is Surabaya-Mojokerto toll road. Jasa Marga has already Rp3.23trn ($387.6m) in 2011. This is a significant begun operating the first section of the Bogor Ring Road, increase over 2010, when its budget was Rp1.55trn which is a part of the Sentul-Kedung Halang, which will ($186m). Approximately 43% of Jasa Marga’s capital be approximately3.8 km long once completed. Devel- expenditure plan — or Rp1.4trn ($163.2m) — will be opment of the second and third sections of the Bogor used for capacity expansion, part of which will be used Ring Road will begin once a feasibility study of the first for additional lanes for existing toll roads. Jasa Marga section’s traffic patterns is completed. has also allocated Rp848.8bn ($101.86m) for the devel- As previously mentioned, Jasa Marga has several proj- opment of new toll roads, Rp104.8bn ($12.2m) of which ects that are currently in the land acquisition phase. will be used in Jasa Marga investments and Rp744bn The second section of the Semarang-Bawen toll road, ($86.7m) for investments in its subsidiaries. Jasa Mar- Ungaran to Bawen, will be approximately 11.8-km long ga has formed subsidiaries for most of the new toll road once completed. Jasa Marga is also in the process of development by cooperating with regional govern- acquiring land for the development of each section of ment-owned companies and private companies. its Surabaya-Mojokerto toll road. This toll road will be Demand for toll roads in Indonesia is very high. Toll comprised of five sections. The sections to be devel- roads can help stimulate economic growth and improve oped are Waru-Sepanjang (2.3 km); Sepanjang-WRR public transportation. The locations of existing toll (4.3 km); WRR-Driyorejo (4.3 km); Driyorejo-Kriyan (4.3 roads are mainly in Java due to high levels of traffic. Jasa km); and Kriyan-Mojokerto (4.3 km). Marga has a competitive advantage, as it controls the GETTING THE JOB DONE: One of the major obstacles majority of domestic toll roads. This advantage is fur- to Jasa Marga’s further expansion is land acquisition. ther strengthened by strong capital and Jasa Marga’s The Republic of Indonesia’s government has support- experience in managing toll roads. In order to expand ed the company by awarding it a revolving fund and its network, Jasa Marga is developing some new toll land-capping programme. Jasa Marga will pay for the roads. It expects to complete the developments of all concession agreement plus 10% of the initial estimat- new toll roads by 2014. It is estimated that Jasa Marga ed acquisition costs. Following that, the government is going to book revenue of approximately Rp5trn will pay the remaining costs related to land acquisition. ($600m), with net profit of Rp1.5trn ($180m) in 2011.
  • 73. 93InsuranceIncreasing market access for foreign playersWidening scope for sharia-compliant productsMicroinsurance set for rapid rise in uptakePrivate and public opportunities for health coverage
  • 74. 94 INSURANCE OVERVIEW It is not compulsory for vehicle owners to have motor insurance The contest for coverage Major players prepare to profit from long-term potentialThe industry has seen With GDP growth at 6.1% in 2010 and forecast to reach these two segments, there is overlap on products suchsteady growth over the last 6.6% in 2011, on the back of buoyant consumption, as health insurance (see analysis). In 2011, 126 under-decade. Gross premiums expectations are high for insurance in Indonesia. writers shared the market, 44 in life and 82 in non-life,and assets have grown byan annual average of 23% The industry has enjoyed stable growth since the with four small reinsurers handling limited levels of riskand 21% respectively since 1997-98 Asian financial crisis, particularly over the past reinsured domestically. Theoretically, there is still room1996. five years, with gross premiums growing an average of for consolidation, and Swiss Re, the world’s largest re- 23% annually since 1996 to reach a total of Rp133.5trn insurer, has forecast more mergers and acquisitions. ($16.02bn) in 2010, a 25% year-on-year (y-o-y) rise FOREIGN ENTRANTS: Although the market saw its fair over 2009 levels. Assets have grown by 21% on aver- share of mergers and acquisitions in 2010, instead of age, to Rp399.6trn ($47.95bn) in 2010, a growth of consolidating the industry, this has brought financial- 24% on 2009. Total industry assets, which include social ly strong players into the market. No new licences have insurance rather than just life insurance assets, are been awarded since 2005. Rather, foreign entrants near the $35bn mark, while total investments are above have bought their way into the market and restructured $30bn. Total insurance penetration in 2010 was the low- small local underwriters. One example is Zurich Life, est in South-east Asia at roughly 1.7%, a little above the which bought out Mayapada Life in 2010 as a means 1.4% in 2008. By comparison, the penetration rate in to acquire a licence. It is now in the process of com- Malaysia was 5.1%, 3.7% in Thailand, 11.1% in South Korea pletely restructuring the business, closing the group life and 9.2% in Japan. During the financial crisis of 2008- policies that constituted most of the underwriter’s 09, however, penetration managed to remain constant. business and launching individual policies in July 2011. Underwriters hope that as disposable income grows, While foreign underwriters agree that the market the middle class – now estimated at up to 40% of the remains small for the moment, most major brands have population – will purchase more coverage. positioned themselves to take advantage of the longer- With a strong recovery that began in the second half term potential. Meanwhile, the return on investment of 2009, investment-linked products were performing for general insurance grew a healthy 19% in 2010, but remarkably well in 2011, following strong stock mar- remains at Rp6.75trn ($809.88m), far lower the Rp25trn ket growth. Long regarded as one of the region’s most ($3bn) for life. 17 international underwriters current- vulnerable insurance markets due to an over-reliance ly operate in non-life joint ventures in the country, on unit-linked products in life insurance, Indonesia did including Allianz Utama Indonesia, Asuransi AIU Indone- not end up experiencing the sharp downturn that many sia and Tokyo Marine Insurance. widely predicted (see analysis). Major local interests such as Tugu Pratama Indone- FIGHTING FRAGMENTATION: As the biggest poten- sia, Asuransi Sinar Mas and Asuransi Central Asia (ACA) tial market in South-east Asia and with the highest are some of the leading players. Three of the 82 non- long-term potential for growth for global insurers, many life companies are state-owned, including majority- eyes are on Indonesia. For instance, British insurer Pru- state-owned Asuransi Jasa Indonesia (Jasindo), Artarindo dential, for whom Indonesia was one of the main attrac- and Asuransi Ekspor Indonesia. tions in its attempted buyout of AIA Indonesia in 2010, MAJOR PLAYERS: The largest provider of life insurance sees the country as its second-most-promising Asian remains Asuransi Jiwa Mega Life with 17.2% of the mar- market after Hong Kong. The industry regulator, the ket, followed by Asuransi Jiwa Sinar Mas (15.5%) and Insurance Bureau, segregates the market between life Prudential Life Insurance (10.5%). Prudential in partic- and non-life. Despite the strict separation between ular has been growing rapidly, collecting Rp10trn
  • 75. INSURANCE OVERVIEW 95($1.2bn) in premiums from its client base of 1.14m. Thelargest non-life underwriters in terms of gross premi-ums are Asuransi Jasa Indonesia, with a 10.3% marketshare, Asuransi Sinar Mas (10.2%) and Asuransi AstraBuana (7.3%). Small and medium-sized enterprises(SMEs) still dominate the ranks of licensed underwrit-ers, which has created uneven operating standardsacross the industry. As a means to confront this, theOECD has called for major upgrades in the IT systemsof insurance SMEs. Operational costs also tend to behigher for any underwriter seeking “national” cover-age, due to Indonesia’s sheer size. A leading life insur-er like Prudential is a good example. It maintains sev-en sales offices in major cities in western Indonesia, aswell as 202 agency offices and 62,000 agents.REINSURANCE: Domestic reinsurance capacity remainslimited. Underwriters face a legal cession requirementof 10% to domestic reinsurers, but only around 20% ofreinsured risk is placed domestically. The main prob-lem is the lack of capacity, with domestic reinsurers only Motor insurance accounts for 45% of total non-life premiumsrequired to hold Rp200bn ($24m) in equity. As a resultof these factors there have been repeated calls for a risk retention. Market access for foreign underwriters Access for foreignmerger of Tugu Reasuransi Indonesia (Tugu Re), Rea- is more straightforward than in most countries in the underwriters is more straightforward insuransi Internasional Indonesia and Nasional Re, the region, with foreign investors allowed to own up to Indonesia than in mostthree state reinsurance enterprises. 80% of an insurance company – due to be raised to 100% countries in the region. In However, profits in 2010 were especially strong for in 2012. Foreign underwriters active in the market pri- 2012 foreign investors willthese mid-sized reinsurers, as well as for privately held or to the 2007 legislation have been allowed to con- be able to own 100% of anMaskapai Reasuransi Indonesia, growing an aggregate tinue operations. Thus, for example, Manulife is able to insurance company.21.8% in 2010. Reinsurers have capitalised on a shift own 99% of Asuransi Jiwa Manulife their investment portfolios, which were becoming BAPEPAM-LK has begun stringent “fit and proper”increasingly overweight with stocks and mutual funds. tests, which require more transparent financial state-Tugu Re, a mid-sized private reinsurer, saw a 64% jump ments and more in-depth auditing. A new e-reportingin profits to Rp18.1bn ($2.17m) in 2010. system, set up with the industry associations, shouldREGULATORY REFORM: The Insurance Bureau, which be in place by the end of 2011. This will speed up dis-regulates the industry, is a part of the Capital Markets closure and improve visibility for the industry and theand Financial Institutions Supervisory Agency regulator. Investment regulations were tightened in(BAPEPAM-LK). As of mid-2011 details were still emerg- 2010 to insulate the industry from price volatility in asseting about plans to create a new independent Financial classes. The industry’s aggregate investment incomeSupervisory Authority. This new authority will be inde- grew 26% in 2010 to Rp356.3trn ($42.76bn), follow-pendent from the Ministry of Finance and will regulate ing strong returns on the capital markets, with lifeall financial services institutions, including banks, when insurance investments accounting for a full Rp168trnit commences operations in 2013. ($20.16bn). Investment portfolios are dominated by “The aim is to create a more stringent regulator,” government securities, which amounted to Rp81.61trnHendro Utomo, the vice-president of financial institu- ($9.79bn) in 2010, alongside Rp73.82trn ($8.86bn) intions ratings at PEFINDO, told OBG. As a result, the bank deposits, Rp63.94trn ($7.67bn) in investmentroom for arbitraging regulatory frameworks between funds as well as Rp62.81trn ($7.54bn) in and banking will narrow. The blueprint for UNDERWRITERS: Underwriters are now allowed tothe industry, known as the Indonesian Insurance Archi- place only up to 10% of their assets in time depositstecture (IIA), sets out clear goals of raising capitalisa- with one particular bank, down from the previous 15%.tion and improving competition. It is gradually raisingcapital requirements for underwriters, from Rp40bn Breakdown of life insurance by type, 2004-08 (%)($4.8m) in 2011 to Rp70bn ($8.4m) at the close of Type 2004 2005 2006 2007 20082012, and to Rp100bn ($12m) by 2014. It is also chang- Term insurance 7.23 7.9 7.59 7.31 9.23ing the market to a risk-based capital framework, to be Endowment 54.03 44.39 39.53 40.9 35.26fully enforced in 2012. The Rp100bn ($12m) require- Whole life 8.47 7.59 5.87 4.24 4ment may be a discouragement for new players in an Annuity 5.18 3.09 3.12 1.46 1.21already crowded market, but there is no shortage of Health & PA 5.92 8.97 7.31 5.94 6.88interest in buying out existing licence holders. BAPEPAM- Investment linked 19.17 28.06 36.33 38.48 41.3LK estimates that 46 of the 87 general insurers still have Others 0 0 0.25 1.67 2.13less than Rp100bn ($12m) in capital. Recapitalisation SOURCE: Life Insurance Associationis vital to raise the industry’s capital base and improve THE REPORT Indonesia 2012
  • 76. 96 INSURANCE OVERVIEW entered the market in recent years, insurers, particu- Insurance breakdown by type, 2004-08 (%) larly Asian insurers, have been watching the market Type 2004 2005 2006 2007 2008 closely. Meanwhile, there have been a number of acqui- Property 23.61 34.09 32.85 37.41 28.33 sitions in the life segment (see analysis). Motor 18.32 31.71 35.06 33 33.74 The $10bn bundle of contracts signed in April 2011 Marine & aviation 6.99 12.73 9.59 10.49 14.78 between China and Indonesia with regard to infrastruc- Energy 44.1 6.61 7.12 3.31 5.76 ture, cement, property and agriculture projects is sure PA & health 2.97 5.4 6.42 5.96 7.75 to bring a sharp rise in activity for Chinese insurance Others 4 9.45 8.95 9.84 9.64 underwriters, which are widely expected to expand SOURCE: General Insurance Association their presence in the coming years. At the signing, Chi- nese Premier Wen Jiabao announced that Chinese banksProperty and motor The regulator has also outlawed the use of any new and insurers would be rapidly increasing their pres-insurance together discretionary mutual funds, given their history of fraud. ence. Insurance groups from India, Thailand and Viet-generate over 60% of total The ceiling for investment in a particular asset class has nam are also seeking market access in Indonesia, eithernon-life premiums, withmotor insurance alone been set at 20% of all assets, excluding bank deposits. through ventures with private equity or through localaccounting for 45% of that. Non-life insurers, which tend to have healthy oper- groups. With new investment and increased mergers ating profits, place up to 90% of their assets in low- and acquisitions, the expectation is that the insurance yielding-but-liquid bank deposits and government industry’s weight in the capital markets will grow. There bonds. Life insurers, however, often rely more on invest- is certainly space, as insurance currently accounts for ment returns to offset lower operating profits, placing a modest 6% of the financial sector’s assets, compared their assets in liquid stocks, mutual funds, and corpo- to the 80% of commercial banks. rate and government bonds. The revised date of 2014 AUTO: Property and motor insurance together still for the enforcement of the Rp100bn ($12m) require- generate over 60% of total non-life premiums, with ment, as well as looming liberalisation within ASEAN motor insurance alone accounting for 45% of that. But by 2015, has been driving new rounds of capital-rais- given the absence of mandatory motor insurance and ing. In an effort to raise Rp150bn ($18m), Panin Finan- the limited incentives for lower-income owners to insure cial, a subsidiary of Panin Bank, put 34% of its equity their vehicles, the segment falls short of its potential. on the market in the second quarter of 2011. Motorcycles are perhaps the most poorly covered, with The underwriter recorded a 20% increase y-o-y in prof- only two underwriters offering motorcycle insurance. it in 2010, with premium revenue of Rp1.24trn In addition, down payments on motorcycles are as low ($148.8m). Another leading player, Tugu Pratama, has as Rp500,000 ($60), while default risks remain high. twice deferred plans to become a publicly-listed com- Policies tied to lease financing have been the key driv- pany, although it is continuing to look to sell 20-30% er in the growth of motor protection. Given that such of its equity in new shares through an initial public automotive credit is dominated by auto leasing com- offering (IPO), at such time when its standing in the panies rather than banks, agents still play a leading market is seen as favourable. In addition, Asuransi Jiwas- role in this segment, in contrast to neighbouring coun- raya is also widely expected to launch an IPO in 2012, tries, where the bank insurance model (bancassur- although it had yet to publicise such plans by late 2011. ance) has made more inroads. FOREIGN PLAYERS: Both domestic and foreign PROPERTY: The main players in property insurance are investors are keen on preserving their majority stakes Asuransi Jaya Proteksi and Jasindo, and underwriters that in underwriters. Although few new foreign players have have equity links to major banks, such as Assuransi
  • 77. INSURANCE OVERVIEW 97Central Asia (owned by Bank Central Asia), Asuransi into five different zones. At 2.5%, Indonesia’s general Although uptake of takafulSinarmas (linked to Bank Internasional Indonesia) and earthquake deductible is the highest in South-east is currently limited, the segment is set to growPanin Insurance (owned by Panin Bank). Asia, followed by the Philippines at 2%. rapidly. In 2010, takaful Leading banks in mortgage and real estate financ- Momentum has been gathering for the creation of represented 2% of theing, which have non-exclusive bancassurance relation- an ASEAN-wide natural disaster insurance pool, an ini- industry total, but was upships with a number of underwriters, include Bank tiative enthusiastically backed by Indonesia and the 47.6% y-o-y.Tabungan Negara and Bank CIMB Niaga. Tugu Pratama Philippines. Meanwhile, in addition to the Rp50bn ($6m)Indonesia remains the leading player on high-rise prop- disaster management fund already in place, the Min-erty insurance. Agents still dominate distribution in the istry of Finance is seeking parliamentary approval forsegment, given the limited growth of housing credit another Rp150bn ($18m) to complement the fund –property insurance. Growth has been driven by a healthy out of a total of the Rp4trn ($480m) allocated to dis-amount of construction activity in urban centres and aster management in the 2010 budget.a growing awareness of the dangers of fire and other REACHING CLIENTS: The industry’s distribution chan-natural disasters. Both life and non-life companies run nels are still dominated by agents, who generated 53%insurance awareness days as a means to broaden mar- of premiums in 2010, far outstripping bancassurance’sket penetration, but total premium growth has remained 22%. Agents have played a key role in insurance, butsluggish due to highly competitive pressures on rates. historically loose standards have plagued the industry.Insurance tariffs have been poorly enforced, as has the BAPEPAM-LK is now forcing all agents to be certifiedcrackdown on excessive discounting, although both by July 2011. Both general and life insurance compa-the regulator and the companies are now becoming nies have been running such drives. The Indonesian Lifemore stringent. Many private underwriters are watch- Insurance Association had certified 250,000 agents bying upcoming large infrastructure projects that have mid-2011 and expects to double this number by 2012.been structured as public-private partnerships by the The process of agent certification now under way isadministration of Susilo Bambang Yudhoyono. bringing about a reduction in the total number ofISLAMIC INSURANCE: The world’s most populous agents on the market. Oemin Handajanto, the presi-Muslim nation has a limited, but rapidly growing, sharia- dent-director of Zurich Topas Life, estimates that 70%compliant insurance sector. Takaful, or Islamic insur- of agents work part-time and are reluctant to spendance, assets were only Rp4.5trn ($54m) in 2010, 2% of the Rp350,000 ($40) needed to get their certification.the insurance industry’s total, according to BAPEPAM- After all, turnover in Indonesian agents is notoriouslyLK figures. However, this was growing fast, with a 47.6% high. Some insurers are subsidising the cost for theiry-o-y rise in 2010. Takaful investments, meanwhile, more committed agents, but the pool will likely shrinkreached a mere Rp2.38trn ($285.6m), 2.3% of the indus- by 2012. Costs associated with bancassurance have alsotry’s total. Takaful contributions grew a very healthy been growing since new rules were issued in 2010,35.7% to Rp3.2trn ($384m) in 2010, albeit this is less which mandated that each bank branch selling invest-impressive than the 63% y-o-y growth recorded in 2009. ment-linked insurance products have at least one cer- This niche market, which many expect to grow quick- tified agent. While certified bank staff can still sell basicly in the future, has attracted much attention; 18 non- life insurance or health products, the operating costslife and 13 life underwriters offer some form of the of selling unit-linked insurance has risen.sharia-compliant product, and underwriters have a OUTLOOK: The Indonesian market has fast emergeddedicated association. BAPEPAM-LK has sought to sup- as a key battleground for the world’s largest insurers,port the development of the segment by issuing new particularly in the more profitable life insurance seg-takaful regulations in January 2010, establishing clear ment. Planning for the long term, underwriters seeguidelines and a separation of assets and obligations. unique promise in this market, which has the potentialDISASTER READINESS: Despite being prone to natu- to be the largest in the region. Much recent activity with-ral disasters, Indonesia maintains a manageable claims- in the market has been in line with this long-term invest-to-premiums ratio of around 50% in non-life policies. ment view, adding to the dynamism of a still overlyRisk retention by non-life underwriters is relatively high, fragmented market, particularly in the non-life sector.averaging 80% for motor and property insurance and In the future, insurers are set to increasingly adoptaround 60% for other non-life products. a multi-channel distribution approach. Furthermore, if The only significant natural disaster coverage in the initial forays into microinsurance prove to be success-country is managed by a pool of underwriters that cede ful, the Indonesian market will not only grow at a faster5% of their premiums in Jakarta and 25% in other regions rate but may also offer a number of useful lessons forto earthquake reinsurer Asuransi MAIPARK. This limit- other lower-income emerging markets in Africa or Asia.ed capitalisation has drawn criticism and there havebeen requests that contributions be raised to 50%, giv- Premium growth, 2008-12F (%)en the highs risks in country that regularly ranks at the 2008 2009 2010 2011F 2012Ftop of global earthquake lists. For instance, one earth- Real GDP growth rate 5.8 4.5 6.1 6 6.1quake in September 2009 caused 1200 deaths and Life growth rate -0.5 -5.8 13.5 10.9 11.2$2.3bn in damage. Of this only $50m was insured. In Non-life growth rate 11.7 -4.6 8.6 8.9 5.3March 2010 the General Insurance Association issued SOURCE: Swiss Rethe latest earthquake insurance tariffs, with rates split THE REPORT Indonesia 2012
  • 78. 98 INSURANCE ANALYSIS Studies suggest that low-income adults could spend $1.20-6 a day Going micro Targeting the low-income consumer marketWhile individual premiums The large low-income consumer market has become on microcredit life coverage. Underwriters like Zurichmay be quite small, a testing ground for many industries in Indonesia, and Topas Life, Manulife and Prudential are looking to sellmicroinsurance has great insurance is no exception. The microinsurance seg- directly to customers through a micro-bank distribu-potential as over half ofIndonesians live on less ment, although still marginal relative to the industry as tion strategy. As possibilities to partner with banks tothan $2 a day. a whole, has recently been attracting the attention of run successful microcredit schemes open up, as with mainstream underwriters in this regard. With over half Bank Danamon in 2012, underwriters will aggressive- of Indonesia’s population living on less than $2 a day, ly compete for them. “Maintaining roll-out costs is key potential demand is enormous. to the success of microinsurance,” Oemin Handajanto, Studies such as that run by Allianz, in conjunction president director of Zurich Topas Life, told OBG. “Part- with international donors like the UN Development Pro- nerships with banks running successful microcredit gramme, suggest that low-income adults would be programmes are in high demand.” ready to spend between Rp10,000 ($1.20) and Rp50,000 SALES NETWORK: Insurers are also looking at alter- ($6) a month for limited insurance coverage. native sales networks – through local post offices for MICROCREDIT INSURANCE: Simple micro-products instance – to capture some of the growth in consump- with low premiums and limited coverage have been avail- tion on some of the country’s more remote islands. Asur- able for years, but microcredit insurance schemes have ansi Jiwa Nusantara, already a leader in life insurance, long dominated the market. It is estimated that over has entered the market in a big way. Using regional gov- 10m micro-enterprises have drawn microcredit from a ernment bank branches as distribution centres, the formal institution, creating the large first pool of cus- underwriter has fast become the largest micro-under- tomers for this niche insurance market. writer. In non-life insurance, Asuransi Bangun Askrida Government programmes in this sector have con- has achieved similar dominance. Allianz Life launched tributed to the expansion and success of microcredit a big push in microinsurance in 2010, hoping to treble schemes, projects spearheaded by Bank Rakyat Indone- the Rp9.5bn ($1.14m) in premium revenue it generates sia (BRI), Bank Danamon and Bank Tabungan Pensiu- from its 440,000 low-income clients. It is sending more nan Nasional, among others. BRI’s microinsurance agents into rural Indonesia and seeking partnerships scheme, BRIngin Life, has been very successful in with rural banks and associations. bundling mandatory – as well as voluntary – credit life VOUCHERS: Some insurance companies are hoping to insurance with microcredit products. target the customer directly, and have launched vouch- Asuransi Kredit Indonesia and Perusahaan Umum er systems for simple non-life products with limited Jaminan Kredit Indonesia provide credit guarantees for coverage. Dengyu Insurance has launched a scheme micro-enterprises ordinarily rated as unbankable. But whereby clients purchase a Rp50,000 ($6) card for this microcredit insurance has created some moral haz- health insurance coverage and are covered up to Rp2m ards too, with defaults being unbearably high up until ($240). Although microinsurance is covered under exist- 2010. One challenge has been the absence of credit ing insurance regulations, the government is clearly information on borrowers, although the establishment seeking to promote initiatives in this sector. While of a system of identification cards for all citizens will remaining vigilant of potentially high loss ratios and unvi- likely help this. Since 2010 the quality of microcredit able operating costs, underwriters are innovating fast has been steadily improving. in this dynamic low-income market. If the market can Foreign insurers are increasingly looking to develop be monetised in Indonesia, the success could well be the microinsurance market beyond its current reliance replicated in other high-potential markets, like India.
  • 79. INSURANCE INTERVIEW 99 Hotbonar Sinaga, CEO, JamsostekAddressing social securityOBG talks to Hotbonar Sinaga, CEO, JamsostekWhat is your position on the potential merger of is not simply a compulsory programme with no bene-the four major government-managed national social fit, but a service that will actually help develop andsecurity providers (SSPs)? improve their business. There is a certain lack of under-SINAGA: This is not a good idea. These organisations standing about the advantages of social security andwere originally created by segmenting employees into it is our responsibility to educate employers and cre-various categories – civil servants, military service, pri- ate awareness regarding the actual benefits. We canvate sector, etc. Each category is governed by totally do this by aggressively pursuing a promotional cam-different employment regulations. As a result, over the paign and by working directly with the specific labourpast few decades each of the SSPs have become high- unions and confederations of unions. We even offerly specialised and possess a unique expertise that fiscal incentives to the confederations of unions whoenables them to better serve their membership. are successful in getting their members to contribute.Throughout the region, in countries such as Malaysia,the Philippines and Thailand, governments have adopt- Should contribution rates to social security beed segmentation as their preferred system and agree increased? What would the outcome of a rise be?that it achieves the level of international best practise. SINAGA: While it is true that Indonesia has one of theHad Indonesia originally established a single SSP, sim- lowest contribution rates in the world, with a maxi-ilar to Singapore, then we would be debating whether mum rate of 12.7%, an increase is not necessary. Theor not to implement a segmentation scheme. Trying to real issue is to increase the base of our membership,restructure our four already well-established and high- not penalise those who are already meeting their legally functional SSPs under one umbrella would be extreme- obligation. We must also examine this issue from aly difficult and would not result in an overall benefit to macroeconomic perspective. In a highly competitivethe members they are obligated to serve. environment to attract foreign investment, one of Indonesia’s advantages over other countries in theHow can employers be encouraged to fulfil their region has been its lower labour costs. An increaselegal obligation to contribute to social security? in social security rates would somewhat negate thatSINAGA: Currently, over 30m formal workers in Indone- advantage. It is also felt that the merger of the foursia are employed by private and state-owned compa- national SSPs would result in rate increases.nies. By law they are all required to contribute aportion of their income to us and we are responsible Is there a need to re-examine regulations concern-to provide them with social security. At the moment ing how social security providers can invest?only 9m (30%) actually do so. The responsibility to SINAGA: These regulations are over seven years oldenforce the law is held by the Ministry of Manpower and are now too restrictive. We would like to have moreand Transmigration at the regional level. As a compa- flexibility in terms of direct investment. That is why weny, we do not have the authority to enforce the law or are in the process of establishing a subsidiary with theeven to audit companies in order to accurately deter- aim of supporting economic development in labourmine how many employees they have. To be granted intensive industries. For example, we would investthis authority would require amending the existing law, in large-scale infrastructure projects, which the coun-which would be extremely difficult if not impossible to try desperately needs, as well as manufacturing indus-do. Therefore, the approach we must take is to help com- tries. This will not only provide a national economicpanies understand that contributing to social security benefit but will also help us increase our membership. THE REPORT Indonesia 2012
  • 80. 100 INSURANCE ANALYSIS Claims on life insurance policies grew 36% y-o-y in 2010 to $6.35bn Life lines Rapid growth in unit-linked life coverageLife insurance policy Life insurance premiums in Indonesia have been grow- for the long term. Alternatively, foreign insurers usual-uptake is expected to rise ing faster than non-life for a decade. The Life Insur- ly have a seven- to 10-year time horizon for achievingas a result of increasing ance Association (Asosiasi Asuransi Jiwa Indonesia, AAJI) returns on investment. Potential takeover targets maydisposable incomes. TheAAJI expects the life estimates that there are around 33.2m policyholders include weaker underwriters like Bumi Asih Jaya, Kres-segment to grow by 30% in nationwide, of which 9.3m have individual policies. na Life, Nusantara Life or Pasaraya Life.2011. There is room to expand the pool of 16.75m exist- INTERNATIONAL INTEREST: The only closure thus far ing life insurance clients, which has already been grow- in 2011 was achieved through regulatory pressure, ing rapidly – 48% year-on-year (y-o-y) – from 11.32m when Capital Markets and Financial Institutions Super- policyholders in 2009. “Most life clients are through visory Agency (BAPEPAM-LK) withdrew Asuransi Jiwa group life, although individual demand is growing, driv- Bakrie’s licence, following over $30m in investment- en by investment-linked products,” Oemin Handajan- linked losses. International interest in entering this to, the president director of Zurich Topas Life, told OBG. high-potential South-east Asian market has resulted in Nonetheless, the sector is still small in relation to the a number of foreign acquisitions in recent times. Aver- vast domestic market’s potential, with life insurance pen- age return on investment for life insurance grew by 21% etration at a modest 1.5%, the lowest in the region. y-o-y in 2010, reaching a total of Rp25.41trn ($3.04bn). Although claims on life insurance policies grew 36% Since the beginning of 2010, Mayapada Insurance y-o-y in 2010 to Rp52.9trn ($6.35bn), underwriters (renamed Zurich Topas Life) was sold to Switzerland’s hope this will fall in line with stronger economic activ- Zurich Life, UOB Life (renamed MNC Life) was sold to ity. Indeed, the AAJI expects the life segment to grow investment firm Bhakti Capital Indonesia and Winther- 30% in 2011, driven by higher disposable income for tur was sold to UK-based AVIVA. In April 2011 leading the middle class and bullish capital markets. Japanese insurer Mitsui Sumitomo Insurance Group KEY FOREIGN PLAYERS: The structure of Indonesia’s and Aioi Nissay Dowa Insurance paid about $860m for life insurance market, like in many countries, is much a 50% stake in Asuransi Jiwa Sinar Mas, the latest acqui- more consolidated than the general insurance seg- sition in a regional buying spree. However, the impact ment. The 10 largest life insurance underwriters, all of the 2011 tsunami on Japanese investment is unknown. linked to foreign insurers, generated over 70% of insur- Large players like Mandiri AXA, a joint venture ance premiums in 2010. Competition, however, contin- between Indonesia’s largest bank and the French insur- ues to be fierce: 44 underwriters compete in this small er AXA, bought smaller underwriter Asuransi Dharma but dynamic market, down from 45 in 2010. Bangsa, with Rp70bn ($8.4m) in assets, in 2011. Finan- Mergers and acquisitions within the industry, rather cial firms are also seeking opportunities in the sector. than driving consolidation, have attracted foreign under- For instance, investment company Bhakti Investama writers. “Larger foreign players are likely to enter the announced an acquisition in mid-2011 (although this market by snapping up smaller underwriters, as has hap- was later delayed), and Japanese insurer Daichi is said pened in the banking sector,” Hendro Utomo, vice-pres- to be eyeing the market for acquisition opportunities. ident of financial institutions ratings at ratings agency UNIT-LINKED: Investment-linked life insurance prod- PEFINDO, told OBG. Local insurers are the most suscep- ucts, known as “unit-linked”, continue to lead the life tible to a foreign takeover, according to industry play- insurance segment, as has been the case for a decade. ers. These insurers are usually smaller than the foreign Unit-linked premiums accounted for over 62% of total joint ventures and form part of large Indonesian con- life insurance premiums in 2010, growing around 53% glomerates that are reluctant to invest in life insurance y-o-y, outpacing the life insurance segment as a whole.
  • 81. INSURANCE ANALYSIS 101Prudential Life is the largest unit-linked underwriter, hav-ing been the first to launch such products in 1999. Therate of growth in personal life insurance coverage hasbeen negative for years now, as conversions to unit-linked insurance continue. Although group life insur-ance continues to dominate products that are notinvestment-linked, its share of total premiums is drop-ping. “In the past, insurance was just about protection,”Evelina Pietruschka, the chairwoman of AAJI, told OBG.“Now, with unit-linked products, insurance can also bea means to invest. Insurance agents now must be ableto become financial planners for customers.” Drops in Indonesia’s equity markets in 2008 and2009 did not spur as high a sell-off of unit-linked poli-cies as was seen in 2005, as policyholders tended towait out the crisis. “The appetite of consumers is clear-ly towards unit-linked products,” Handajanto told OBG.“The market is more mature as more and more insur-ance companies sell unit-linked as insurance ratherthan investment products. We are no longer seeing the Bancassurance has helped to drive take-up of life coveragevolatility in demand witnessed in 2005.”BANCASSURANCE: Bancassurance has had the most Mandiri and CIMB Life have opted for exclusive part- While Indonesia’s equityimpact on the life insurance segment, through the nerships, the first through Bank Mandiri, the latter markets experienced a fall in 2008-09, this did notgrowth of credit life insurance. While agents and bro- through CIMB Niaga Bank. Prudential has partnered with lead to a large-scale sell-kers continue to play a role, particularly in group life UOB Life, while Asuransi Jiwa Manulife is working with off of unit-linked policies,insurance, Indonesia’s sizable base of bank clients is prov- 19 banks, including Standard Chartered Bank, Bank with policyholders decidinging particularly attractive to insurers. Danamon, HSBC and Bank DBS. to wait the crisis out. While associated telemarketing has yet to take off LOOKING AHEAD: Non-exclusive bancassurance rela-in a significant way, bancassurance is continuing to tionships have the potential to create channel conflict,grow rapidly (see overview). Major banks hold equity but underwriters have tended to prefer non-exclusivein underwriters to better synergise the cross-selling of partnerships with major banks over exclusive tie-upstheir products. Bank Mandiri, for instance, has taken with smaller players. Regulations ensure a certain lev-the majority stake in its joint venture with AXA in a bid el of competitiveness in bancassurance and the com-to leverage its client base of over 10m. Meanwhile, petition to find banking partners is fierce. In credit lifeMalaysia’s CIMB Bank and Canadian underwriter Sun insurance, for instance, the regulator specifically requiresLife Financial formed the joint venture CIMB Wed Life banks to liaise with three underwriters. With keen inter-in May 2010. The market has witnessed very few exclu- est from new and existing players, life insurance is setsive bancassurance tie-ups, with underwriters prefer- to play an increasingly important role in the develop-ring to sell their policies through a portfolio of banks. ment of Indonesia’s capital markets. “If our sector grows,Most banks only sign exclusivity agreements with under- we should be the primary institutional buyers in thewriters for one particular product, if at all. Only AXA capital markets, as in other countries,” Pietruschka said.
  • 82. 102 INSURANCE ANALYSIS Basic coverage has been extended to 76.4m poor and nearly poor A large margin Health coverage is modest but profitableCurrently, around 108m Although health insurance is an add-on sold by both scheme are concentrated in urban areas with formalIndonesians are covered by life and non-life underwriters, it remains a profitable sector employment, particularly around Jakarta. Onlysome form of health yet under-recognised product on the Indonesian mar- a third of health care establishments accept Jamkesmasinsurance. However, thegovernment aims to ket. The reform of the public health sector into one based coverage, while most private firms do not contributeachieve universal coverage on insurance has seen the role of state enterprises to the scheme. This leaves ample ground for privateby 2014. expand, but has also provided opportunities for private health insurance coverage to flourish. insurers. A regulatory grey zone allows both types of PRIVATE COVERAGE: The transition from a state-fund- underwriters to offer these products. Although the ed public health system to one based on insurance, in 1992 Insurance Act opened the door for private under- which government covers contributions for the poor, writers to provide health coverage, it does not explic- has opened up attractive opportunities for private itly regulate health policy contracts. insurers. Approximately 7m Indonesians are covered by PUBLIC HEALTH: Public schemes have long provided a health insurance policy, according to insurers. While the majority of health care coverage in Indonesia, as private employers must contribute to Jamsostek’s old initiation costs are high in such a vast territory. Under age and death benefits, they are allowed to opt out of the Askeskin programme, later renamed Jaminan Kese- higher benefit payments, including health coverage. hatan Masyarakat (Jamkesmas), basic coverage was Typically, companies that contribute more than radically extended in 2005 and now covers over 76.4m Rp60,000 ($7.20) a month per employee for health of Indonesia’s poor and nearly poor. A universal health benefits decline public health schemes and seek pri- care bill was approved by parliament in October 2011, vate coverage instead. Much of this private health insur- and is set to come into effect in 2014. ance is made up of group coverage. Individual prepaid Around two-thirds of Indonesians with formal health health insurance accounted for a mere 9.7% of all pri- insurance are covered under this tax-financed scheme, vate health care spending in 2008, less than one-sixth and benefits under the programme are significantly that of out-of-pocket expenditure, according to the higher than those of Jamsostek or Askes, the civil ser- World Health Organisation. As most hospitals insist on vants’ health programme. Jamsostek raised the maxi- proof of insurance or at least a patient’s ability to afford mum work injury medical claims from Rp12m ($1440) treatment, medical insurance is set to sustain its growth. to Rp20m ($2400) in January 2011. Combined, the var- Leading players in the health sector include Allianz, ious state and private policies cover 108m Indonesians. AXA, China Life, AIA, Prudential, AVIVA, ManuLife and UNIVERSAL COVERAGE: The national implementa- BNI Life, among others. Although rarely sold as a stand- tion of the programme has been efficient, but many alone product, health insurance generates attractive districts have been slow to establish the implementing revenues and is usually viewed as a supplement for institutions. Such insurance schemes have only been established underwriters. As standalone health insur- set up in about 100 districts. Regardless, Indonesia ers are unlikely to emerge in the short term, main- hopes to reach universal health insurance coverage by stream insurers will continue to target this segment. If 2014, a timeframe still widely seen as optimistic. anything, competition is likely to grow. Moreover, while With costs not shared with patients or local govern- government schemes will continue to play a key role ment, the central government currently pays Rp6500 for lower-income Indonesians, private insurers are vying ($0.78) per Indonesian covered. Jamkesmas remains for the middle and upper segments of the market. the main insurer for health, but private coverage is Although profit margins may fall with the development growing. Unsurprisingly, most people covered by the of more health micro-policies, the market is set to grow.
  • 83. 103InfrastructureNew efforts to tackle historic connectivity issuesGovernment actively seeking private involvementProject funding from a wide variety of sourcesSolutions are key to unlocking economic potential
  • 84. 104 INFRASTRUCTURE OVERVIEW Public-private partnerships are expected to play a central role Realising potential Jumping the economic hurdles of connectivity and transportWith a population of 240m, Although the country’s economy is a multi-faceted one, more it would like implemented. But the sheer volumeincluding a rapidly growing in which energy, agriculture, manufacturing and finan- of improvements needed overwhelms the govern-middle class, reaching 93m cial services are key parts of the mix, the attention in ment’s ability to plan, design, build, outsource and oth-as of 2009, the Indonesianmarket is widely regarded 2011 was not on the economy’s heavy hitters, but erwise control the infrastructure sector. Indonesia wantsas having huge potential. rather on the playing field in which they operate. private investors to come in and participate, and is The hot topic across the archipelago is improving infra- offering long-term contracts in the form of public-pri- structure, as fast as possible. Doing it slowly or doing vate partnerships (PPPs) in hopes of inducing domes- nothing could endanger the compelling growth story tic or international builders to sign on. that has Indonesia increasingly mentioned along with As with so many investment opportunities in Indone- the BRIC countries as the world’s hottest developing sia, both the potential and the potential pitfalls are markets. At the heart of Indonesia’s investment policy easy to spot. “Indonesia is seen as a destination with is people – 240m of them. The country has an emerg- great investment potential,’’ said Emma Sri Martini, ing middle class that is bigger than the entire popula- president of Sarana Multi Infrastruktur (SMI), which tion of most countries. The chance to service and sell works to build relations with private investors for infra- to that many people in one country makes Indonesia structure projects. “However, foreign and domestic an important destination for multinational companies. investors are well aware of Indonesia’s short history of The middle class as of 2011 had reached 130m, accord- success in developing PPP projects despite the numer- ing to research from Bank Danamon, more than tripling ous advances the government has achieved over in in size since 1999. That brought its share of the popu- recent years.’’ Thus far few projects have reached the lation from 25% then to 43% in 2009. implementation phase. Major international construc- ARRESTED DEVELOPMENT: What is clear now is that tion and engineering companies, now in a position to the inefficient ports, crumbling roads and patchy elec- play the role of arbiter, have expressed concerns regard- tricity grid are not only no longer sufficient to meet the ing process. And because PPPs are typically projects with country’s growing needs but threaten the economic long gestation periods and thin profit margins, they growth expected. Manufacturing is an example. require large capital investments years before revenue Indonesia is an ideal manufacturing centre, as it has is generated. Few potential investment players have so raw materials, cheap land and labour, a massive domes- far been fit to partner with the Indonesian govern- tic market, and proximity to China and India, two of the ment on a PPP, though many remain interested. Con- three countries with larger populations. But getting cerns to date are over how to share in the risks, the goods to market is time-consuming and costly because availability of investment guarantees, potential design infrastructure is lacking. It costs less to import oranges flaws in some of the projects, and an overall feeling of from China to Jakarta, for example, than to bring domes- uncertainty based on Indonesia’s history of corruption tic ones from Indonesian Borneo to the capital city, and bureaucratic confusion. The country’s leadership according to data from Pelabuhan Indonesia II (Pelin- appears sensitive to those fears and has introduced sev- do II), a state-owned ports-management company. Oth- eral new measures and agencies to address them. This er estimates show that gridlock on Jakarta’s winding is an ongoing process, and the hope in Jakarta is that and damaged road network costs the economy $1.5bn a balance is reached before the moment passes, and a year through wasted time, fuel costs and even illness. all the attention focused on Indonesia shifts elsewhere. PRIORITIES: The government has identified 13 prior- SIZE & SCOPE: Indonesia’s infrastructure needs should ity projects to improve infrastructure, and outlined 79 be viewed in the context of the Master Plan for the
  • 85. INFRASTRUCTURE OVERVIEW 105Acceleration and Expansion of Indonesian EconomicGrowth (MP3EI), which covers the period from 2011to 2025. The overall goal is to make Indonesia a top-10economy by 2025 and boost per-capita income to$15,000 a year. That implies economic growth ofbetween 8% and 9% annually, and Indonesia’s leader-ship knows that it will not happen without a boom ininfrastructure. Estimates vary on how much infrastruc-ture spending is needed. The government has about$115bn in projects planned or under construction.EYES ON GROWTH: According to a report by the BritishChamber of Commerce, the country will need to spend$70bn a year for the next five years to keep econom-ic growth at an annual rate of 7% or higher – general-ly the pace considered necessary to lift meaningfulamounts of people out of poverty. According to a report from Morgan Stanley, publicand private investment in infrastructure reached 3.9%of GDP in 2009 and will expand to 5.9% by 2015. Theglobal securities firm’s report, in an indication of need The country’s energy sector is set for a boost, with a number of PPPs already in the pipelinelevels, found that during Indonesian President SusiloBambang Yudhoyono’s first five-year term in office just BKPM’s front-and-centre position. That means helping According to one estimate,125 km of highway was built. In comparison, China possible PPP partners understand the details of proj- public and private investment inadded 4710 km of highway in 2009 alone. The govern- ects, and making options known via the publishing of infrastructure reached 3.9%ment’s diagnosis is that it can afford to pay for about an annual list of PPP projects on offer. of GDP in 2009 and willa third of what is necessary, and wants private invest- PROJECTS: BAPPENAS has 13 projects at the top of its expand to 5.9% by 2015.ment for the rest. The plan is to separate out projects priority list. Together they are worth $27.52bn, and thethat could generate profits for the private sector, and planning has already been done, so private partner canlook for investment partners for them. To encourage simply step in and get to work unless modifications areprivate sector interest, the government will provide desired. Past those 13, BAPPENAS has 79 projects onthe so called VGF (viability gap fund) for projects that its wish list worth $53.4bn, according to its website. Theneed to be built but offer slim profit margins. Although agency’s role ends at the planning phase. From there,the government’s presentation of its PPP-based infra- a PPP partner is expected to work with the Ministry ofstructure drive is still evolving, Indonesia’s government Finance and the government agency relevant to thehas settled on a defined process, and is sending out project selected. If it is a port, for instance, that agencyofficials to investment fairs to drum up interest. could be one of the country’s several port regulatorsPROCESS: Government officials are directing interest- or the municipal or regional government.ed parties first to the Investment Coordination Board Because the PPP structure is unproven in Indonesia,(BKPM). In 2011 BKPM had the responsibility of find- many potential investors will be looking to what are con-ing PPP partners for five specific projects near the top sidered two predictive model PPPs. The first is a collab-of the agenda: a highway on Sumatra, a potable-water oration between government agencies, indigenousplant on Java, a power plant in central Java, a cruise- coal miner Adaro Energy and two Japanese construc-ship terminal for Bali and a rail link from central Jakar- tion firms— J-Power and Itochu. The consortium plansta to the airport. Beyond that role, however, BKPM’s job to build a $3.2bn coal-fired power plant in Pemalangis to act as a first point of contact, to help potential in central Java that would provide 2 GW of power. Theinvestors narrow down options. From there the Nation- plant would consist of two 1000-MW units — Indone-al Development Planning Agency (BAPPENAS) takes sia’s largest thus far — and will use ultra-supercriticalover. BAPPENAS is to play a back-office role vis-à-vis boiler technology, which reduces coal consumption. The project will be completed according to a build- Bilateral infrastructure loans at end-2010 ($ m) own-operate-transfer model, with a concession peri- Source Amount od of 25 years. The plant is expected to be operational Australia 318.7 by 2017. The Pemalang PPP deal was signed on Octo- Netherlands 32.57 ber 6, making it the first of what Indonesia hopes will Belgium 14.87 be many successful projects. The project will be private- China 183.61 ly financed for the most part, with the Adaro-J-Power- Germany 122.8 Itochu consortium contributing $600m-700m of the Korea 37.13 necessary funding, and the Japan Bank for Internation- France 108.12 al Cooperation (JBIC) providing a loan worth $2.4bn- Spain 24.86 2.8bn. The deal includes a power purchase agreement between the consortium, which was incorporated as SOURCE: BAPPENAS Bhimasena Power Indonesia (BPI), as well as the state THE REPORT Indonesia 2012
  • 86. 106 INFRASTRUCTURE OVERVIEW works projects and former owners compensated. Despite this law, however, the land acquisition process is difficult and lengthy. Compensation is a key problem, as past governments have not kept promises to com- pensate land owners, making Indonesians reluctant to accept the need to participate in an eminent-domain sale. After years of delay, a new law giving the govern- ment more powers, and setting out a clear arbitration process for land owners, was finally passed by parlia- ment in mid-December 2011 and is expected to come into effect in mid-January 2012. Another issue concerns the level of experience of smaller government agencies in planning PPP projects. “Most of the regional governments lack the skills required to execute and deliver PPP projects,’’ said Scott Younger, president of Glendale Partners, a Jakarta- based consultancy. “There has to be a team of experts working closely with the government to help them develop their capacity and knowledge of how to exe- cute these kinds of complex projects.”Traffic-related problems on Jakarta’s roads are estimated to cost the economy around $1.5bn each year A further cause for concern is that these agenciesThe government is actively electricity company, Perusahaan Listrik Negara (PLN). for the most part will not be the ones paying. When itencouraging involvement Crucially, the deal is being underwritten by the Indone- is time for a private partner to collect from the gov-from the private sector, for sia Infrastructure Guarantee Fund (IIGF), which would ernment they will need to go to the Ministry of Finance.example by offering toconstruct additional step in to provide financial guarantees to the investors “Often in the past, where PPPs have been successful,infrastructure in the case in the event that PLN cannot meet public obligations. one reason has been that the government remains inof a discrepancy in prices. PPP SCHEMES: It is this guarantee mechanism, and sim- close contact with the private investor,” said Raj Kan- ilar instruments of state support, that the government nan, founder and managing director of Tusk Advisory, hopes will spur the implementation of future projects a Jakarta-based infrastructure consultancy firm. and break Indonesia’s infrastructure bottleneck. NEW ACTORS: Indonesia has responded by creating a According to the office of the coordinating minister number of new actors to address these issues. SMI was for economy, the project’s success “has proved that PPP created to be an investment vehicle that will help fund scheme is an open, competitive, transparent and PPP projects through lending or equity stakes. accountable process in Indonesia”. The World Bank’s The IIGF, created by the Ministry of Finance, will pro- finance and advisory arm, the International Finance vide guarantees. The Indonesia Infrastructure Finance Corp (IFC), is acting as an advisor on the deal. (IIF) is a non-bank financial company established by the The plant is expected to be operational by 2017. In government and private partners. Tusk Advisory acted the same vein, a water project in Jakarta’s western out- as the interim manager of the IIF, pending the recruit- skirts promises to be the first of several water delivery ment of the board of directors. The Presidential Deliv- projects undertaken according to a public-private mod- ery Unit, which reports to the executive, was created el. Aetra Tangerang, a private Indonesian firm, con- in 2010 and envisioned as serving mediating role structed a delivery system for bringing water to homes between public and private partners. Many potential and businesses in Tangerang, an industrial centre and private partners have doubts about the efficacy of bedroom community in Jakarta’s western outskirts. Indonesia’s proffered solutions, however. Kannan Funding for the Rp520bn ($57m) project was raised pri- believes it is generally preferable to create one nation- vately, but the government has guaranteed the invest- al-level agency to deal with all PPP matters. ment and will construct additional infrastructure in the Working with one agency would be advantageous case of a discrepancy in prices. because of Indonesia’s reputation for public-sector The Tangerang project was signed in 2008 and went corruption and bureaucratic hassle. The country slipped into operation in September 2011. Other water proj- from 126th to 129th in the latest World Bank “Doing ects are also being looked at as candidates for a PPP, Business” rankings, which assess countries worldwide with two major projects being planned for West Java. based on the ease of operating a private-sector com- The $397m Jatigede Water Supply would supply 2.4m mercial operation – it evaluates categories such as set- people, while the $690m Karian-Serpong Water Con- ting up a business, getting licences and legal remedies veyance is designed to connect the Karian Dam with to problems. Several countries Indonesia benchmarks the cities of Serang and Serpong. itself against ranked near the top – Singapore was first, CONCERNS: Major concerns remain, however, largely Thailand 17th and Malaysia 18th. Part of the challenge around issues of land acquisition, bureaucratic uncer- for the government has been determining the right tainty, and payments. Regarding the biggest issue, land mechanism for government support of infrastructure acquisition, the government has an eminent domain projects. In Indonesia, a process of deliberation has law that allows for private land to be seized for public resulted in the evolution of the IIGF’s role. “Some of
  • 87. INFRASTRUCTURE OVERVIEW 107the compensation mechanisms included in most PPPconcession agreements signed by other countriesinclude longer concession periods, cash compensa-tions or soft loans to make sure that the projects donot default on the project debts, tax incentives or oth-er more developed compensation mechanisms,’’ saidKannan. “In Indonesia, however, before the IIGF was cre-ated, investors were only offered an extension for theconcession period and adjustment to the tariff rate”.CHANGE: But this situation is changing, and that is whythe IIGF now has a strategic role in addressing the gov-ernment’s financial contractual obligations under aPPP concession agreement.” For example, the Pemalangproject includes a guarantee to ensure investors willbe paid if government agencies cannot continue pur-chasing. In addition, the guarantee funds are helpingto ease the costs of financing PPP projects. Because PPP projects require large amounts of up-front capital but often do not start generating revenuefor a decade or longer, partners find it difficult to obtain Land acquisition has been a major hurdle in the pastfinancing from Indonesian banks. The majority of lendersin the archipelago are unaccustomed to such long- projects to be delivered, but they do not penetrate Jakarta is planning to sellterm finance, and generally offer loans lasting no longer beyond the surface to address deeper systemic issues,’’ bonds in 2012, offering some $204m in debt andthan seven years, and only to a small minority of cus- said Glendale Partners’ Younger. “The drawing up of reg- using the proceeds to helptomers. It is also telling that the majority of the financ- ulations — as well as their execution — has in effect fund four infrastructureing in the Pemalang project came from a foreign lender stagnated the development of new PPPs.” projects, including arather than from a domestic bank. OUTLOOK: Private-sector interests gauging an invest- hospital and a bus terminal.CREATIVE SOLUTIONS: The economic imperatives of ment in Indonesia usually end up weighing the risks ofdeveloping Indonesia’s infrastructure are fuelling the an uncertain legal and regulatory environment againstsearch for creative solutions to the financing dilemma. the massive potential of the country — its 240m con-Debt financing may be one option. Jakarta’s municipal sumers, its emerging middle class and its economicgovernment, for example, plans to sell bonds in 2012, promise. This is yet again the case with the PPP-basedwhich would make it the first city in the country to do infrastructure drive. The long-term nature of theseso. According to a report in The Jakarta Post, the city types of projects makes their calculations more diffi-will offer as much as Rp1.7trn ($204m) in debt, and cult. However, Indonesia is far from the only develop-use the proceeds to help fund four infrastructure proj- ing country struggling to make PPPs work. Others, suchects – a hospital, a liquid-waste management facility, as Turkey — another just-beyond-the-BRICs economylow-cost housing and a bus terminal. — want to draw in capital through PPPs and are find- Larger still was the bond issuance of PLN, Indone- ing it to be a trial-and-error process as well.sia’s state electricity firm, which sold $1bn in bonds in Indonesia’s infrastructure bottleneck is unlikely tothe largest Indonesian corporate debt sale to date. disappear quickly without effective and forceful gov-Finally, Indonesia has announced that it will become ernment and legislative action. However, the processthe first country to tap into the newly created ASEAN is at least now moving forward with some momentum,Infrastructure Fund (see analysis). “Ultimately, more particularly with the passage of the land acquisitionreforms will be necessary to further ease bottlenecked law. If this momentum continues, the country will beprojects. SMI and the IIF are helping some of the PPP able to take full advantage of its economic potential.
  • 88. 108 INFRASTRUCTURE ANALYSIS The financial sector has many options beyond traditional banking Footing the bill Development funding is being met by a mix of sourcesIndonesia has been One of the biggest issues facing Indonesia’s infrastruc- maturity mismatches. Many potential PPP partners areannounced as the first ture push is how it will be financed. The government likely to be foreign companies, often from countries withbeneficiary of the ASEAN says that it wants to build and pay for about a third of lower interest rates than on offer in Indonesia, whereInfrastructure Fund,created in 2011 and worth its public-works priorities, and is currently in the process the cost of borrowing is slightly higher than 10%.$500m. of attracting investors willing to share the risk, cost and Indonesia has several banks considered credit-wor- the construction responsibility for the remainder thy on international debt markets which could offer for- through public-private partnerships (PPPs). eign companies loans at internationally competitive Indonesia boasts a modern financial sector with a rates, but the challenge for the banks in such cases will growing list of options beyond traditional bank financ- be to borrow from its creditors on a long-term basis, ing. Private-equity firms are already participating; the because its customers want long-term loans as well, country’s debt market is growing in size and sophisti- and to use currency swaps or other methods to pro- cation, as is its stock market. But because infrastruc- tect themselves from the risks inherent in currency ture finance is a longer-term proposition, the banks will fluctuations. Banks also increase their risk by handing have to move beyond their comfort zones if they wish out long-term loans if they do not have sources of to participate. Profiting from toll roads, railroads, ports long-term cash available as well, because a sudden and other such projects typically takes more than 10 increase in short- or medium-term lending rates could years, and banks’ lending departments will likely have wipe out any potential profits from a long-term loan to adjust. The Indonesian government has anticipated with an interest rate locked in. the problem and has set up several risk-sharing mech- Such maturity mismatches were an exacerbating anisms to make the country’s lenders, as well as poten- factor in the recent financial crisis, as many banks had tial private sector partners, keener to participate. been financing long-term concerns with short-term The Indonesia Infrastructure Guarantee Fund was financing in a different currency. For example, one alter- created by the Ministry of Finance in 2010 in response native source of financing might be debt financing. to concerns from partners about the bankability of Meanwhile, the three major international debt ratings projects. A similar organisation, the IIF, is a non-bank agencies, Standard & Poor’s, Moody’s and Fitch, have financial company created and funded by a mix of pub- signalled that Indonesia’s ratings are likely to be boost- lic and private partners and donor agencies. It may end ed to investment grade in 2012, which would lower the up playing a wider role than simply helping to provide cost of bond sales. Finally, Indonesia was announced guarantees. Sarana Multi Infrastruktur (SMI) is anoth- as the first beneficiary of the ASEAN Infrastructure er government-created agency that will provide guar- Fund, which was created in 2011. The $500m fund will antees, loans, or equity investments. “Indonesia lacks deliver loans to six infrastructure projects per year that project finance institutions providing long-term proj- physically link up the ASEAN economies. This particu- ect debt, said Raj Kannan, of infrastructure advisory firm lar project will expand roll-on, roll-off (Ro-Ro) shipping Tusk. “The roles of SMI and the IIF are expected to lanes that connect Davao in the Philippines to Bitung change this drastically.’’ Others, including the Asian in North Sulawesi. Moreover, shipping lanes are due to Development Bank and the International Finance Corp, be opened in other ports in Malaysia, Brunei and Thai- the private-equity arm of the World Bank, have agreed land later. Although this unlikely to become a major to participate in various roles as well. source of financing for Indonesia, the fund shows how One of the biggest challenges for banks will be insu- the challenge of developing infrastructure is now being lating themselves against currency fluctuations and actively tackled at the regional and national levels.
  • 89. INFRASTRUCTURE INTERVIEW 109 Kuntoro Mangkusubroto, Head, PDUSustainable developmentsOBG talks to Kuntoro Mangkusubroto, Head, Presidential DeliveryUnit (PDU)What are the strategic priorities in securing infrastructure development. It is therefore ourimproved economic conditions for the country, responsibility to assist in making land acquisitionand how will these be implemented? procedures simpler, which would boost the con-KUNTORO: The PDU was established in 2009 to struction of key infrastructure works such as roadsaddress the lack of delivery of infrastructure proj- and power plants. This, in turn, would augmentects and poor coordination between ministries. Our Indonesia’s economic growth.focus for 2012 has to be on improving the overall Overall, the concept of the MP3EI is a good initia-infrastructure of the country. tive, but it demands an implementation strategy to When it comes to attracting investment, Indone- be successful. The PDU will have to intervene tosia has a number of competitive advantages over oth- ensure that projects are executed. The key problemer countries in the region, such as low labour costs. is the overlap between regional and central govern-However, costs related to infrastructure such as road ment regulations, which has made the implementa-transportation, logistics and handling, mean that tion of development projects very complicated.our competitive advantages are effectively cancelled Regional autonomy has produced several differ-out. For this reason, we believe that the current lack ent levels of contradictory regulations, making it dif-of infrastructure is the single greatest barrier to ficult to know who the final decision maker is. Weachieving greater economic development. need to take a pragmatic approach in dealing with Attached to the presidential office, the role of the overlapping authority and improving coordination.PDU is to establish the list of national priority pro- We have already implemented measures to positivegrammes and to watch over the execution of proj- effect, although much more needs to be done.ects taking place to ensure their timely completion.The unit actively participates in the overseeing of How do you respond to the claim that the mora-key infrastructure developments such as toll roads, torium on deforestation will have little impact?seaports, airports, electricity, waste management KUNTORO: The complaints about this moratoriumand water treatment. If an infrastructure project are not directed at the concept or the policy; as isgets stalled, for whatever reason, the PDU will imme- often the case, criticism concerns the policy’s lackdiately step in to put it back on track. of enforcement. With this moratorium we are mov- ing away from a system where primary forests areWhat are the main objectives of the Master Plan converted to plantations while more than 30m hafor the Acceleration and Expansion of Indone- of degraded land are left unutilised. The new poli-sian Economic Growth (MP3EI)? cies mean that sufficient land will be available forKUNTORO: The MP3EI provides a clear road map for the future growth of important Indonesian industriesdeveloping the economy through six specific corri- such as agriculture, palm oil, rubber and forestry.dors. The plan brings existing opportunities togeth- By making use of degraded lands we are protect-er into a single integrated programme with the aims ing our forests while ensuring sustained andof securing large mid- and long-term investments, increased economic activity in the future. The two-producing sustainable economic growth, creating year suspension will give us time to solve issues suchjobs and eradicating poverty in the country. as spatial planning and land tenure, which will allow Investors and economists have identified land for more sustainable management and develop-acquisition as the single greatest impediment to ment of Indonesia’s rich supply of natural resources. THE REPORT Indonesia 2012
  • 90. 111EnergyPromoting exploration activities at home and abroadDemand for electricity is increasing in rural areasProduction of natural gas has been on the riseNew potential seen in coal bed methane extractionRoom for growth in the development of renewables
  • 91. ENERGY OVERVIEW 113 The sector will generate 13.4% of government earnings in 2011Mixing it upNew acquisitions and expansions in hydrocarbons and electricity arechanging the landscape of the sectorAfter years of declining production and investment 2025, Indonesia’s primary energy mix should con-in Indonesia’s crucial oil and gas sector, a combina- tain 33% coal, 30% natural gas, 20% crude oil, 5% eachtion of new exploration contracts, renewed progress of biofuels, geothermal and other renewable sources,on developing potentially vast new offshore reserves, and 2% liquid coal.and continued acquisitions by the state oil and gas CALLING THE SHOTS: Created in 2001 to take overcompany are lending a more positive outlook to the the role of regulator from state-owned oil and gascountry’s hydrocarbons segment. Meanwhile, the company Pertamina when it was incorporated as anfuture looks promising in the electricity segment as limited liability company, the Executive Agency forthe country rushes ahead with its plans to add more Upstream Oil and Gas Activity (BPMIGAS) is in chargethan 30 GW of new energy generation capacity of supervising and establishing cooperation con-before the end of the decade. tracts or production sharing contracts (PSCs)NUMBERS GAME: Crude oil and condensate produc- between the government and oil and gas produc-tion dropped off at an average rate of 4.1% per year tion contractors. Although the MEMR is the bodyfrom 2000 to 2010. This decline in production, com- responsible for entering into production-sharingbined with growing consumption, pushed Indone- contracts (PSCs) with oil companies, it falls uponsia into the net oil importer column in 2004. The sil- BPMIGAS to manage and implement the agreementsver lining for the country’s hydrocarbons sector can as well as serve as the upstream found in the growth of natural gas production, Because many of the larger international oil com-which has taken some of the edge off falling petro- panies such as ConocoPhillips and ExxonMobil tendleum output and will undoubtedly be a source of to shun many of the smaller, lower-production oil andfuture success in the sector. gas fields in favour of bigger game, BPMIGAS has been Although its contribution towards the country’s forced to set its sights beyond the major players andcoffers has dropped off in recent years, falling from pursue smaller companies in its efforts to exploit21.65% of government revenue in 2008 to a project- these less plentiful reserves.ed 13.4% in 2011, according to data from the Min- The increased efforts by the government to boostistry of Finance, the oil and gas sector remains an hydrocarbons production in recent years have beenimportant contributor to the nation’s economy. enough to interest an array of oil and gas compa- Indonesia was still very much dependent on hydro- nies, as noted in the number of production con-carbons for its primary energy needs, accounting for tracts signed. In the three years from 2008, an aver-95.4% of the total in 2010, according to statistics age of 29.67 contracts were signed each year, afrom the Ministry of Energy and Mineral Resources significant improvement over the previous three-(MEMR). Petroleum held the top spot, making up year periods from 2005-07 and 2002-04, which aver-43.9% of total production, followed by coal (30.7%) aged 18.67 and 11 contracts per year, respectively. Under the National Energyand natural gas (21%), with new and renewable ener- Yet despite this general upward trend, only 21 con- Policy for 2025, thegy sources accounting for the remaining 4.4%. tracts were signed in 2010, a decrease from 34 in country’s primary energy This ratio is expected to undergo a substantial each of the previous two years. mix will contain 33% coal, 30% natural gas, 20% crudetransformation over the next 15 years, with the However, the body will have its hands full in the oil, 5% each of geothermal,county’s National Energy Policy for 2025 calling for coming years and tens of existing production con- biofuels and othera dramatic shift away from hydrocarbons and oil in tracts are due to expire by 2020. One of the most renewable sources, and 2%particular. Upon completion of the policy period in crucial of these is the Mahakam Block, which will liquid coal. THE REPORT Indonesia 2012
  • 92. 114 ENERGY OVERVIEWThe country had a total of expire in 2017 with future control of the country’s most productive oil fields. State energy champion Per-1.2% of the world’s oil largest gas block currently being contested by both tamina ranked second with 23%, followed byreserves in 2010, though incumbent Total and state champion Pertamina. PetroChina International and Total E&P Indonesiaproduction of crude oil hasbeen decreasing since the In addition to Mahakam, 18 more contracts will ter- with 8% each; ConocoPhillips Indonesia produced1970s. minate between 2010 and 2020, according to BPMI- 7% of the total; China National Offshore Oil Corpo- GAS, including the Sanga Sanga block in East Kali- ration (CNOOC) had 5%; and four other companies mantan, currently operated by Vico Indonesia and combining for the final 14%. the South Natuna Sea Block B in the Riau Islands cur- The country’s most productive oil fields are situ- rently operated by ConocoPhillips Indonesia. ated to the East of the island of Sumatra and include OIL: Indonesia had a total of 0.3% (4.2bn barrels) of the Minas and Duri fields (both operated by Chevron). the world’s proven oil reserves in 2010, according In operation since the 1950s, these historically pro- to the “BP Statistical Review of World Energy” pub- ductive fields are now in decline and require lished in June 2011. Additionally, BPMIGAS has esti- enhanced recovery techniques to maintain output. mated that proven and unproven reserves will One existing project bucking this trend and gear- amount to 7.56bn barrels at the end of 2011. ing up for increased production in late 2011 was the However, production of crude oil has been on the Bany Urip field in East Java’s Cepu Block. A joint ven- decline since the 1970s. More recently, national out- ture between ExxonMobil’s subsidiary Mobil Cepu, put decreased to 945,000 barrels per day (bpd) in with 45% ownership; Pertamina, also with 45%; and 2010, slightly lower than 2009 levels of 979,000 four local government companies combining to have bpd, but representing a more significant decline 10% ownership, Banyu Urip was awarded the first of from 2001 production levels, which reached 1.34m five engineering, procurement and construction bpd, according to BPMIGAS data. As a result, new (EPC) contracts totalling $1.3bn for the develop- exploration and production operations are moving ment in August 2011. toward the east of the country in deeper areas where Construction and development are expected to extraction is more expensive. take 36 months, after which the full field is target- As of December 2010 Chevron Pacific Indonesia ed to produce approximately 165,000 bpd. Infra- was the single largest major producer of crude oil structure for the project will include 49 wells on in the country, accounting for 43% of total produc- three pads, a central processing facility, 95 km of tion as a result of controlling many of the country’s pipeline, and a 1.7m-barrel capacity floating storage
  • 93. ENERGY OVERVIEW 115and offloading barge. The field first began produc-ing in 2009. In order to make up this shortfall between con-sumption and production, Indonesia has redoubledefforts in recent years to seek out new sources ofenergy. This is being accomplished by facilitating thedevelopment of domestic reserves by foreign oil andgas contractors as well as through a massive cam-paign by state oil and gas company Pertamina tosecure new supplies both at home and abroad.NEW PRODUCTION: Indonesia took another steptoward boosting future domestic production capac-ity when BPMIGAS awarded 11 new PSCs to oil andgas contractors in November 2011. According tothe terms of contract made public by the MEMR, thecontractors paid a combined signing bonus of$36.08m to the government and have committed topaying another $201.3m for exploration activitiesover the next three years. These efforts will includegeological and geophysical (G&G) studies, a 3850- BPMIGAS awarded 11 production-sharing contracts in late 2011km 2D seismic survey, a 1730-sq-km 3D seismic sur-vey and the drilling of nine exploratory wells. The company’s upstream activities are primarily Companies that were Four new working areas were also awarded in carried out through its stable of subsidiaries includ- issued tenders to work in four new areas inNovember 2011 as part of first phase of the oil and ing Pertamina EP (PEP), Pertamina Hulu Energi (PHE), November 2011 committedgas working area tender of 2011. The blocks and PEP Randugunting and PEP Cepe. PEP’s primary to investing a combinedrespective winning firms were the Offshore Timor responsibilities are to manage exploration and pro- $64.5m in exploratorySea I, which will be explored by Hess; Halmahera II duction fields within the country, while PHE is in activities in the first threewon by a consortium of Niko Resources Limited and charge of managing the company’s overseas produc- years of the contract.Statoil; and West Aru blocks 1 and 2 contracted to tion fields as well as some of the newer domesticBP Exploration Indonesia. Terms of the contract production acquired after 2001. Support services,included winning companies paying a combined sign- including exploration, are also carried out by Pert-ing bonus of $19.35m to the government as well as amina offshoots such as Pertamina Drilling Servic-commitments to invest $64.5m in exploratory activ- es (PDSI) and Elnusa.ities during the first three years. These include a Pertamina upped its stake in the West MaduraG&G survey, a 7500-km 2D seismic survey and a Offshore Block in May 2011 – to 80% from its pre-5000-sq-km 3D seismic survey. vious share of 50% – after the original 30-year pro- There are several large blocks with potentially sub- duction contract expired May 7. Under the initialstantial reserves. These include the East Natuna agreement, Pertamina held a 50% share, with Chi-Block (formerly known as the Natuna D-Alpha Block), na’s CNOOC taking 25% and Kodeco of South Koreawhich is currently in the very early stages of devel- holding a 25% share. Under the new ownership struc-opment by French firm Total, Malaysia’s Petronas, the ture, Kodeco retains the remaining 20% stake.US’s ExxonMobil and Pertamina. In September Pertamina subsidiary PHE purchased Additionally, there are the offshore Mahakam and the oil and gas interests of Japanese company InpexSebuku Blocks run by Total east of Kalimantan. Fol-lowing the general trend of hydrocarbons produc- Oil production, 1996-2009 (000 barrels)tion in the country, most of these large new fields Crude oilcontain primarily natural gas rather than crude oil. 500HEAD OF STATE: Fuelled by a war chest of some SOURCE: Indonesian Statistics Agency (BPS) 480Rp10.2trn ($1.2bn), state-owned Pertamina hasembarked on an aggressive policy of expansion and 460acquisition by buying up oil and gas extraction rights 440from a number of different international operators 420in recent years. 400 As a result of this strategy, production of both 380crude oil and natural gas has increased substantial-ly for the company over the course of the past five 360years. Crude oil output hit a total of 70.01m barrels 340in 2010, up from just 48.6m barrels in 2006 and 32064.4m barrels in 2009. Pertamina’s net profits for 3002010 came to Rp16.78trn ($2bn), up 3.5% from ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09the Rp16.2trn ($1.9bn) recorded the previous year. THE REPORT Indonesia 2012
  • 94. 116 ENERGY OVERVIEWGovernment-owned energy Corporation in the Offshore North-west Java Block the rest of the ownership structure. Other interna-company Pertamina has (ONWJ), in which it held a 7.25% stake and the Off- tional Pertamina blocks in the exploratory stages ofbegun seeking out shore South-east Sumatra Block (OSSB), in which it development include the onshore Block 3WD in Iraq’sopportunities abroad, bothin regional markets such as held a 13% share. Combined with the 46% of the ONWJ West Desert region, in which the company has 100%Malaysia as well as further purchased from BP West Java in June 2009 for $280m, ownership; a 15% stake in the offshore Block 13 inafield, including in Libya Pertamina now owns 53.25% of shares of the block. Sudan along with partners China National Petrole-and Qatar. The ONWJ concession encompasses a total of 8300 um Company (CNCP), Sudapet, Dindir Petroleum sq km just offshore of West Java and includes 314 International, Express Petroleum and Gas Company producing wells, 218 offshore structures and 1250 and Africa Energy; a 100% share in the 17-3 and km of pipelines producing approximately 220m cu 123-3 Blocks located offshore and onshore, respec- feet of natural gas and 28,000 bpd of oil. Pertami- tively, in Libya; a 25% share in Qatar’s offshore Block na’s share of offtake for the OSSB amounts to 5200 3 along with Wintershall, Cosmo Energy and E&D; a barrels of oil and 9m cu feet of gas per day. 10% share in offshore Vietnamese Blocks 10 and CROSSING BORDERS: The company is looking to 11.1 in conjunction with Petronas Carigali, Petro- compete with oil and gas giants abroad, having Vietnam and Quad Energy; and a 10% stake in Aus- expanded its reach into numerous exploration and tralia’s Block Basker, Manta, Gummy (BMG) along production projects around the world over the course with Anzon Australia, Beach Petroleum, CIECO Explo- of the past decade. Overtures into foreign markets ration and Production, and Sojitz Energy Australia. began in 2002 with Pertamina’s entrance into joint As the company continues to increase its reserves ventures in both Vietnam and Iraq. These move- and production capacity, it also has its eye on big- ments were followed in rapid succession by forays ger game – namely Indonesia’s single most produc- into neighbouring Malaysia in 2005, Libya in 2006, tive gas block. The Mahakam Block located in East Sudan in 2007, and Qatar and Australia in 2009. Kalimantan produces 2.5bn cu feet of gas per day Pertamina’s overseas conquests began paying div- and 9300 barrels of oil and condensate per day via idends in 2010, when the offshore SK-305 Block the Tunu, Tambora, Peciko, Sisi and Nubi fields. located in Malaysia became Pertamina’s first over- Apart from the size of reserves, the block is attrac- seas asset to begin actively producing. The compa- tive to Pertamina because its current operating con- ny owns a 30% share in the project, with Petronas tract with French energy giant Total (working in con- Carigali of Malaysia and PetroVietnam making up junction with the Japanese Inpex Corporation) is set
  • 95. ENERGY OVERVIEW 117to expire in 2017 according to the original arrange-ment, first inked in 1967 and extended in 1997. Per-tamina and the Indonesian government have madeno secret of their desire to take control of the blockand have been negotiating with Total for control ofthe project for years. The initial proposal by Pertamina involved pur-chasing a 15% stake in the operation in 2011 fol-lowed by a gradual increase in share up to 45% bythe time the contract expires in 2017, though theimplementation of this plan was not yet successfulat the time of print. As progress in negotiations hasslowed significantly, the company has also tabled asecond alternative proposal in which Pertaminawould acquire a 51% stake in 2017. Even these sub-stantial acquisitions do not tell the full story of thecompany’s aggressive tactics in securing new ener-gy supplies. Pertamina has also failed in severaldomestic takeover bids, including trying to purchasea 10-15% participating interest in the Masela Block, Electricity is quickly replacing other, more traditional forms of energy such as coal and keroseneas well as attempt at a 27.9% stake in Medco via itsmajority stakeholder Encore International. at existing refineries, such as Pertamina’s upgrade The government isREFINING: Indonesia’s refining capacity was just at the Cilicap facility, which is expected to boost out- projecting that demand for electricity will increase byover 1m bpd at the end of 2010 and refining is car- put by some 62,000 bpd by 2014. The Balikpapan 9.5% a year andried out almost exclusively by Pertamina’s domestic refinery is in the midst of a $1.7bn upgrade, which electrification rates arefacilities, mostly located on Java and Sumatra. With is intended to boost capacity by 40,000 bpd by 2014. predicted to hit 93% bya capacity of 348,000 bpd, the Cilacap refinery is Per- POWER TO THE PEOPLE: As of late 2010 Indonesia 2025.tamina’s largest facility, followed by Balikpapan with had a total installed electricity capacity of approxi-a capacity of 260,000 bpd, the Plaju and Dumai mately 31 GW composed primarily (87%) of hydro-refineries with capacities of 127,000 bpd each, Bolon- carbons generation including coal, oil and gas. Anoth-gan with 125,000 bpd and Tuban with 100,000 bpd. er 8% of capacity was provided by hydropower plants,The refineries of Sungai Pakning, Kasim, TWU and with the remaining 5% supplied by geothermal andCepu have capacities of 50,000 bpd or less. other assorted renewable sources.SEEKING PARTNERSHIPS: With only around 70% At the same time, electricity consumption has alsoof domestic demand met by the country’s existing been climbing, growing from 120,162 GWh in 2004capacity, Pertamina has also been looking for part- to 169,786 GWh by 2010. Of the 2010 total, 131,710ners with which to expand current facilities or build GWh were produced by PLN assets, with IPP andnew refineries. In August 2010 the company signed PPU generators accounting for the remaining 30,076a deal with the Kuwait Petroleum Corporation to GWh. In terms of distribution, residential householdexamine the feasibility of expanding the existing use accounted for the greatest consumption withBolongan site and has also been in negotiations with 59,825 GWh or 35.2% of the total. This was followedSaudi Aramco regarding the construction of a new by industrial consumption with 50,985 GWh (30% of200,000-300,000-bpd refinery in East Java. As with the total), commercial with 22,157 GWh (13%), andthese first two projects, plans for another 300,000- public with 9330 GWh (5.5%).bpd refinery located in Banten Bay have stalled due Going forward the government is projecting elec-to the fact that low margins on refining projects tricity demand to increase by 9.5% annually for themake it difficult for them to be economically viable. next five years. A substantial portion of the grow- In the short term, any refining capacity increases ing demand will come from the continued electrifi-will have to come in the form of expansion projects cation as traditional wood, charcoal and kerosene energy sources used for cooking, heating and light PLN installed capacity by type, 2005-09 (MW) are replaced by electricity. According to PLN, nation- Type 2005 2006 2007 2008 2009 al electrification rates have increased from 57% in Hydro 3221 3529.1 3501.5 3504.4 3508.6 2000 to just over 67% in 2010 and are projected to Steam 6900 6900 7114 8764 8764 hit 93% by 2025. Considering that only 8% of the pop- GasTurbine 1865 1869.2 1885.6 2496.7 2570.6 ulation had access to electricity as late as 1980, this SteamGas 6281 6280.9 6280.9 7371 7371 is an impressive improvement, though around 80m Geothermal 395 395 415 830 415 Indonesians are still without power at home. Diesel 2982.2 2941.5 2956.2 3020.8 2980.8 In order to meet this demand, the government Total 22,515 22,531 22,153.3 25,986.9 25,609.6 plans to increase domestic total power generation capacity to approximately 85,804 MW in 2019, SOURCE: Indonesian Statistics Agency (BPS) according to the country’s supply plan for 2010-19 THE REPORT Indonesia 2012
  • 96. 118 ENERGY OVERVIEW power plants (438.75 MW). The remaining genera- tion is filled by an oil-and-gas-fired power plant of 38.84 MW, as well as small-scale wind projects of 0.19 MW and 0.34 MW. ON TRACK: In order to meet the power consump- tion demands of a large and rapidly growing popu- lation, the government outlined an ambitious mul- ti-phase “fast-track” programme which will feed around 30 GW of new installed power into the coun- try’s grid by 2020. Initiated in 2006 and amended in 2009, the first phase of the programme mandated the construction of 42 coal-fired power plants with an aggregate capacity of nearly 10,000 MW by 2012. By the end of 2011, 5830 MW had been installed, with another 2500 MW expected to be completed in 2012 and a final 1400 MW in 2013. Phase two of the plan is decidedly more green- oriented, with 55% of the total new production slat- ed for renewable power generation. Spanning the years 2010-14, the programme is targeting the instal-The further development of LNG plants could help to spread electricity to rural communities lation of 10,153 MW, consisting of 3977 MW of geot-The price of electricity is established by PLN in 2010. This plan relies on strong hermal production (39%), 3312 MW coal-poweredrelatively high when initial growth of cheap coal-fired power generation, production (33%), 1560 MW of combined-cycle pro-compared to other which is supposed to increase from generating 44% duction (15%), 1204 MW of hydropower productioncountries in the region:industrial consumers pay of the nation’s total power in 2010 to around 52% (12%) and 100 MW of gas turbine production (1%).$0.11-0.12 per KWh, while by 2019, with later additions of renewable and gas- Total investments are expected to reach $16.44bn,household customers, who powered sources at the expense of petroleum fuel. $11.11bn of which is earmarked for private sectorreceive government Also by 2019, electricity generation is to be powered development through IPPs.subsidies, pay around $0.06 51.8% by coal, 25.1% by gas, 10.7% by hydro, 8.3% by A third and as of yet unrealised fast-track schemeper KWh. geothermal, 3.4% by diesel and 0.7% by other forms. is also planned to take the country up to the year “The development of geothermal and liquefied 2020. Although the exact make up of the next phase natural gas (LNG) plants has the potential to be an of development has not been made public, PLN’s extremely viable option for the electrification of director for planning and technology, Nasri Sebayang, regional communities,” said Handry Satriago, the told the local press in November 2011 that the next president of GE Indonesia. instalment would focus on hydropower, comprising Electricity prices in Indonesia are relatively high up to 5600 MW of new generation capacity by 2020. compared to other countries in the region, with OUTLOOK: Although the problems of declining industrial consumers paying an average of $0.11- domestic hydrocarbons production and increasing 0.12 per KWh, while subsidised household rates are consumption will not ease Indonesia’s growing import approximately $0.06 per KWh. These subsidies cost requirements in the short term, the nation is taking the government roughly $5.5bn annually, according strong measures to steady its course in the future. to the Indonesian Department of Finance (APBN). Commitments to diversify primary energy sources SUPERPOWER: The power sector is dominated by away from petroleum and into domestically abun- state-owned power utility PLN, which operates dant resources including coal and renewables will through a vertically integrated framework as a pow- help in this effort, as will the exploitation of poten- er transmission system operator and distributor as tially vast gas fields in the medium and long term. well as the largest single power generator. A new The country’s electricity sector is in for rapid energy law introduced in 2009 legally terminated expansion over the next 10 years, which will also pro- PLN’s distribution monopoly, although no real chal- vide ample opportunities for private investment, lengers had entered the market as of late 2011 and particularly in the areas of renewable energy. Indeed, PLN has retained its control over the sector. many industry players see private sector participa- In terms of generation, PLN accounts for approx- tion as key for the future success of the sector. “Local imately 86% of all power generation in the country banks cannot provide the long-term capital neces- with a total installed capacity of 26,895 MW in 2010. sary for large-scale infrastructure projects,” Kian Min Coal-fired thermal power plants accounted for rough- Low, the president-director of East Java-based Paiton ly one-third of its total power capacity with 9451 MW, Energy, told OBG. “As a result international financ- according to company reports. This was followed by ing is required, but without adequate government combined-cycle power plants with 6951 MW, guarantees that can be extremely difficult to obtain.” hydropower plants with 3522 MW, diesel-fired ther- The government is working to clarify its regulatory mal power plants (3268 MW), natural gas-powered framework, and it is hoped that these proceedings thermal power plants (3223 MW) and geothermal will result in a more stable climate for investment.
  • 97. ENERGY INTERVIEW 119 Evita Legowo, Director-General, Oil and Gas DirectorateManaging the industryOBG talks to Evita Legowo, Director-General, Oil and Gas Directorate,Ministry of Energy and Mineral ResourcesHow does the ministry stimulate investment, In order to ease the process and address the con-especially in more remote areas of the country? cerns of some of our current contractors, we areLEGOWO: Investors searching for new opportuni- working together with individual contractors toties in the oil and gas industry not only look at the analyse the investments required to develop eachhydrocarbons potential of the country, but also field that is nearing its expiry date.aspects such as regulatory stability and investment Our decisions are based on the size of the field,environment. The eastern part of Indonesia has been the required technology and the investment neces-noted as a region with high potential reserves, but sary to continue operations. For example, we wouldgaining access to these reserves entails high costs, like Pertamina, the state-owned oil extraction andhigh technology and high risk. For these reasons we refinery company, to have a bigger role in the indus-are working on new initiatives to lessen the chal- try and maintain a number of these fields. Howev-lenges and create a more attractive investment cli- er, its participation in new fields is greatly narrowedmate. Measures being taken include better splits in by its limited investment capacity.production-sharing contracts (PSCs) when the fieldhas unfavourable conditions, and shortening the How will increased levels of gas utilisation with-process of obtaining a licence in our country. in the energy mix be achieved? We have a very close relationship with the min- LEGOWO: Liquefied natural gas (LNG) is mostly pro-istries of energy, finance, environment and forestry, duced in Kalimantan and Papua, but the bulk of con-which emphasises the importance of the oil and gas sumption takes place in Java and Sumatra. As a result,industry as one of the main contributors to govern- the government plans to build three LNG storage ter-ment revenue. With current oil prices, and an invest- minals that are expected to be operational soon.ment goal of $15bn in 2011, we believe we should The one in Jakarta is expected to start operatingbe able to maintain production of 1m barrels per day. in the first quarter of 2012, followed by the AcehFurthermore, in 2011 we signed agreements for 40 and Belawan terminals, which are scheduled to benew conventional and unconventional blocks, and operational during the second half of the year. Thewe are targeting the same number for 2012. government also has plans for another LNG termi- When it comes to the regulatory environment, nal in Semarang, Central Java, which is expected tosome contractors have raised concerns about the start operations in 2013. Indonesia has huge poten-cost recovery mechanism in PSCs. We are currently tial reserves of natural gas from coal, also known asin the process of preparing more detailed regulations, coalbed methane (CBM). We are hoping to reach awhich will clarify the Government Regulation total production of CBM equivalent to 500m cu feet79/2010. Investors should understand that our goal per day by 2020, and our intention is to take advan-is to make operations more straightforward for them. tage of this new source of energy.At the same time, our role is to not only to defend There are two options available; if the infrastruc-their interests, but also those of our nation. ture required to sell the gas to the buyers is insuffi- cient, CBM producers can choose to use the gas toWhat needs to been done to address concerns generate and sell electricity directly to Perusahaanrelated to contract extension? Listrik Negara (the state-owned electricity distrib-LEGOWO: Within the last few years the process of utor), but if infrastructure is sufficient, they canextending contracts has generally been a tedious one. choose to sell the CBM through a gas sales contract. THE REPORT Indonesia 2012
  • 98. 120 ENERGY INTERVIEW Karen Agustiawan, President Director, Pertamina Looking ahead OBG talks to Karen Agustiawan, President Director, Pertamina What is the rationale behind the decision to focus process which generates serious environmental threats. investments towards the upstream business? This unfavourable reality needs to be seriously addressed AGUSTIAWAN: We currently allocate 75% of our invest- by authorities in order to accelerate CBM production. ments towards our upstream business. That includes Issues to be resolved include legal, business and social maintaining and even increasing our current produc- aspects. We need more government attention to ensure tion to offset a decline rate of 15%, while at the same CBM development will proceed in the right direction. time ensuring the integrity of upstream assets. How- Concerning geothermal energy, Indonesia has a huge ever, it is not our sole intention to increase our oil and potential for this resource. In the second phase of the gas production levels, but to also strengthen our projected additional 10,000 MW of electricity for Indone- reserves. Within our upstream business, one of our pri- sia, geothermal will contribute roughly 1300 MW. Cur- ority projects is the Natuna block. Despite its high car- rently, we only have 272 MW. This, therefore, represents bon content, Natuna has 45trn cu feet of extractable a huge opportunity for developing this energy source. gas reserves. The gas would be used to meet domes- From an environmental perspective, geothermal is tic demand, as the country faces a deficit of 2.5bn the best alternative. If we can reduce or even complete- standard cubic feet of gas per day. ly eliminate oil consumption the state could signifi- On the downstream side we are undertaking work cantly reduce electricity subsidies. For those reasons to upgrade and revamp projects in our refineries as well we should all be supporting geothermal development. as develop products to meet market demand. We also will be aggressively increasing our product lines over- How are fuel subsidy policies being re-examined? seas. While we would like to expand both within the AGUSTIAWAN: As a result of fuel subsidies, people do upstream and downstream, I feel it is in the company’s not realise fuel prices are actually getting higher every best interest to focus on the former. Downstream and day. The general population simply does not have a upstream represent 70% and 30% of our revenue, clear understanding of fuel’s real price. Therefore, fuel respectively, but the net profit is actually reversed. Ulti- is undervalued, and not being utilised efficiently. On the mately, I would like to have a 50/50 revenue split. That other hand, we recognise people’s purchasing power will provide the company with more stability in the is not high and they cannot afford to pay the real price event of business cycle fluctuations on either the down- of fuel. Thus, we can only expect the government to stream or upstream side. establish a price which will neither overburden citi- zens, nor place heavy constraints on the state budget. To what extent will renewable energy resources We have to continue to educate our people about the become a major focus over the medium term? value of fuel and energy. In the future, maintaining the AGUSTIAWAN: We intend to direct more effort towards current level of government subsidies will become exploring alternative and renewable energies. For the increasingly difficult. Right now we are trying to phase moment, we have been developing our Coalbed out subsidies for public transportation and to have Methane (CBM) and geothermal businesses as alter- households move from kerosene to liquefied petrole- natives to conventional sources like oil and gas. Con- um gas. We plan that by 2014 subsidies will be almost fronted with a global energy crisis, alternative and completely phased out and only given directly to those renewable energy is something we have to start work- in critical need. This plan is in line with G20 commit- ing with. Unfortunately, CBM development is far more ments to gradually phase out inefficient fossil fuel sub- complicated than oil, primarily due to the de-watering sidies. Therefore, faster and broader action is needed.
  • 99. ENERGY ANALYSIS 121 Natural gas output has been steadily increasing since 2007Gassing upA renewed focus on producing for domestic consumptionIn contrast to crude oil production, Indonesia’s nat- largest fertiliser plant, run by state-controlled Pupukural gas output has been on the rise each year since Kalimantan Timur in East Kalimantan. Similarly, the2007. Total gas production in 2010 amounted to entire gas output from the Terang Sirasun Batur and3.28bn standard cu feet per day (scfd), up 8.4% on Ujung Pangkah development project of 300m scfdthe previous year’s mark of 3.02bn scfd and 16.8% and 150m scfd, respectively, are being routed to fuelover the 2.81bn scfd in 2007, according to Indone- power plants for electricity generation and indus-sia’s Directorate General of Oil and Gas (DGOG). trial use in West Java. According to the “BP Statistical Review of World Additionally, the new Donggi-Senoro liquefied nat-Energy” published in June 2011, Indonesia had proven ural gas (LNG) plant has 30% of its future produc-natural gas reserves of 108trn cu feet in 2010 – the tion earmarked for domestic consumption, alongeleventh-largest reserves on the planet and the with one-third of the planned output of the Maselalargest in the Asia Pacific region. The country also floating LNG liquefaction terminal. Indonesia’s largesthas an additional 49trn cu feet of potential reserves. LNG facility, Bontang, is also being retasked to sup- Large international oil and gas companies are well ply the domestic market, according to the Executiverepresented in the country’s gas exploration and Agency for Upstream Oil and Gas Activity (BPMI-production segment led by Total E&P Indonesia with GAS), the national energy regulator, which will grad-32% of all production as of December 2010. Cono- ually phase out exports by 2020.coPhillips ranked second, with 15%, followed by state- NEW DIGS: As many of the mature gas fields, suchowned Pertamina with 14%, BP Tangguh (13%) and as Arun, continue to drop off in terms of production,ExxonMobil Oil Indonesia (8%). a host of newer sources are coming on-line to pro-HOPES FOR OFFSHORE EXPANSION: While the vide the country with a steadily increasing supply ofmajority of natural gas is still derived from onshore natural gas. BPMIGAS has approved 10 large-scalefields, the government estimates that nearly three- gas-oriented projects for the 2011-14 period, whichquarters of its proven reserves lie offshore. Most will have a combined natural gas output of 1.75bnsignificant production in the country is currently scfd, along with 26,000 barrels per day (bpd) of gascentred around four areas: East Kalimantan’s offshore condensate compared to 20,000 bpd of oil.fields, including the Mahakam Block operated by The 10 projects will require some $4.73bn in invest-Total; South Sumatra, including the Corridor conces- ment, and only one will produce oil. Other poten-sion operated by ConocoPhilips; North Sumatra, with tially major projects on the horizon include the Eastthe maturing Arun field operated by Exxon Mobil; and Natuna Block in the South China Sea to the norththe offshore Block B, also run by ConocoPhilips, of the country and the Masela Block in the Timorlocated in the South Natuna Sea. Sea, in the south-east.EFFORTS AT HOME: In recent years the country has NANTUNA BLOCK: The Natuna block has attractedshifted from being a primarily gas-exporting nation significant interest, mostly as it is believed to holdto looking inward in its search to provide for its own vast amounts of reserves in the neighbourhood ofgrowing domestic consumption. Some prime exam- 46trn cu feet of gas. Formerly known as the Natuna The 10 major projects BPMIGAS has planned forples of this are the decisions to allocate the expect- D-Alpha Block, the site has a long and complicated the 2010-14 period willed 100m-scfd natural gas output from the Ruby Field history due to its location – being relatively close to likely result in a combinedproject (which is not expected to be operational Malaysia, West Java and Singapore – as well as its natural gas output ofuntil the third quarter of 2013) to the country’s tricky gas composition, as initial testing has shown 1.75bn scfd. THE REPORT Indonesia 2012
  • 100. 122 ENERGY ANALYSIS behind leader Qatar at 25% but ahead of neighbour- ing Malaysia (10%), Oman (9%) and Nigeria (8%) according to the “BP Statistical Review of World Energy”. Primary purchasers of Indonesian LNG are Japan, South Korea, Taiwan, Mexico and China. “Despite the shortage in gas supply, the majority of gas in the country is exported in the form of LNG as producers can command higher prices on interna- tional markets,” said Hanung Budya, the CEO of Indonesian LNG producer Badak LNG. MAJOR LNG PRODUCERS: The country currently has three major LNG plants with a combined capac- ity of 42m metric tonnes per annum (mtpa). The largest plant, located in East Kalimantan, is the Bon- tang facility, with a capacity of 21.6m mtpa. The Arun LNG plant is located in Aceh and has a capacity of 12.8m mtpa. The third LNG plant, Tangguh, began operations in mid-2009 with a capacity of 7.6m mtpa and is located in West Papua. The majority partner and operator of the Tangguh There are currently three major LNG plants in the country plant, BP Indonesia, in August 2011 announced plansThough there is a domestic the block’s gas contains approximately 70% carbon to construct a third LNG train at the plant after itshortage, Indonesia has dioxide. The project is currently being developed by discovered new reserves in the Tanggu gas field. Thetraditionally been a an international consortium of Total (France), addition is expected to be operational by 2018,gas-exporting nation andaccounted for 11% of Petronas (Malaysia), ExxonMobil (US) and Pertami- boosting total capacity by 3.8m mtpa. Tangguh isglobal exports in 2010. na, with production expected as early as 2021. owned by BP Indonesia (37.16%), along with MI Berau US-headquartered Chevron is also pursuing (16.3%), CNOOC (13.9%), Nippon Oil Exploration Indonesia’s first deep-water gas venture in the Gen- (12.23%), KG Berau/KG Wiriagar (10%), LNG Japan dalo-Gehem project located off East Kalimantan. Corporation (7.35%) and Talisman (3.06%). Developed in conjunction with Italy’s Eni and Chi- A fourth plant, the Donggi Senoro LNG (DSLNG) na’s Sinopec, the project spans four PSC blocks and facility being constructed on the island of Sulawe- is hoped to produce up to 1.1bn cu feet per day si, is also slated come on-line in late 2014. A joint (bcfd) of gas and 31,000 bpd of condensate. BPMI- venture between Sulawesi LNG Development, which GAS has stated that the initial phase of develop- holds 59.9% of DSLNG, Pertamina Hulu Energy (29%) ment will be in the Bangka field as early as 2014. Final- and Medco Energy International (11.1%), the plant ly, Japan’s Inpex is developing the Masela project in will produce 2m mtpa and 47,000 bpd of associat- the Arafuru Sea, which is estimated to possess some ed condensate when completed. Japan’s Mitsubishi 14trn cu feet of natural gas. Corporation owns 75% of Sulawesi LNG, with South LNG: Since leading the world in LNG exports as Korea’s taking up the remaining 25%. recently as 2005, Indonesia has slipped to the slipped The $3.7bn project will utilise natural gas supplies to second as LNG exports have fallen off, particu- from the Matindok and Senoro gas fields operated larly in light of domestic gas shortages. As of 2010, by Senoro Gas Development. Additionally, a contract Indonesia exported 11% of the world’s LNG, far to sell 1m mtpa of LNG to Japan’s Chubu Power Com- pany to fuel its power thermal power plants has Natural gas production, 2000-10 (bn cu metres) already been drawn up. Export agreements were also signed with South Korea’s Kogas to buy 700,000 tonnes of LNG per year as well as with Electric Pow- 85 er Company, also from Japan, for 300,000 tonnes, according to DSLNG officials. The gas sales con- 80 tracts span 13 years, starting in 2014, with pricing set at around $12 per million standard cu feet. 75 RESERVES FOR THE FUTURE: The Matindok field holds an estimated 600bn cu feet of natural gas reserves, with the adjacent Senoro field boasting 70 even larger estimated reserves of between 1.42trn SOURCE: BP and 1.76trn cu feet. The two fields are expected to 65 produce up to 415bn British thermal units of gas per day (btud), 300bn btud of which is dedicated to 60 the LNG plant, with the remaining 115bn btud 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 allocated for power provider PLN (60bn btud) and ammonia producer Panca Amara Utama (55bn btud).
  • 101. ENERGY ROUNDTABLE 123 Jim Taylor, President Director, ConocoPhillipsFuture prospectsOBG talks to Jim Taylor, President Director, ConocoPhillips; Sammy Hamzah,CEO, Ephindo; Terry McPhail, President & General Manager ExxonMobil;and Hilmi Panigoro, President Commissioner, MedcoHow would you characterise the government’s deeply interested in continuing our investment in theplan to develop the energy mix and reduce the country. Yet, for the industry to seriously impact pro-country’s dependence on oil and gas? duction levels, independent studies have determinedHAMZAH: Our industry is a very dynamic one where that investment will need to double in the next fivecontinuous evolution takes place and where the years and triple in the next 10. Unfortunately, invest-implementation of a sustainable long-term energy ment has not yet reached that pace and the declinepolicy is complex. The aim is to increase the use of in oil and gas production taking place over the pastalternative sources of energy such as geothermal, several years is likely to continue unless the coun-hydropower and coal bed methane (CBM) to reduce try introduces improved mechanisms to foster aoil dependence to 20% by 2025. However, in order more positive investment achieve this target substantial efforts will be PANIGORO: Under the current scenario, the ener-required in terms of coordination and execution of gy mix targeted by the Indonesian government seemsinitiatives. As of today, the government has been unreachable unless a number of measures are imple-very active in creating and communicating this road mented. As the chairman of the renewable energymap via a number of initiatives. To achieve a timely society, I have been very active during the last yearsexecution though, it will be necessary to see more in the development of road maps to achieve thisof these initiatives being implemented. target, but down the road the problem always residesMCPHAIL: The government of Indonesia’s ability to in the execution of these plans.achieve their targets in terms of their desired ener- However, it has not been a lack of willingness bygy mix will greatly depend on its ability to attract the the government that has resulted in the current sit-necessary investment required to pursue new explo- uation. The political determination is there, and it isration and production activity. While the oil and gas clearly stated that all ministers and regional govern-industry has been well established here for some time, ments will have to actively promote the utilisationand has enjoyed great success working in collabo- of renewable energy nationwide. The main challengeration with the government for many years, like so for the development of renewable energies is sub-many countries around the world, Indonesia’s oil and sidised oil. Whenever a company comes out with agas fields are now mature. The remaining resources proposal to develop any kind of renewable power,are in much more difficult places to reach and their they are compared with the economics of subsidisedextraction requires the use of advanced technolo- energy developments, turning it into an impossiblegies, resulting in higher costs for producers. Unques- competition. The government is aware of the neces-tionably, the landscape of the sector has become sity to start developing renewable energy sources,more complex in recent years. but when developing it, they shouldn’t do it from a However, overcoming technological, geographi- short-term perspective. They must look at thesecal and cost-associated challenges is what our indus- projects from a 10 to 15-year standpoint.try does well. We have the experience that affords Often we see the state electricity company, Perusa-us the ability to implement new ideas and viable haan Listrik Negara (PLN) blamed for the lack ofsolutions that will provide mutually beneficial results renewable energy sources in Indonesia, but as afor both the public and private sector. company, PLN always tries to get the best value for Indonesia, from ExxonMobil’s perspective, ranks money. The ministry must take the lead by develop-very well in terms of future prospects and we are ing of its own renewable energy projects. The price THE REPORT Indonesia 2012
  • 102. 124 ENERGY ROUNDTABLE Sammy Hamzah, CEO, Ephindo per KW obtained through renewable energy will still been overcome in a project. It creates entirely the be expensive, but when diluted with the rest of the wrong perception and expectation if this is consid- KW generated using other sources, the average elec- ered as part of the state budget because it will like- tricity bill would only be increased by around 3%. ly restrict costs from being recovered in the year that the contract allows such an action to occur. How would you respond to those that claim Gov- Finally, it needs to be clearly understood that the ernment Regulation 79 (GR79) regarding cost cost of unsuccessful exploration is entirely borne by recovery will not affect the interest of investors? the PSC contractor, and this can amount to hun- TAYLOR: From an investor perspective, GR 79 intro- dreds of millions of dollars for a single well in the duces more uncertainties, adversely impacts eco- remote deep waters of Indonesia. nomic returns to existing investments and transfers MCPHAIL: Clarity is only a part of the issue. The control of cost recovery issues from the oil and gas industry’s primary concern is the sanctity of exist- regulator to the tax authorities, which are not respon- ing contracts. Given the time horizons for investment sible for oil and gas activities. It exposes the indus- realisation in the upstream energy business, the exis- try to broad government discretion which makes tence of long-term stability is crucial to entice sig- investment returns more difficult to estimate. Due nificant investment. GR79 has language that raises to the impact that it will likely have on future invest- serious doubts over whether existing agreements will ment, it appears to be working against the govern- be respected. The proposed regulations provide the ment’s effort to increase oil and gas production. government with the ability to alter terms on which To create a strong business environment in the original investment decisions were based. high-risk and capital-intensive oil and gas sector, Of course, the government can establish whatev- any regulation should not be applied retroactively er conditions they feel appropriate. As long as such to existing production-sharing contract (PSCs) – new or revised legislation pertains to future oppor- otherwise it threatens agreed contract terms and can tunities, investors can take decisions based on those result in conflicts and legal disputes, further slow- parameters. However, to maintain a stable climate, ing down the pursuit of oil and gas production growth. existing contracts must be honoured. It is predicted that the implementation of the reg- PANIGORO: There are different opinions in interpret- ulation could cause a decline of government revenues ing some of the cost recovery mechanisms. If this from existing PSCs by as much as 20%, as well as pre- new regulation does not conflict with existing con- cipitating a drop in future investments. tracts and is created to provide more transparency Cost recovery is a fundamental aspect of the PSC in classifying the costs, it will be welcome. mechanism which has served the sector and host However, if the proposal caps the cost recovery governments well over many decades, successfully in contracts that have already been signed, that can attracting enormous investment into the exploration be considered counterproductive at the very least. and production of hydrocarbons resources. The investment climate will worsen, slowing the will- Moreover, cost recovery is not a reimbursement ingness of industry players to invest in the country. of contractor costs. It is the government’s agreed For local companies like us, this will be a short-term share of the investment necessary to explore, devel- matter, but when it comes to foreign investors this op and produce oil and gas only after it has been regulation could be an immeasurable step back in found and the geologic and commercial risk have their eagerness to pursue investment in Indonesia.
  • 103. ENERGY ROUNDTABLE 125 Terry McPhail, President & GM, ExxonMobilHAMZAH: As oil and gas revenue is one of the main make it work. While there is great potential for CBM,components of the state’s income, the government and progress has been made in terms of developinglooks at the cost recovery as if the money being the resource, additional efforts are still needed inspent actually belongs to the state and needs to be order for CBM to become a significant componentcontrolled and reduced as it is considered expendi- of the overall energy mix.ture. The fact is, however, that cost recovery funds PANIGORO: Medco is the pioneer of CBM in Indone-not taken from the state budget belong to the sia. We drilled the first two wells in the country as ainvestor which brought investment into the coun- pilot project, and from that experience we conclud-try and utilised it to operate the fields. ed that the yield is as good as the one you get in The big inconsistency here is that under the con- places such as the US or Australia.tract the operators signed with the government Based on that, some estimates were done and thethere is no clause related to possible capping or volume identified happened to be astonishing. Con-decline on recovery expenditure (cost recovery). If sequently we believe CBM can be a good businessthe purpose of cost recovery is to facilitate petro- in Indonesia. However, there are two main challengesleum spending, the contract already has a mecha- that are facing developments when it comes to CBM:nism where all expenditure will have to be approved taxes and environmental the regulatory body, whether through a work pro- On the first point, we strongly believe the CBMgramme and budget mechanism or an individual model should not have a split of the benefits, giv-expenditure approval. ing the government the opportunity to obtain its eco- What the government doesn’t realise is that GR79 nomic return through the corporate taxes on ben-may well serve the state budget, but as soon as efits. On the second matter, Indonesia has huge CBMinvestors are rejected from recovering their spend- potential from a geological point of view, but envi-ing they will start limiting that spending, especially ronmentally, the geography is not the most appro-on exploration. This will ultimately mean that the priate for the current CBM extraction techniques. Thisindustry will not grow as quickly as it would other- is still very a tough challenge that we have to face.wise, were this not an issue. HAMZAH: The government has decided to explore and establish unconventional sources of energy forWhat changes and investments need to be imple- the country, something that will surely attract newmented to encourage the development of uncon- investors and boost demand for these resources.ventional energy such as CBM? CBM, a relatively new source of energy for Indone-MCPHAIL: There is an active and healthy dialogue sia, has received the attention of both governmenttaking place in terms of establishing a fiscal and reg- and private investors during the last three years,ulatory framework for the development of CBM. with nearly 40 PSCs signed by 2011.However, that still needs to be finalised and put in Although this could be seen as a great step towardsplace before we have clear definitions of the terms the use of new unconventional sources of energy,under which CBM will be developed and produced. the fact is that many of the licence-holders are stillExxonMobil is just getting into our field activities and not operating the fields they were awarded. The gov-therefore, along with many other companies, is test- ernment should ensure that the investors are meet-ing the waters of the CBM market and has adopted ing their commitments, and if they are not, eacha very deliberate approach in determining how to specific case should be analysed to decide whether THE REPORT Indonesia 2012
  • 104. 126 ENERGY ROUNDTABLE Hilmi Panigoro, President Commissioner, Medco to revoke the licence. In terms of the changes that $3bn investment we need to make in the liquefac- need to be introduced, we are asking for two things. tion process. To remedy this situation, the govern- One is to give CBM producers the possibility to sell ment should give a financial guarantee, which at electricity other than just hydrocarbons (this will present they are not willing to provide. allow flexibility for PSC holders to develop their HAMZAH: The question that has to be asked is field). The other is fiscal incentives, in the form of whether gas is the right energy for Indonesia and tax holidays or better splits, especially during the first whether the gas produced should be designated for years of operations, to encourage the owners of domestic or foreign consumption. PSCs to develop their fields. If the government wants to use gas for domestic TAYLOR: The government has recently begun to energy or fuel, it has to create a competitive domes- view CBM as having significant potential to help tic market free from any intervention or subsidy that secure the country’s future energy needs. Investment might hamper the economy in the long run. If it does in CBM is likely to increase over the next few years, not manage to create a competitive market then it but will require much more time and capital before is time for the country to begin to look at and con- it can become a significant contributor to Indone- sider international markets. sia’s energy mix. Support is needed to get CBM start- In a global economy, when you are able to pro- ed in Indonesia, and the challenges will likely mean duce a certain commodity in an efficient manner you it will require more favourable fiscal terms. can sell it overseas and meet your domestic demand If the right fiscal terms and a competitive price by importing cheaper resources from countries which can be achieved, the industry has usually found ways specialise in other resources. Self-sufficiency is not to bring CBM to the market, as seen in other coun- a smart strategy when you can maximise the value tries such as the US and Australia. It is important that of your resources in other markets. the interest of existing oil and gas PSCs is respect- TAYLOR: There are two major priorities for increas- ed where CBM PSCs overlap with oil and gas work- ing domestic utilisation of the existing gas chain: the ing areas. Clear guidelines must exist to avoid dis- development of gas pipeline infrastructure and a putes and allow operations to continue unimpeded. market-driven gas price. The installation of much- needed pipeline infrastructure will enable wide- What measures should be introduced to improve spread domestic distribution of gas from existing and the open accessibility of the existing gas chain future gas fields for domestic consumption. as a means to increase domestic utilisation? These should be open-access pipelines that have PANIGORO: The biggest consumer of gas in Indone- a competitive cost of service and are operated in the sia is PLN, which insists on buying subsidised fuel as public’s best interest. Open access to pipelines should its main source of energy. If PLN is ready to buy gas prevent monopolistic commercial behaviour and at market price, the shortage of gas for electricity should be based upon a cost of service model. will be mitigated substantially. The main driver is a market-based price mecha- But even if that occurs, we will still not be able to nism. It is important for business-to-business gas deliver gas from Sulawesi, since Java still doesn’t negotiations to guide market behaviour. Subsidies have the oft-discussed Regas terminal. And even if and regulated prices distort market decisions and the Regas terminal is built, and PLN is willing to buy can sometimes become an obstacle in regards at the right price, we will have trouble financing the to investments in upstream projects and initiatives.
  • 105. ENERGY ANALYSIS 127 CBM production is targeted to reach 500m cu feet per year by 2015Into the deepFirms see greater potential in coal bed methane extractionOn March 25, 2011 the Sangatta West project in East iot Banjar by Indobarambai; and Sanga-Sanga, operat- The use of CBM gas in aKalimantan was the first dedicated coal bed methane ed by Vico. Each of the working areas have an estimat- combined-cycle thermal power plant can help to(CBM) well in Indonesia to successfully release gas ed projected output of 1m standard cu feet per day reduce carbon dioxidetrapped approximately 830 metres below the surface. (scfd), with the Sanga-Sanga area producing 50% more emissions by 50-70% whenThe implications of this milestone go far beyond the at 1.5 scfd, according to BPMIGAS. If all operations compared to conventionalrelatively small amounts of methane gas released from prove viable, their combined output of 5.5m scfd could coal-powered plants.test well SCBM#1, as the country is estimated to house fuel electricity generation of approximately 13.75 estimated 453trn cu feet of the gas. EARLY DEVELOPMENT: In these early stages of CBMSIGNIFICANT EFFECTS: With more than four times as development, the gas resources will initially be used pri-much estimated natural gas than all of the country’s marily to fuel small-scale electrical power generation,proven natural gas reserves combined, CBM has the particularly in more remote areas previously depend-potential to significantly affect Indonesia’s energy land- ent on more expensive diesel-fired power plants. Gasscape far into the future. The government is targeting for SCBM#1, for example, will be sold to GE and localCBM production of 500m cu feet by 2015, increasing power supply company Navigat to power a small gas-to 900m cu feet by 2020 and 1.5bn cu feet by 2025. fired generation plant to help power the currently Indonesia’s CBM reserves are divided into a number undersupplied local electricity grid.of separate reservoirs, or basins, including North Suma- By using CBM gas in a combined-cycle thermal pow-tra, with estimated reserves of 52.5trn cu feet, South er plant it is possible to emit 50-70% less carbon diox-Sumatra, with 183trn cu feet and Jatibarang, with 800bn ide when compared to conventional coal-fired powercu feet, according to data from Indonesian oil and gas stations, according to Hamzah. In addition to produc-regulator BPMIGAS. “The most prolific areas for devel- ing significantly less harmful emissions than conven-opment of CBM are in South Sumatra as well as East tional coal- and diesel-fired plants, CBM is also bene-and South Kalimatan, which represents over 80% of the ficial in terms of the bottom line. The methane ispotential resource," said Sammy Hamzah, the vice- extracted from depths of no greater than 1000 metreschairman of the Indonesia Petroleum Association. "The and therefore requires smaller, cheaper and less envi-East Kalimatan and South Sumatra basins are very well ronmentally invasive drilling operations.developed and have good infrastructural support, with MAJOR PLAYERS: In the 2008-11 period, 32 CBM con-many oil and gas companies already operating in the tracts had been signed by the government with a totalarea. If you can prove the availability of gas, it will only value of firm investment commitment of $213.37m,take a short time to bring the gas to market.” according to BPMIGAS. Most of these projects are cen- A joint venture between Ephindo Energy (with a 24% tred around South Kalimantan and central and south-share), Australia’s Dart Energy (formerly Arrow Energy, ern Sumatra. An additional eight direct-proposal pro-24%), and state-owned PT Pertamina Hulu Energy duction-sharing contracts (PSCs) were issued for tenderMetana Kalimantan-A (52%), Sangatta West is in the in late 2011. These included the Bangkanai 1,2,3 andmost advanced stage of development of the five CBM 4 Blocks; the Kuala Kapuas 1 and 2 Blocks; the Tanahprojects nearing commercial production. Sangatta West Laut Block; and the West Sanga-sanga 1Bblock. Eachhas completed four test wells at the site since 2008. tender allowed for a government-contractor split of The other four working areas nearing initial produc- 55:45 with 100% cost recovery.tion phases are the CBM Sekayu, operated by Medco So far, the primary companies committed to devel-Energy International; Tanjung Enim by Arrow PTE; Bar- oping early CBM projects include the aforementioned THE REPORT Indonesia 2012
  • 106. 128 ENERGY OVERVIEW a 44:56 partnership with Pertamina, as well as the Kapuas I, II and III CBM PSCs, for which the company has a 45:55 partnership with Sugico. Other companies in the sector include CBM Asia Development Corpora- tion and Newton Energy Capital, which are jointly devel- oping a project in the Kutai block in Eastern Kaliman- tan under the Kutai West CBM banner. JUMP START: Since the CBM movement began pick- ing up steam in 2008, the government has been team- ing up with the private sector in order to bring CBM energy sources to the market as soon as possible. One of the ways in which the government has attempted to boost investor interest is by offering favourable profit-sharing arrangements. While con- ventional oil and gas production-sharing agreements generally consist of 85:15 and 70:30 profit-sharing ratios, respectively (more equitable for frontier and higher-risk areas), normal CBM splits are 60:40 for the government and can go as high as 55:45. BY THE RULES: Government Regulation 36 (GR36) Further CBM exploitation could quintuple the country’s gas reserves passed in 2008 also creates another incentive designedGovernment Regulation 36 Ephindo, Pertamina and Dart Energy, along with ener- to increase both initial investor interest in the CBMof 2008 created new gy giant BP through its subsidiary Vico and internation- sector as well as accelerate existing agreements. Someincentives to increase al energy company PT Medco. of these regulations include the option to enter into ainvestor interest, includingopportunities to enter into Indonesia’s national energy champion PT Pertamina new gross production-sharing contract with the gov-production-sharing is one of the companies now leading the CBM charge ernment, under which production is divided equallyagreements. with six CBM PSCs signed since 2008. These include between the government and the contractor. two PSCs signed in 2010 for the Muara Enim I Block in Despite the enactment of previous legislation includ- South Sumatra, managed by subsidiary Methane PHE ing GR36, a number of issues relating to CBM are still Sumatra II, and the Tanjung I Block area 2 in South Kali- being resolved. Due in part to its relatively new arrival mantan, managed by PHE Metan Cape II. Local player to the energy scene, CBM regulations are being creat- Ephindo has also secured three CBM PSCs along with ed from the ground up and the resulting governing the Sangatta West project. framework, which draws upon both the electricity and BP and Italy’s ENI have formed the Vico partnership hydrocarbons sectors, remains a work in progress. Per- with respective shares of 38% and 62% in order to pur- mit and administration details being discussed include sue various oil and gas ventures in Indonesia and entered land use issues such as overlapping claims with preex- into the CBM market via the 2009 Sanga-Sanga CBM isting operations in the coal, forestry, plantation and PSC in East Kalimantan. Vico upped its participation con- residential land areas. Further clarification is also siderably in April 2011 through four new CBM PSCs for required for numerous environmental regulations such projects in the Barito basin of South Kalimantan. These as standardising waste treatment for CBM and estab- include the Tanjung IV Block in which BP entered into lishing procedures for environmental impact analysis.
  • 107. ENERGY ANALYSIS 129 The national energy policy was issued in 2006 and updated in 2009Natural potentialLaying plans for the development of renewablesWithin its vast territory, Indonesia contains enough Technology-specific benchmarks include a 2.2% con-renewable energy sources to enable the country to tribution of geothermal power, 5.3% contribution ofmore than quadruple its current power-generating hydropower and a 9.1% contribution of bioenergycapacity. According to data from the Directorate-Gen- (including biomass electricity production and biofu-eral of New and Renewable Energy and Energy Con- els). To make these goals a reality, the government’sservation (EBTKE), the combined renewable energy Master Plan of Acceleration and Extension of Econom-potential of Indonesia’s hydro, geothermal and bio- ic Development (MP3EI) states that some Rp134.6trnmass resources amounts to around 155.28 GW. This is ($16.1bn) in investments will be required for new anddivided into large hydro, with a potential of 57.67 GW, renewable energy projects over the next 15 years.biomass with 49.81 GW, geothermal with 29.04 GW and These funds would then be channelled into five ener-micro-hydro with 770 MW. gy corridors: Sumatra with an allocation of $3bn, Java This abundance of natural potential, combined with with $10.4bn, Bali-Nusa Tenggara with $316.8m, Sulawe-ambitious renewable power generation targets and si with $1.9bn and Papua Maluku with $579.6m.incentives set by the government, should provide ample The government has been especially proactive recent-opportunities for potential investors going forward. ly in terms of boosting investment in large geothermalAMBITIONS FOR DIVERSIFICATION: In order to bridge projects, which have so far been underutilised, with justthe gap between potential and realised renewable pow- more than 4% of the resource’s potential tapped. Theseer production, the government has outlined a nation- efforts include the 2003 Geothermal Law, which allowsal energy policy (Kebijakan Energi Nasional) setting a private-sector control over geothermal sources, as wellseries of diversification targets to be achieved by the as the right to sell baseload electricity directly to elec-year 2025. The objectives pertaining to the renewables tricity transmission system operator PLN.sector include: reducing the contribution of oil to the MAJOR GEOTHERMAL POWER PLANTS: There arecountry’s primary energy mix to less than 20%; increas- currently seven active large-scale (with a capacitying the contribution of gas to more than 30%; and greater than 20 MW) geothermal power plants produc-boosting the contributions of both biofuel and geot- ing electricity in Indonesia with a total combined installedhermal to more than 5% each. Other renewable sources, capacity of 815 MW. These power plants are primari-including biomass, micro-hydro, solar and wind, are ly clustered around West Java within a few hundred kilo-also targeted to collectively contribute an additional metres of Jakarta and at a second location in North5% to the country’s optimal energy mix. Sulawesi. The West Java geothermal power plants As of 2010, new and renewable energy sources made encompass the twin Salak power plants with installedup just 4.4% of Indonesia’s total primary energy mix. capacities of 165 MW each, as well as the Wayang Win-Petroleum was the primary contributor with 43.9%, fol- du facility with 220 MW, Kamojang (140 MW), Darajatlowed by coal with 30.7% and natural gas with 21%. 3 (110 MW) and Darajat (55 MW). Geothermal produc- In addition to the national energy policy, which was tion in Sulawesi is produced through the three 20-MWfirst issued in 2006 and updated in 2009, the EBTKE units at the Lahendong power plant.was created in 2010 by the mandate of Presidential In addition, there are numerous small localised geo- Government guidelines have set a target forRegulation No. 24 of 2010. The EBTKE has laid out a thermal projects around the country, such as the Ulum- renewable energy sourcesseries of ambitious objectives as well, setting a target bu Geothermal Plant (PLPT), which began producing to make up 25% of thefor what it calls new and renewable energy sources power in the testing phase at the small village of Wewo primary energy mix byto make up 25% of the primary energy mix by 2020. in East Nusa Tenggara in November 2011. The PLPT is 2020. THE REPORT Indonesia 2012
  • 108. 130 ENERGY ANALYSIS country averages approximately 4.8 KWh per sq metre of solar radiation per day. Relatively low wind speeds have so far limited the application of wind power generation, although signif- icant wind mapping in order to more accurately deter- mine the country’s true potential has yet to be carried out. Despite this, the Ministry of Energy and Mineral Resources has stated that it intends to install 270 small- scale wind turbines with a combined total installed capacity of 21.67 MW. ON THE RIGHT TRACK: As part of the governments drive to create 54 GW of new generation capacity by 2019, it has instituted two series of 10,000-MW “fast track” power generation portfolios. The first of these, which relied heavily on coal-powered generation proj- ects, was being wrapped up by the end of 2011. The second fast-track plan favours renewable energy gen- eration to a much larger extent than its predecessor, with more than half of the power projects receiving ener- gy from renewable sources.There are 17 large-scale hydropower plants in operation, with a combined capacity of 3330 MW Geothermal power production is the single largest powered by two 2.5-MW units operated by PLN. In total, primary energy source of the programme, accounting an additional 373 MW of small-scale geothermal proj- for 3977 MW (39%) of the total initiative’s 10,153 MW. ects are operating throughout Indonesia. Private investors will be heavily involved in this sector Widely dispersed through the country from Central going forward with 3097 MW representing investments Sulawesi to North Sumatra, there are currently 17 large- of $8.51bn designated for development by IPPs. The scale hydropower plants (greater than 20 MW) oper- remaining 880 MW will be developed by PLN at a total ating in Indonesia with a combined installed capacity investment cost of $522m. of 3330 MW. Of these, 15 are operated by PLN and range OPPORTUNITIES FOR IPP DEVELOPMENT: The 33 in installed capacity from 30 MW to 1008 MW, while geothermal power projects allocated for IPP develop- the two privately run independent power production ment range in size from 5 MW at the Songa Wayaua (IPP) plants have installed capacities of 150 MW and facility in North Maluku to the 330-MW Sarulla 1 pow- 180 MW. In addition to these large projects, 2593.18 er plant in North Sumatra. Of the 10,153-MW total, 1204 MW of capacity has been installed in smaller projects MW (12%) are to be generated from hydropower. But throughout the country. To date, only around 8% of the unlike the geothermal projects, the majority of these country’s hydropower resources have been tapped. projects will be carried out by PLN and account for With a number of relatively cheap and easily imple- 1174 MW of the 1204-MW total. This output is domi- mented geothermal and hydropower generation proj- nated primarily by the Upper Cisokan hydropower plant ects under way, more expensive technologies such as in West Java with a total installed capacity of 1000 MW. solar and wind have not been exploited. According to This leaves just 30 MW for IPP development at a total EBTKE data, the country has just 13.5 MW of total investment cost of $45m. installed solar power capacity (mostly rooftop residen- In addition to these projects, this is a large hydropow- tial and utility scale installations) and 1.87 MW in wind er project held over from the previous round of IPP proj- capacity as of 2010. ects still awaiting investors. The Karama Hydropower While large-scale power projects for these technolo- Plant in West Sulawesi consists of three separate dams gies are still economically challenging compared to with a total installed capacity of 4400 MW. Estimated other alternative sources, the dispersed geography of to cost $1bn, the project is expected to tender in 2012 Indonesia with its hundreds of isolated island commu- and come on-line by 2019. nities makes small-scale solar power generation a viable ROOM FOR DEVELOPMENT: Despite the priority posi- option to conventional diesel-powered generators tra- tion that has been given to renewable energy, there are ditionally used in remote areas. In this vein, national elec- still substantial roadblocks along the way to creating a tricity company PLN has embarked on a plan to con- truly attractive framework that would entice investors struct more than 100 small-scale photovoltaic solar into the sector. Some of these include the lack of a uni- power plants across the country. According to the com- form renewable energy incentive scheme, which could pany, six of these solar power stations were operating take the form of a feed-in tariff, green certificate sys-The national electricity as of November 2011 and another 100 were slated to tem or tax breaks for using renewable has announced a come on-line by the first quarter of 2012. The continued subsidisation of petroleum is a fur-plan to construct more The project will supply power to an estimated 370,000 ther hindrance that could prevent greater investmentthan 100 small-scalephotovoltaic solar power households when complete. If the initial plants are suc- in the development of renewables. As such, large-scaleplants throughout the cessful, the company is considering expanding the scale renewable energy projects can be difficult to developcountry. of the project tenfold. Potential solar energy in the in terms of producing competitively priced electricity.
  • 109. 131MiningUpdates to mining law should boost investor interestCoal output rises to meet export demandTin production and exports fall to increase pricesLocal thermal power plants also heighten need for coalTwo firms have majority of gold and copper production
  • 110. 132 MINING OVERVIEW Indonesia has significant deposits of coal, copper, gold, tin and nickel Forward momentum Increasing domestic production is capitalising on high pricesThe country is already Even as economic woes continue to grip the world’s ernment passed the 2009 Law on Mineral and Coal Min-taking advantage of a developed economies, Indonesia’s mining sector has ing Number 4 to replace its antiquated 1967 prede-combination of high been on an impressive roll, with strong demand bol- cessor, Mining Law Number 11.commodity prices in early2011 and increasing stering sales. Unlike the previous global downturns of Two years after its passage, the law has garnereddemand for mining 2007 and 2008, commodity prices surged in the first mixed reviews as investment has begun to pick up, yetproducts, particularly coal, half of 2011 before dropping off slightly in the fourth a few critical implementing regulations remain pend-in the fast-growing Asian quarter. This led to a windfall for many of the mining ing. These tricky issues primarily involve balancing theeconomies. companies operating in the country, with year-on-year interests of cash-laden foreign mining companies wish- net profits soaring by double and even triple digits ing to invest in Indonesia with the desire to retain the through the first six months of the year. vast wealth derived from the exploitation of these SOLID POSITION: With expansion plans tapping ever resources within the country to benefit the local pop- larger amounts of mineral and coal resources, Indone- ulation. Some of the outstanding issues still to be sia continues to rank among the world’s top mining play- resolved at the end of 2011 include determining the ers, with significant production of coal, copper, gold, areas open to mining activities, how price benchmarks tin and nickel. Coal in particular is experiencing increas- are determined and domestic market obligation rules. ing demand, and Indonesia – having already estab- As a result, existing Contract of Works (CoW) con- lished itself as a leader in global coal export – is well tracts are in the process of being converted into Intend- placed to take advantage of this trend. ed Use Plans (IUPs) and foreign companies can direct- Although the new mining law passed in 2009 has in ly apply for and win mining contracts. Gone also with many ways fulfilled its intended purpose by clarifying the CoW is the requirement that all foreign companies many of the permit and regulatory aspects of the min- divest a minimum of 51% of the company to an Indone- ing sector and boosting transparency of the process, sian registered company within 10 years of beginning newer additional regulations proposed in the ensuing production. Under the 2009 law, the majority divest- years have continued to raise concerns among investors. ment option was watered down to a minimum 20% As such, the final form of these regulations will likely stake after a period of five years. determine whether or not the investment floodgates RESOLVING ISSUES: Despite the apparent simplifica- are thrown open and allow Indonesia to take its place tion of the law, the Indonesian parliament in early 2011 among the global mining leaders. began mulling a host of issues which were thought to Early indications are that investors are taking a wait- have already been addressed including a return to and-see attitude, with 2011 investments of $1.1bn in majority divestment requirements, reducing the con- the mineral and coal subsectors well off the pace of cession size of pre-existing contracts to conform with the $3.19bn 2010 total, according to the Indonesian new rules, reducing the length of contracts and increas- Directorate General of Mineral and Coal (DGMC). ing the royalty payments from companies. PLAYING BY THE RULES: Although Indonesia has the The other major issue that is still in the process ofInvestment has picked up in advantages of holding significant natural resource being worked out is clarifying which government enti-the two years since the wealth within its territory, its investment climate and ty retains jurisdiction over resource use permits, min-passage of the 2009 Law mining policies in the past were seen as restricting the ing included. Since the post-Suharto era began inon Mineral and Coal MiningNumber 4, but there are full potential of the sector. Indonesia, regional autonomy has been on the rise.still a few outstanding In order to address these impediments and provide Now with the recent increase in commodity pricesissues to be resolved. greater certainty for international investors, the gov- bringing new wealth and power into the equation, it
  • 111. MINING OVERVIEW 133has proven difficult to centralise authority for the licens-ing of these potentially lucrative mining concessions.This power struggle continues to muddle the waterson numerous issues which are critical to investors inmaking long-term decisions, including environmentalcompliance, overlapping mining claims, local ownershipdivestment requirements and so on. “It is still very important for foreign investors to dotheir due diligence, especially in land acquisition,” Nori-co Gaman, the head of research for BNI Securities, toldOBG. “Some land already has permits for mining fromthe local government and other land use laws contra-dict each other, which can be confusing for investors.They also need to ensure that the land and use per-mits are acquired from local and national governmentbodies, as well as the Ministry of Forestry.”OVERLAPPING AGREEMENTS: The central govern-ment has made headway on one of the most signifi-cant ongoing investor concerns – that of overlappingconcession agreements – through the Ministry of Ener- A new mining map should cut down on overlapping concessionsgy and Mineral Resources (MoEMR) national mining mapinitiative. The MoEMR has managed to cut through the ber Herman Afif Kusumo, a new copper smelter would Coal mining is carried outswathe of some 9000 licensed mining companies on cost approximately $800m to build. by roughly 80 major companies, though therecord and reduced the number to 2500 through the As the regulation continues to be debated leading sector as a whole isidentification of double licensing, inactive companies up to its projected implementation in 2014, other inter- composed of 300-400and other measures. Lengthy bureaucratic delays have mediate measures are also being discussed that would registered firms. Demandalso long-plagued the sector which are also being form a semblance of a transition period in the run-up for the mineral continuesaddressed. This includes a stipulation (Forestry Law to full enforcement. These regulations include propos- to outstrip supply, despite production increasing from#18 of 2011) limiting the time of issuance of a land als to impose new, higher export taxes on raw miner- 132.35m tonnes in 2004 toclearing permit from the Forestry Department to log al exports, quota limits on ore exports resulting in an 275.16m tonnes in 2010.mining concession areas to 125 days. In the past, this obligation to sell part of production on the domesticprocess has often taken years to be resolved. While this market, or a combination of the two.process is being undertaken, the government has essen- COAL: Rapacious energy demand throughout the regiontially called a moratorium on issuing new mining per- spearheaded by manufacturing powerhouses Chinamits. While this may slow development and investment and India has spurred Indonesian coal production toin the short term, it should in the long run create a more unprecedented growth rates in recent years.stable and transparent licensing framework. Despite boosting domestic coal production by 26.83%DOWNSTREAM IMPLICATIONS: Also in the 2009 law from 2007 to 2010, demand continues to outstrip sup-is a stipulation that will have a significant effect on the ply. Production of Indonesian coal has increased frommineral mining market segment. In an effort to boost 132.35m tonnes in 2004 to 275.16m tonnes in 2010,downstream industries, the government has imple- according to data from the DGMC. Through the firstmented a law requiring all mineral producers to refine half of 2011, production reached 149.51m tonnes, offall exports by a minimum standard of 99% within five the pace of the projected levels of 327m tonnes.years of initiating production. While this law will likely While the bulk of coal mining is carried out by rough-produce the desired effect of boosting downstream ly 80 major mining companies, the sector as a wholecapacity of refined metals, particularly in larger min- is made up of 300-400 registered companies that areing operations, smaller operations stand to suffer underthe added burdens of refining. Production of minerals, 2000-09 From the government’s perspective, the measure is Year Bauxite Nickel ores Gold Silver Granite Iron sand Copper con.intended to boost revenue in the mining sector by (m tonnes) (m tonnes) (kg) (kg) (m tonnes) (m tonnes) (MT m)adding more domestic value-added processes to the 2000 1.15 2.43 109,612 310,430 5.94 0.42 3.27production line and increasing employment opportu- 2001 1.24 2.47 148,528 333,561 3.98 0.44 2.42nities as a result. Such a move would likely prove pop- 2002 1.28 2.12 140,246 281,903 3.98 0.19 2.85ular domestically for any politician supporting the meas- 2003 1.26 2.5 138,475 272,050 3.94 0.25 3.24ure ahead of upcoming elections. Mining companies 2004 1.33 2.11 86,855 255,053 4.04 0.08 2.81and industry trade groups have vociferously opposed 2005 1.44 3.79 142,894 326,993 4.3 0.09 3.55 2006 2.12 3.87 138,992 270,624 4.51 0.08 0.82such a measure, citing the substantial capital expen- 2007 1.25 7.11 117,854 268,967 1.79 0.08 0.8diture required for constructing processing plants, as 2008 1.15 6.57 64,390 226,051 2.05 44.55 0.66well as the additional high costs of running the ener- 2009 0.94 4.86 140,488 359,451 n/a 45.61 0.97gy-intensive operations. According to Indonesian Cham- SOURCE: Indonesian Statistics Agency (BPS)ber of Commerce and Industry advisory board mem- THE REPORT Indonesia 2012
  • 112. 134 MINING OVERVIEWThe majority of coal is operating on 4000-5000 mining permits, according to UPDATED LEGISLATION: Similar to the mineral min-exported, mainly to China, the Indonesia Coal Mining Association (ICMA). The exis- ing sector, new governmental regulations are also beingIndia, Japan, South Korea tence of so many fragmented small-scale operations mulled that would ban the export of lower-quality coaland Taiwan. However,domestic demand is has proven a challenge for authorities to accurately reg- products. But unlike other minerals, for which the inten-increasing due in large part ulate in terms of compliance with environmental and tion is to add value to the production process beforeto the growing number of other laws, as well as timely use of permits. exporting, the impetus behind the potential ban oncoal-fired thermal power Coal deposits are distributed primarily in the west- low-rank coal with a caloric value of less than 5100 kcal/plants coming on-line. ern and central areas of the country, with nearly half kg is to ensure a constant domestic supply of power. (48%) situated in southern Sumatra and another 8% in If passed, the new law would likely create a redun- northern Sumatra, according to the ICMA. Another dancy with the existing Domestic Market Obligation 32% is located in east Kalimantan, followed by 10% in (DMO), which has also already been instituted in order south Kalimantan, with the remaining 2% spread out to guarantee the domestic supply of minerals, and coal over the rest of the country. in particular. The law itself contains no set percentage HOME AND ABROAD: According to data from the of the amount of production that must be set aside for ICMA, Indonesia’s total coal resources amount to domestic market needs, but rather is decided upon 104,852bn tonnes. The majority of coal produced in annually by the minister of energy and mineral resources Indonesia is exported, with 208m tonnes of the 2010 on the basis of a number of forecasting procedures. shipped abroad, according to the DGMC. The primary COAL PLAYERS: Although there are hundreds of small- destinations of Indonesian coal are China, India, Japan, scale coal mining operations currently permitted in South Korea and Taiwan. According to the ICMA, Chi- Indonesia, there are only a handful of large-scale oper- na and India are the largest purchasers, with 16.7% and ations responsible for the bulk of the country’s pro- 16.51% of total exports in 2010, respectively. South Korea duction. And with global demand pushing up prices ranked third with 14.27% of the total, followed by Japan through 2011, these companies reaped windfall prof- (13.76%), Taiwan (10.56%) and Malaysia (5.33%). its through the first half of the year. The average sell- While exports currently make up a significant amount ing price of coal increased from $91.30 per tonne in of the country’s coal production, domestic demand is January 2011 to $119.03 by June and is expected to also increasing at a quickening pace due in large part remain in the $90-per-tonne range through 2012, to the growing number of coal-fired thermal power according to the International Energy Association. plants now coming on-line. National power company Bumi Resources is the largest coal producer in the PLN is in the midst of a second massive 10,000-MW country through its two producing subsidiaries Kaltim power generation capacity increase programme, much Prima Coal and Arutmin Indonesia, The two operations of which will be fuelled by coal. Six separate large-scale produced a total of 60.4m tonnes in 2010, up from power plants with a minimum installed capacity of 625 59.6m tonnes in 2009, according to the company’s MW generating a total of 4480 MW, along with a num- annual report. Bumi also has two more coal companies, ber of smaller plants generating an additional 1350 MW, Fajar Bumi Sakti and Pendopo Energi Batubara, which are slated to come on-line by the end of 2011. This will are still in the exploratory phases. Net profits for Bumi be followed in 2012 with an additional 2500 MW and rose 8.76% in the first half of 2011 compared to the in 2013 and 2014 of another 1400 MW. same period the previous year, a boost of $274.37m. The combined fuel requirements of these plants are The company has ambitious expansion plans for the projected to boost domestic demand by 18.2m tonnes future already well under way and is projecting a surge in 2011 followed by an additional 8.75m in 2012. In in production to 111m tonnes per year by 2012. total, the new electrical power generators will require The second largest coal producer is Adaro Energy, some 44m tonnes of coal annually when completed. which produced 42.2m tonnes of coal in 2010. Accord- ing to company reports, Adaro posted an 103.8% jump Coal production & export, 2007-10 (m tonnes) in net profits during the first six months of 2011 com- Production Export pared to the previous year to $268m. Adaro also has substantial expansion plans in the works and is expect- SOURCE: Directorate General of Mineral and Coal 300 ed to double its output over the next five years. Tambang Batubara Bukit Asam (TBBA) is the only 250 state-majority-owned company (65% government stake) among the top contenders in coal mining, producing 200 12.46m tonnes of coal in 2010. The company’s primary mine is located in Tanjung Enim, South Sumatra, although 150 it owns several other mines in the region, including Ombilin and Cerenti. TBBA is also boosting its produc- 100 tion through a number of investment projects with a target output of 40m tonnes by 2015. 50 The fifth-largest coal producer in the country, Berau Coal, produced 17.38m tonnes in 2010 and holds the 0 2007 2008 2009 2010 sixth-largest reserve, at 246m tonnes. In first-half 2011 Berau’s net profits hit $90.3m for the period, up 270.3%
  • 113. MINING OVERVIEW 135over the previous year. Its 2011 production is expect- ing to company reports. Antam also produced signifi- Further clarification on theed to reach some 20.3m tonnes. cant amounts of gold (1241 kg), silver (9365kg) and mining law should pave the Other players in the coal market include Indika Ener- coal (215,150 tonnes) in the first half of 2011. Gold way for additional investment in the sector, asgy, which holds a 46% stake in the country’s third- production came primarily from its Pongkor mine (974 should continued highlargest coal mining firm, Kideco, and Indo Tambangraya kg), with 267 kg derived from it Cibaliung mine. commodities prices andMegah, in which Banpu of Thailand has a 65% control- OUTLOOK: With Asian economies showing no sign of increasing demand for coalling stake and which produces 20m tonnes annually. slowing, the demand for coal in the region’s power and and nickel in Asia.NICKEL: Nickel ore production reached 6.56m wet met- manufacturing bases is only likely to grow in the fore-ric tonnes (wmt) in 2010, with output picking up in the seeable future. Domestic production is projected to hitfirst six months of 2011 to 3.91m wmt. The country’s 560m tonnes by 2025, according to ICMA estimates.largest nickel producer since its inception in 1968 is Over this timeline, exports are predicted to remainInternational Nickel Indonesia (INCO), which is major- largely static and account for 260m tonnes by 2025,ity-owned by Brazil’s Vale Inco (58.73%) and Japan’s Sum- with growing domestic consumption increasing dramat-itomo (20.09%), with other smaller shareholders mak- ically to 300m tonnes to consume the remainder of pro-ing up the remaining 21.18% of the shares. INCO duction. “The coal industry continues to thrive as theproduces exclusively nickel-in-matte, a semi-finished lat- price climbs and everyone seems to want to enter theerite-based product processed at its refining facility in market,” Roy Olsen, the president-director of Thiess, toldSoroako, South Sulawesi. The company’s entire output OBG. “The concern of course is that the market over-is shipped to Japan where it undergoes further purifi- heats and then the potential for a crash emerges.”cation processes under a long-term contract. Although domestic production will continue to grow, Another major nickel producer in the country is Ane- largely due to the increase of domestic coal-fired pow-ka Tambang (Antam), in which the state holds a 65% er plants, the success of Indonesia’s exports will bestake and which is listed on the Australian stock largely determined by legislation governing the expor-exchange. Total nickel ore production for the compa- tation of low-rank coal. Further clarification on theny increased 15% in the first half of 2011 compared to country’s updated mining law should also pave the waythe previous year, swelling from 2.39m wmt to 3.91m. for investments. The combination of the global eco-Rising production boosted its first-half profits to nomic rebound and the widely predicted high com-Au$238.1m ($242.5m), up 9% over Au$218.8 ($222.9m) modities prices bodes well for Indonesia to capitaliserecorded over the same time period in 2010, accord- on renewed demand in gold, tin, nickel and copper.
  • 114. MINING ANALYSIS 137 Total gold production reached 111,387 kg in 2010Gold standardTwo companies lead production of gold and copperInterest in the most reliable and safest of metals, gold, ounce. The decrease in output was explained by min- The most productive minecontinues to bolster commodity prices even as enthu- ing in lower-grade sections of the Grasberg mine. contains the largest recoverable coppersiasm for other metals flag, and Indonesia’s mining Freeport predicted further decreases for 2011, with reserves in the world, pluscompanies are keen to capitalise on this. copper and gold production estimated at 1bn pounds the single largest goldLOWER PRODUCTION: Total gold production for 2010 and 1.3m ounces, respectively. The company will be reserve. One company hasreached 111,387 kg, according to data from the Direc- hard-pressed to meet even these goals, however, as the the rights to conducttorate General of Mineral and Coal (DGMC), but pro- mine was effectively shut down in mid-September exploration, mining and production activities at theduction in the first half of 2011 did not keep pace with 2011 by a labour dispute. mine.the 2010 performance, registering 40,806 kg. Copper PTNNT is an Indonesian joint venture company ownedproduction in 2010 amounted to 989,953 tonnes, by a number of international mining companies includ-according to the DGMC. ing Denver-based Newmont Mining Corporation, the Production targets through the first half of 2011 fell Sumitomo Corporation of Japan, local mining power-far short of their mark of 665,158 tonnes as well, with house Bumi Resources and various other local investors,total output registering some 329,655 tonnes. The as well as local government interests.drop in national output is attributed largely to tempo- The company operates the Batu Hijau gold and cop-rary production decreases in the country’s primary per mine located in West Nusa Tenggara. The Batumining companies, although further declines are Hijau mine produced 542m pounds of copper in 2010expected due to an extended work stoppage at Indone- and 737,000 ounces of gold, according to companysia’s largest gold and copper mine. reports. This was up from the 504m pounds of copperCOMBINED EFFORT: Two large international mining and 557,000 ounces of gold produced in 2009. Totalcompanies, Newmont Nusa Tenggara (PTNNT) and reserves of the site are estimated at 3.76bn pounds ofFreeport Indonesia, make up the lion’s share of both copper and 3.7m ounces of gold. In August 2011 New-copper and gold production in Indonesia through their port also announced it was beginning exploratory workstakes in local mining operations. on a new gold and copper block of its 87,000-ha West PT Freeport Indonesia, a subsidiary of Freeport- Nusa Tenggara concession.McMoRan Copper & Gold, operates the Grasberg mine ADDITIONAL PLAYERS: In addition to the Freeport andcomplex in the province of Papua. The mine contains Newmont combined copper and gold mines, there arenot only the largest recoverable copper reserves on five other major gold mining companies currently inthe planet, but also the single largest gold reserve as production in the country: Aneka Tambang (Antam),well. Freeport has the right to conduct exploration, Avocet Bolaang Mongondow, Cibaliung Sumberdaya,mining and production activities within the 27,400- Indo Muro Kencana and Nusa Halmahera Minerals.acre Block A area, which includes all current mining Major copper mining in Indonesia is carried out pri-operations and proven reserves, as well as the current- marily by the big two, although a smaller third compa-ly unexplored 500,000-acre Block B. ny, Batutua Tembaga Raya, has a mine out on a small According to company reports, in 2010 Freeport island in East Nusa Tenggara. Smelting capacity forproduced 1.2bn pounds of copper at an average realised both minerals is limited, with the only sizable facilityprice of $3.69 per pound, down slightly from 2009’s being the 300,000-tonnes-per-annum copper cathodeoutput of 1.4bn pounds. Gold production similarly producer, Smelting, in East Java. It is a joint venturedipped from 2.5m ounces in 2009 to 1.8m ounces in between Mitsubishi Materials (60.5%), Freeport (25%),2010, fetching an average realised price of $1271 per Mitsubishi (9.5%) and Nippon Mining & Metals (5%). THE REPORT Indonesia 2012
  • 115. 138 MINING INTERVIEW Martiono Hadianto, President Director, Newmont New targets, new projects OBG talks to Martiono Hadianto, President Director, Newmont, and Chairman, Indonesia Mining Association (IMA) What needs to be done to encourage investment government only to find out in two or three years that in greenfield projects rather than simply expand- it is going to be unilaterally modified. ing existing mining operations? MARTIONO: Production at existing mining areas will To what extent has the government been able to eventually decline and shut down. In order to maintain encourage investment in the downstream sector? – or even increase – current production levels, the gov- MARTIONO: There is a lot work that needs to be done ernment has to undertake new mineral explorations in before moving up the value chain and getting into the addition to expanding current projects. value-added business. The 2009 regulation forces us Exploration spending is essential for the future of this to process the products domestically but not to invest industry, and the Indonesian government should work downstream, which is currently unrealistic. To be able harder to create a competitive and investor-friendly fis- to process raw materials, we require a number of facil- cal regime to attract additional investment in the min- ities that are currently unavailable to us. Adequate ing sector. The industry is capital-intensive, which means infrastructure is key, and once it is established we will that strong incentives are key to competing with oth- develop value-added industries, which will be our com- er countries. In addition, when it comes to new proj- petitive advantage in meeting our domestic market ects, the government and the private sector must have needs, as well as expanding to international markets. the same understanding of forestry regulation, espe- A company like Pertamina, for instance, which is state- cially regarding the balance between exploration and owned and benefits from numerous resources, has not forest protection. Coordination between the forestry been able to undertake this challenge yet and still can- and energy ministries should be intensified to address not refine their own crude oil. Moreover, the govern- investors’ concerns, and a 100% guarantee for explo- ment cannot impose certain requirements upon our ration and production should be offered. industry without providing the necessary support that will allow us to achieve the goals they have set. How has the industry reacted to the government’s willingness to renegotiate existing contracts so What measures are being considered to ensure that the distribution of royalties can be improved? that environmental standards are being upheld for MARTIONO: It has been said that the government’s plan all companies operating in the sector? could drive away investors willing to take part of future MARTIONO: Environmental standards are a matter of explorations in our country. However, the IMA under- education and attitude towards a problem, and not stands the government’s point of view and the popu- about the resources, technology or volume that a com- lar pressure to avoid what is considered an imbalance pany has. Therefore, standards should be upheld in of wealth distribution in certain contracts. every company, no matter its size or its geographical Accordingly, our role is to act as a bridge between location. We have a duty to educate people about the the government and the private sector, transmitting the importance of preserving the environment. We are concerns of the industry. Most of our members want very concerned about environmental measures, and we to stay in Indonesia and be involved in future explo- take the principles of sustainable development and rations. They want to see this issue addressed in the conservation of biodiversity extremely seriously. I believe best possible way, and they are assuming that the con- that all the members of the IMA will be able to meet tracts they sign will be honoured. Nobody in the indus- the government’s targets for carbon emission reduc- try likes the idea of entering into a contract with the tions, and adopt environmentally friendly practices.
  • 116. MINING ANALYSIS 139 Operations are centred in the Bangka Belitung and Riau IslandsElemental productionVarying tin prices impact local manufacturing outputAs the largest exporter of tin on the planet, Indone- manufacturing industry and maintains much of its A combination of marketsia has been enjoying a wave of strong demand and domestic production for internal consumption. factors have slowed tin production in 2011, thoughrising commodity prices in recent years as regional THE PLAYERS: The country’s tin-producing industry an increase during the firsteconomic growth has surged. is dominated by the state-owned Timah, which is also nine months of the year Tin mining companies have been in for a wild ride the world’s largest integrated tin mining company. could boost overallin 2011, however, as tin prices diverged from those According to company records, Timah produced production and profitabilityof other minerals and spiralled up and down through- 40,413 tonnes of tin in 2010, down 10% from its 2009 above 2010 levels.out the year. These uncertain market conditions, com- production level of 45,086 tonnes. The company cit-bined with a number of other unrelated factors, have ed adverse weather conditions and declines in themanaged to hinder tin production, despite early pre- easily recoverable onshore reserves as the primarydictions that 2011 would be a banner year for tin out- reasons for the production decline.put in the country. There is, however, a silver lining in Through the first three quarters of 2011, the com-that the higher production during the first nine months pany’s production again declined significantly toof 2011 will likely boost overall production and prof- 25,266 tonnes from the 29,252 tonnes recorded overitability over the levels seen in 2010. the same time period the previous year. Despite theEXPORT POTENTIAL: Indonesia exported 78,715 decrease in production, Timah benefitted from strongtonnes of tin through the first 10 months of 2011, prices in the first half of 2011, which the companyup 3.9% over the 75,778 tonnes recorded the previ- was able to leverage into a net profit of Rp689bnous year, according to data from the Indonesian Trade ($82.7m) through the first six months of the year.Ministry (ITM). Total domestic production of tin in This marked an impressive 113.9% hike over first-halfIndonesia is expected to increase by 2.3% for full-year 2010 profits of Rp322bn ($38.64m).2011, due primarily to the fact that a dramatic reduc- Company officials alluded to the fact that thetion of production was expected in the final two decrease in production may not be entirely due to pro-months of the year in response to market conditions. duction constraints and could also be a result of mar- Tin exports totalled 92,487 tonnes in 2010, down ket conditions. “Excessive supply will not be good for7.35% from the 99,287 tonnes in 2009, according to maintaining the world’s tin price,” the company’s cor-the ITM. The value of tin exports reached $1.74bn in porate secretary, Abrun Abubakar, told the press in2010, up from $1.27bn the previous year but far below February 2011. “We will always control our produc-the $1.99bn recorded in 2008. Primary export nations tion rate for reserve conservation purposes.”for Indonesian tin are led by Singapore, along with Timah has also been investing heavily in expand-Japan and the Netherlands, according to the ITM. ing its downstream operations in recent years, adding Indonesia’s mining and refining operations are lim- a 2100-tonne-per-annum (tpa) solder factory at Kun-ited to two primary areas in the Bangka Belitung dur on Beltung Island in June 2009 and a new tinIslands located in the Karimata Strait between Suma- chemicals plant at Cilegon in April 2010.tra and Kalimantan and the Riau Islands just south of Koba Tin is the second-largest tin producer in theSingapore. Widely used in a diverse range of prod- country. Timah holds a 25% stake in the company,ucts that include electronics, plating, lead-free sol- with the remaining 75% share held by the Malaysianders and packaging, tin is a highly sought-after ingre- Smelting Corporation. Total tin production for thedient for a number of manufacturing processes. China, company fell to 6900 tonnes in 2010, down fromfor instance, is a large consumer of tin in its thriving some 7337 in 2009, according to company statements. THE REPORT Indonesia 2012
  • 117. 140 MINING ANALYSIS $25,000 in June before rebounding in late July to near- ly the $30,000 level. This was then followed by con- cern over Europe’s continuing sovereign debt crisis and its effects on the global economy, which conse- quently sent tin prices tumbling in the third quarter of the year to around $19,000 in August. BAN TO BOOST: In response, a total of 28 domestic tin producers accounting for a combined 40% of glob- al exports implemented a self-imposed ban on tin exports starting October 1, 2011. The ban was to last until the end of the year in a bid to further boost tin prices to at least $25,000 a tonne on the London Metal Exchange. The action initially excluded exist- ing contractual orders from Timah while restricting the company from participating on the spot market, although the Indonesia Tin Association (ITA) then asked the company in late November to halt all exports in order to expedite the rise of global prices. The move marked a dramatic reversal by the indus- try after the government announced as recently asA total of 78,715 tonnes of tin were exported in the first 10 months of 2011, up 3.9% on the previous year February 2011 that it would limit annual output to a These two large primary producers are further sup- maximum of 100,000 tonnes per year to protect plemented by dozens of small local operations stocks from illegal mining operations, which were throughout the country. The effectiveness of these proliferating due to the high tin prices. At that time, small-scale operations has been diminished in recent analysts were predicting that global tin prices could years, however, after the government began citing the reach as high as $35,000 or even $40,000 per tonne mines for environmental infractions. The proliferation before the end of the year due to a continued sup- of difficult-to-regulate, small-scale smelters began ply shortage, an estimate that indeed proved in ret- after the government banned the export of raw tin rospect to be overly optimistic. ore in 2002. New mining laws also restrict the small- By November the ban had shown only limited effec- er operations to less invasive river bank operations. tiveness in propping up tin prices which had remained Unlike many other mineral mining operations in below the $23,000 per tonne mark. Signs were show- Indonesia, the tin industry also operates with a sig- ing, however, that the ban was becoming effective nificant amount of downstream capacity for refining enough at restricting supply that many buyers, includ- its ore. The largest smelters are operated by Timah at ing those from Germany, Japan, South Korea and Tai- Metok, with a capacity of some 68,000 tpa, followed wan, complained to the Indonesian Tin Association by the 25,000-tpa capacity smelter in Koba operat- that they had begun experiencing difficulty in secur- ed by Koba Tin. Another refinery, Bangka Belitung ing the metal. At the time of publication, the ban was Sejahtera, is supplied through numerous small-scale still in effect. According to the ITM, only five compa- miners operating in the vicinity and produced approx- nies exported tin in October 2011: Timah, Refined imately 20,000 tonnes of tin in 2010. Bangka Tin based in Bangka Belitung, Eunindo Usa- SUPPLY AND DEMAND CURVE: In addition to the vari- ha Mandiri, Singkep Timas Utama and Tambang Timah ety of factors, including adverse weather and the (a subsidiary of Timah) based in the Riau Islands. shutdown of mining operations in Congo, conspiring EXPORTS FALL: As a result of this work slowdown, to restrict tin production, the commodity price’s roller- tin exports from Indonesia were projected to fall to coaster ride through the global market in 2011 has just 4000-5000 tonnes in November and December spurred the Indonesian tin mining sector to take more 2011, their lowest level in three years. This would be proactive measures to stabilise its value. As the world’s less than half of the 8986 tonnes shipped in Novem- largest tin producer supplying a majority of global ber 2010, according to data from the ITM. Through refined tin exports, Indonesia has significant leeway the first nine months of the year prior to the ban, the to alter the global price of the commodity by con- country exported an average of 8136 tonnes. trolling its output. This effect is compounded by the While this slowdown in production and exports fact that the world’s second-largest producer, China, may improve commodity prices in the short run, it consumes the bulk of its production internally. could ultimately prove detrimental to Indonesia’s tin Initially, the carryover of strong prices from 2010 mining sector in the long run if higher global pricesA self-imposed ban on tin into early 2011 more than offset a slowdown in pro- drive mining operations in other countries to boostexports in late 2011 by 28 duction caused by poor weather, a clampdown on production. Although there are few new tin mine proj-domestic tin producers small-scale operations and tighter export restrictions. ects scheduled to come on-line in the near future, athat account for 40% ofglobal exports was But after peaking at a record high of $33,000 per combination of higher commodity prices and a slow-intended to boost the price tonne in April 2011 due to supply deficits estimated down in the local production could draw in newof tin to $25,000 per tonne. as some 22,000 tonnes, tin prices plunged below investors to boost exports onto the global market.
  • 118. 141Industry & RetailTransition to an industry-based economy under wayGrowing disposable income creating new demandsScope of automobile sales increasingTraditional tobacco products remain popularImpact of the ASEAN-China FTA being felt
  • 119. INDUSTRY OVERVIEW 143 The sector’s contribution to GDP growth is substantialA stronger foundationThe focus remains on becoming an industry-based economyWith economic growth of 6.1% in 2010 and widespread IMPRESSIVE IMPACT: The industrial sector’s impactpredictions of continued expansion in 2011, Indone- on overall GDP growth is substantial. Indeed, whensia’s industrial sector is attracting more attention from manufacturing in oil and gas is added in, the manufac-international investors than ever before. The country turing sector as a whole comprised 25% of GDP in 2010,is also making a major effort both to shift away from according to CBS data. Manufacturing also contributedresource-based industries to more value-added sectors, greatly to the country’s export earnings. The data showsand to boost its fundamental economic infrastructure that in the January-December 2010 period, manufac-in ways that will directly benefit investors. turing or free on board (FOB) exports totalled $98bn. With six new economic corridors and six priority This was a 33.47% hike on the same period of 2009,industry groups established, the nation of some 17,500 when the total value of FOB exports was $73.43bn.islands is also set to give its distinctive regions and its Manufacturing exports also amounted to some 62.14%,small and medium-sized enterprises (SMEs) more of a by value, of Indonesia’s total exports in 2010.focus in industrial planning. At the same time, public- Those exports were dominated by 12 industrial sub-private partnerships (PPPs) and close involvement with sectors, with the top three being crude palm oil andthe private sector are high priorities for development. coconut processing, which together contributed 17.6%CRUNCHING THE NUMBERS: Figures from the Cen- of total export earnings in 2010; textiles, which con-tral Bureau of Statistics (CBS) show Indonesia’s annu- tributed 11.4%; and iron and steel, machinery and auto-al GDP growth rose from 5.7% in 2005 to 6.1% in 2010. motives, which contributed 11.1%. The year 2010 sawIn contrast to many economies, GDP continued to grow the sector receive some impressive investments, bothduring the global downturn, at 6.2% in 2008 and 4.5% from domestic sources and from overseas. Somein 2009. The non-hydrocarbons sector is behind much Rp3.26trn ($391m) of domestic investment went intoof the expansion, with industry playing a major part. the organic chemical, chemical product and pharma- Indeed, the CBS figures show that while oil and gas cy segment – the top recipient in the non-oil and -gashave been in decline over the above-mentioned peri- sector – along with $798m of foreign direct investmentod – 2005 registered a 1.66% reduction in value in (FDI). Other big recipients were the paper, paper prod-hydrocarbons and they fell by 2.31% in 2010 – the uct and printing segment; iron and steel; machinery andnon-oil and -gas sector continued to expand, with 5.27% electronics; and rubber and plastics. Going into 2011growth in 2005 and 5.09% in 2010. CBS figures show the country’s industrial production The CBS divides the non-oil and -gas sector into sev- index, which measures annual changes in output foreral categories, which combined accounted for 21.55% manufacturing, mining and utilities, saw a 4.9% rise inof total GDP in 2010. Within the industrial sector, the June after 5.35% growth the month before. The ratelargest amongst these categories was food, water and for 2010 overall was 3.6% and 3.5% for 2009, demon-tobacco, which together contributed 7.24%, while the strating again the remarkable degree of insulation fromfertilisers, chemicals and rubber industry contributed the global downturn Indonesia has managed.2.74%, and the textiles, leather and footwear segment PLANS & PLANNERS: Indonesia has set itself the goal Industry plays a major rolecontributed 1.93%. Other categories include wood of becoming an industrialised country by 2025, mean- in the economy – indeed, when the manufacturing inproducts and forestry, at 1.25%; paper and printing, at ing that by then, industry will be globally accepted as oil and gas is included,1.02%; cement and mineral extraction, at 0.71%; and the country’s economic base. The goal is to achieve this manufacturing as a wholeiron, metal and steel, at 0.42%. The non-industrial trans- via sustainable competitiveness, enabling manufac- amounted to 25% of GDP inport and ports category makes up approximately 6.06%. turing to both compete and succeed internationally. 2010, according to the CBS. THE REPORT Indonesia 2012
  • 120. 144 INDUSTRY OVERVIEW Banten, shipping in the Riau Islands and coal in South Sumatra. On Java, the corridor focuses on manufactur- ing textiles, automotives, electronics, shipping, petro- chemicals, steel, cement and industrial electronics. On Kalimantan, key sectors are palm oil, coal, steel and alu- minium, and oil and gas condensates. Sulawesi, mean- while, focuses on nickel and fisheries, and Bali-Nusa Tenggara on tourism and fisheries. In Papua-Maluku, activity centres on petrochemicals and copper. INFRASTRUCTURE BACKBONE: In tandem with the corridors, a substantial effort is being made to improve basic infrastructure in transport, energy and informa- tion and communications technology (ICT). The coun- try has long realised one major challenge to industrial development is the poor state of its infrastructure, which raises production costs and negatively impacts efficiency. “We want to meet with the government to discuss our concerns regarding the insufficient social infrastructure in Indonesia and develop a long-term plan, as this problem is driving up our costs and bring- Six core industrial groups are designated for accelerated growth ing our competitiveness down,” said Man Gyu Yim, theThe three key government In 2008 the National Industrial Policy was passed by president director of Samsung Indonesia.agencies coordinating presidential decree and aimed at government min- Indonesia’s current five-year development plan, whichindustrial development are istries, state agencies and the private sector. The state runs from 2010 to 2014, seeks to pull in some Rp1429trnthe Ministry of Industry, theNational Development has long pursued a cluster-based policy for industrial ($171.5bn) of investment into infrastructure, withPlanning Agency and the development, seeing this concentrating of resources Rp511trn ($61.3bn) coming from the state and theIndonesia Investment and infrastructure as the most efficient way to devel- rest from state-owned companies, regional govern-Coordinating Board. op the sector. The 2008 policy mapped the guidelines ments and the private sector. Some Rp407trn ($48.8bn) for 35 clusters, each for a particular priority industry. of the non-state investment should come from PPPs. A Road Map of Core Competence Industrial Develop- MAKING IMPROVEMENTS: The success of this invest- ment was set out for 18 provinces and five districts. ment drive will be crucial for industrial development In 2010 a new presidential policy targeted acceler- overall, with the Indonesian authorities working to ated development for a more focused group of indus- implement a number of improvements to the existing tries (fertilisers, sugar, agro-oleo-chemicals, and oil and structures for investing in industry. First, an expediting gas condensates) while also facilitating further devel- of licensing procedures to start a company is under way, opment of special economic zones. The body assigned with the time this takes now slashed from 47 days to responsibility for this accelerated development was 17 days in the Jakarta area, with times shortening else- the Ministry of Industry, currently headed by Mohamad where too. A “one stop” integrated system for invest- Hidayat. Two other key bodies are the central govern- ment services has also been set up at the national, ment’s National Development Planning Agency and provincial and regency/city levels. This is run through the Indonesia Investment Coordinating Board (BKPM). the BKPM, with an integrated computer system now in SIX FOCAL POINTS: From 2010 to 2014 the Ministry place for 33 provinces and some 44 regencies and of Industry is focusing on improving the competitive- cities. The next stage will be to connect this to the ness of six core groups, all of which have been select- Indonesian National Single Window system for Cus- ed for their potential to significantly expand and add toms clearance and the release of cargo. to the nation’s GDP. The six are labour-intensive indus- The sometimes controversial negative investment tries; small and medium-sized industries; capital goods list – the register of conditions attached to types of industries; natural resource-based industries; high- growth industries; and special priority industries. Industrial GDP, by line of business, 2008-10 (%) To give this focus concrete form the government is 2008 2009 2010 providing fiscal incentives, state budget allocations, Food, water & tobacco 6.99 7.49 7.24 administrative support and direct construction of infra- Textile, leather & footwear 2.12 2.08 1.93 structure. PPPs are also being used to bring private Wood products & forestry 1.48 1.43 1.25 sector assistance to this development programme. Paper & printing 1.05 1.09 1.02A number of improvements Dovetailing geographically with these six priority Fertiliser, chemicals & rubber 3.11 2.9 2.74are under way to make industry groups are six economic corridors. These are Iron, metal & steel 0.81 0.77 0.71investing in the country in Sumatra, Java, Kalimantan, Sulawesi, Bali-Nusa Teng-easier, including cutting Transport & parts 0.59 0.48 0.42 gara and Papua-Maluku. Each of these corridors focus-the days needed to get a Other goods 6.66 6.17 6.06company licensed from 47 es on a particular industry or set of industries for which Total non-oil & gas 23 22.57 21.55to 17 in Jakarta, with similar it has some competitive advantage. Thus, Sumatra is SOURCE: Central Bureau of Statisticsreductions elsewhere. for palm oil and rubber, along with petrochemicals in
  • 121. 146 INDUSTRY OVERVIEWInvestment incentives exist foreign investment and business activity – is also being 21.1%, according to Finance Asia. Some of the challengesin five main areas: general simplified and clarified, with the overall theme of mak- to growth are hindering all economies at a time oftax facilities, energy and, ing more sectors open to foreign involvement. global uncertainty, yet Indonesia has shown itself in theinfrastructure benefits,local government INCENTIVES: There are also a series of investment past few years to be often isolated from internationalincentives and tax credits, incentives available. These fall into five broad areas: trends, thanks to its huge domestic market and, inand import and trade general tax facilities, energy benefits, infrastructure 2008, lack of connectivity to global financial markets.benefits. benefits, import and trade benefits, and local govern- How the global economy fares ahead will therefore ment incentives and trade credits. On the first, official likely have an impact, but perhaps not as strongly as regulations in 2007, 2008 and 2009 have all seen tax on some other countries. “While the global economic reductions for companies investing in specified busi- crisis has not had a major impact on Indonesia, in my ness lines, while 2011 also saw a major new incentive. experience there is often a lag before the real effects In August 2011 the government announced plans for are felt. Therefore, it is advisable to carefully monitor tax breaks on foreign investments of over Rp1trn the situation,” said Lalisang. ($120m) in certain key areas. The breaks include a tax Many businesses thus see the challenges as more holiday of 5-10 years from the start of commercial domestic. A longstanding concentration of political operations for such investments, followed by a possi- and economic power in Java, particularly in Jakarta, has ble 50% income tax reduction for two years, provided left infrastructure elsewhere in poorer condition. the business is considered a “pioneer”. The new regu- Investors remain focused on Java, where around three- lation targets five sectors specifically – base metals, oil quarters of all industry is located, widening the gulf refining, petrochemicals, renewable energy and the between the centre and regions. This similarly applies machinery or telecoms equipment sector – but other to human resources, with Java and Jakarta attracting producers may also benefit if they have broad back- most qualified staff. Thus, moving industrial develop- ward and forward linkages in the supply chain. “The ment into the regions is a challenge. country would greatly benefit from a universal policy In the past as well, doing business in Indonesia has governing tax holidays and tax incentives. With improved entailed a great degree of bureaucracy, with a lack of clarity it would be easier to attract investors to the transparency and a multiplicity of authorisations lead- country,” Maurits Lalisang, the president director of ing to frequent allegations of graft. These are now tak- Unilever, told OBG in an interview. en seriously and the government has been involved in In terms of energy, the government offers incentives a lengthy battle to both increase transparency and for renewable usage and development, such as in bio- combat corruption – a battle likely to last some time. gas and geothermal power. There is also a major boost OUTLOOK: Indonesia’s government has made a move in electricity supply under way, with a new 10,000-MW up the value chain a central goal of industrialisation programme of power station construction. This aims plans. One way this is being done is through extra tax- to address another capacity constraint – the availabil- es on raw material exports in an effort to boost domes- ity of power for industry, particularly in less developed tic processing. Interest rates have also been high, as corridors. More generally, infrastructure receives sup- the central bank tries to combat inflation. port from government guarantees in PPP project land At the same time, the move towards more econom- procurement funding. Meanwhile, there are exemp- ic integration within ASEAN, and between ASEAN and tions from import duties on machinery, goods and regional giants such as China and India, is also leading materials for companies producing goods, provided to greater competitive pressures on Indonesian indus- the good is not yet produced domestically to required try. “Following the China-ASEAN FTA, the textile indus- specifications and quantities. Local governments, along try realised that to compete with China, we had to shift with the Indonesian Export Financing Agency and our strategy such that we focus our core business Indonesian Credit Insurance, provide additional incen- towards the production of more value-added prod- tives if their requirements are met. The BKPM is the ven- ucts,” said Agus S Tjandra, the president director of ue for facilitating PPP projects, with this agency involved Ateja, an interior fabric manufacturer. This, of course, in investment promotion, as well as in providing serv- is also an advantage for those Indonesian businesses ices to investors and coordinating local and central that can exploit the new markets this affords. government bodies and agencies. Nonetheless, there is still political pressure for a more All of these incentives are attractive for foreign com- protectionist economic agenda. Yet, with a developing panies looking to set up shop in Indonesia. “With ris- infrastructure backbone, national and local policy com- ing costs in China and an increase in the availability of mitments to industrial growth, and increased interest rubber, we envisage the possibility of companies relo- from investors, the hope is that Indonesia can use these cating their tyre production to Indonesia,” Luigi Carlo challenges to move itself forward to its 2025 goals. Gastel, the president director of Pirelli, told OBG. LOOKING TO THE FUTURE: The industrial sector now Exports, 2009-10 (FOB value, $ bn)In 2010 $16.61bn of has a clear and coordinated structure for its develop-investment came from FDI. Sector 2009 2010 % change % of total ment, with the drive for investment already reaping Manufacturing 73.44 98.01 33.47 62.14Similarly, in the secondquarter of 2011, year-on- rewards. In 2010 a total of $23.38bn of investment Total 116.51 157.73 35.38 100year growth in overall FDI was realised, $16.61bn of that in FDI. In the second quar- SOURCE: Central Bureau of Statisticsamounted to 21.1%. ter of 2011, year-on-year growth in overall FDI was up
  • 122. INDUSTRY INTERVIEW 147 Sudhamek AWS, President Director, GarudaFoodOvercoming infrastructureOBG talks to Sudhamek AWS, President Director, GarudaFoodTo what extent is growth within the food and bev- this is the reality that we are confronted with, and soerage industry able to continue rising? we deal with it as best we can. While the private sec-SUDHAMEK: The growth that we have experienced tor, in many instances, has developed its own infra-is very much sustainable over the medium term. More- structure to compensate for shortfalls in the system,over, it is one of the most stable industries in the we cannot do it all on our own. It is simply too cost-country. The official GDP growth in 2012 is expected ly. The challenge of addressing infrastructure devel-to be around 6.5%. Moreover, growth is no longer opment is one for the government to address. Whilerestricted to Java. In fact, the ratio of consumption there have been a number of improvements, expec-between Java and other islands has narrowed from tations have not been met.65:35 to 48:52. This represents a great opportunity Supply chain costs for the food and beverage indus-for the industry, as long as issues related to logistics try continue to hover around 19% on average. In com-can be adequately addressed and affordability main- parative terms, this is much higher than most of thetained. Additionally, per capita consumption, when other developed countries in the region. Singapore,compared to other Asian countries, has remained rel- for example, which sets the benchmark that all coun-atively low, and as per capita income increases, tries should strive to match, has a centre of logisticalimproved prospects for growth and increased domes- excellence, and operates at around 9.8-10%.tic consumption are inevitable. As a result, many investors have begun to set up How has the sourcing of raw materials from theproduction bases here in Indonesia. The size of the domestic market improved? What can be expect-domestic market alone provides enough incentive. ed in the immediate future?With the potential for export factored into the equa- SUDHAMEK: Strategic sourcing is important, as pack-tion, it is a very attractive situation indeed. This is ide- aging and raw materials account for 65-70% of foodal for potential joint venture partnerships between and beverage costs. One of the challenges that weIndonesian-based food and beverage manufacturers face as an industry is that while we may source a com-and businesses in other high growth markets like Chi- modity domestically, we are still required to pay thena, India and the Middle East. It is my assessment that international price, as is currently the case withover the course of the next 10 years we could see the peanuts. Therefore, we not only have to manage theindustry achieve double-digit growth. quality and quantity of the supply, but also the price. Indonesia has gradually become more competitiveHow do you respond to the claim that logistics in the upstream industry, thus improving the supplycosts are acting as the greatest disincentives to of food and beverage materials. Advancements haveinvestment in Indonesia? been made within the flour, cocoa and sugar indus-SUDHAMEK: We have to live with the fact that infra- tries. In the future I anticipate that this trend will con-structure in Indonesia remains our primary obstacle tinue, as there are large quantities of land that areand this situation is unlikely to significantly change in not being utilised at present. Papua, for instance,the foreseeable future. More specifically, our major holds great potential, since its land and climate areconcern is the lack of interconnectivity between the ideal for agricultural development. More generally,two major markets of Java and Sumatra. To overcome there can be little doubt that the sourcing of rawthis challenge we have established several factories materials from the domestic market will play anin both provinces. Economically, it is not ideal, but even greater role in the industry’s continued success. THE REPORT Indonesia 2012
  • 123. 148 INDUSTRY INTERVIEW John Gledhill, President Director, HM Sampoerna Local impact OBG talks to John Gledhill, President Director, HM Sampoerna Do you think international investors are aware of great quantity, providing thousands of jobs for its cit- the ease of doing business in Indonesia? izens. Additionally, kretek is made up of a tobacco called GLEDHILL: There is a misperception about the level to rajangan and is supplemented by clove. The tobacco which barriers to investment exist, and these obsta- and clove is grown mostly by small-scale farmers. As a cles are often overstated. The fact is that there has been result, the tobacco industry employs more than 6m a lot of foreign investment in Indonesia, and it is steadi- people, the majority of whom are in the agronomy and ly increasing. Most of the major international oil and manufacturing and distribution sectors. While most gas companies already have a significant presence, and tobacco industries around the world only contribute long-term investors such as us, Unilever and Proctor & roughly 1% to the national budget in various forms of Gamble have been successfully operating in the coun- tax revenue, the Indonesia tobacco sector contributes try for years. I think when people fully comprehend the close to 7%. Additionally, it has been growing steadily size of this market from an economic, population and at 3% per year, providing a sustainable employment consumption perspective, they realise that this is a base for Indonesia’s rural communities. That is why the market that cannot be ignored. Also, a notion exists that tobacco industry has been designated by the govern- there are a limited number of professionally run com- ment as one of the 10 priority industries. panies. The reality is that there are a vast number of extremely large, well-organised local companies with How do you respond to claims that the industry is the potential to be great partners for any internation- avoiding dealing with impending regulations? al organisation that wants to enter the market. GLEDHILL: We in the tobacco industry often get In general people tend to overestimate the compli- accused of avoiding questions dealing with the regu- cations associated with bureaucracy and the ease of latory environment, but the truth is that we are total- doing business. And while some challenges do exist, ly in favour of regulation so long as it is fair, balanced any company that is serious about doing business here and impactful. We fully support any measures that will can easily overcome them. So, while potential investors have a significant impact on reducing youth smoking continue to ask basic questions about the country’s eco- and which increases the awareness of the dangers of nomic position and political stability, organisations that smoking. What we do not support is regulation for the are not easily swayed by existing misperceptions are sake of regulation. There are varying interpretations of already making sizeable forays into the market and tak- the legislation governing tobacco across each region. ing advantage of an immense opportunity for growth. This makes it very difficult from an industry standpoint to manage what is a national business. To what extent has tobacco been able to bring As an industry we have put forth recommendations employment and economic stimulus to rural areas? to the Ministry of Health and the Peoples Represen- GLEDHILL: The Indonesian tobacco industry is very tative Council for the adoption of a national tobacco different from other tobacco industries around the control law. These recommendations include a mini- world in that it is comprised of two types of products mum age to purchase tobacco, restrictions on tobac- rather than one: machine-made white cigarettes and co marketing, larger health warning requirements and kretek (cigarettes made with a blend of tobacco, cloves sponsorship restrictions. There is common ground and other flavours). A large quantity of kretek cigarettes between the tobacco industry and the government, and are hand rolled and this makes Indonesia one of the I am confident together we can continue to develop a only countries to manufacture hand-rolled products in balanced and enforceable framework for the industry.
  • 124. INDUSTRY ANALYSIS 149 The tobacco industry remains a major source of employmentAn evolving traditionTraditional tobacco products continue to lead the segmentWith its internationally famous clove cigarettes, known national distribution. From 2006 to 2010, the com- The most popular form ofas kretek, and an expanding domestic market, Indone- pound annual growth in volume was 3.3%, from 229bn cigarette by far is kretek, or clove, cigarettes, withsia is a centre for many global tobacco companies. The sticks to 270bn. Of the 2010 figure, 21bn were white, machine-made and hand-industry provides employment and income for tens of 167bn machine-made kretek and 82bn hand-rolled rolled ones togetherthousands of people, from growers to hand-rollers and kretek. At a time when many markets are shrinking, comprising 92% of all sales.retailers. With an estimated 60% of adult males smok- Indonesia is thus a major source of industry and a population of 240m overall, Indonesia is also FUTURE ROADMAP: The Indonesian market remainsthe third-largest market for tobacco products in the somewhat undeveloped in legislative framework, making tobacco a major part of the nation’s Cigarette advertising is still allowed, with packets dis-economy. Around 10% of the country’s revenues come playing minimal health warnings. In 2007 the govern-from the growing and selling of tobacco products. ment launched a Tobacco Industry Roadmap, which In recent times, though, the sector has been facing set out three periods for industry development. In thegrowing challenges. More regulation is on the way, as first, from 2007 to 2010, the order of priority was pro-are campaigns to spread awareness of health risks. tection of employment, revenue and health. For theChanges in taxes and tariffs are contentious, with the 2010-15 period, health moved to number two and rev-lack of an overall, consistent tobacco law a complaint enue to number one, with employment bringing upfor many in the sector. Nonetheless, most remain bull- the rear. From 2015 to 2020 health takes the top spot,ish that the market will continue to grow in coming years. followed by employment and revenue. The tax struc-A DIVERSE MARKET: With three main types of ciga- ture has traditionally been at a fixed rate per piece andrettes available (hand-rolled kretek, machine-made designed to help small manufacturers by adjusting thekretek and whites) Indonesia has one of the most var- rate according to volume produced. The manufactur-ied markets in the world. The kretek cigarette is some- er, not the retailer, pays sales tax. The tax structure isthing of a national symbol too, traditionally hand rolled due to be simplified in 2012, removing the productionfrom a mixture of black tobacco and cloves. Indeed, at volume determinant and setting three across-the-boardPhilip Morris-owned manufacturer Sampoerna’s plants rates for the three cigarette types. Rates will also goin Central and East Java, some 30,000 people are still up, with more damaging varieties penalised. This is notemployed to hand roll cigarettes. In terms of the mar- expected to have much impact on demand, however.ket overall, around 92% of all sales are kretek, with The government has set a limit on total productionwhites holding a roughly 8% market share over the past between 2012 and 2014 of 265bn cigarettes per year,five years. Hand-rolled kretek accounts for around 30% although previous targets such as this have provedof sales and machine-made kretek the other 62%. The hard to meet, as the market keeps expanding. Parlia-market is dominated by three companies: Hanjaya Man- ment has been debating new tobacco laws, while adala Sampoerna (HMS), Gudang Garam and Djarum. Two separate piece of legislation from the Ministry of Health Sector players wouldother important players are BAT/Bentoel and Nojorono. was initiated in 2011, although the issue was still being welcome more regulation Market share has remained fairly constant over the debated in November 2011. These bills offer increased of the tobacco industry,past few years, with figures from Nielsen Retail Audit regulation, which is broadly welcomed, although play- though many say they would prefer aresults showing HMS with 29.1% in 2010, Garam with ers also advocate a comprehensive and simplified comprehensive and21.8%, Djarum with 19.7%, BAT/Bentoel with 8.4% and approach via a single new law, created by all stakehold- simplified approach underNojorono with 6%. The remaining 15% is mostly a vari- ers. In the meantime, the market looks set to continue a single law, created by allety of small manufacturers, largely local outfits lacking growing, with kretek maintaining its overall dominance. stakeholders. THE REPORT Indonesia 2012
  • 125. 150 INDUSTRY ANALYSIS Beverages are a segment with huge potential for growth A matter of choice Growing disposable income is creating demand for new productsThe recently accelerated Another recent beneficiary of Indonesia’s rapid econom- are available in Indonesia at the same time as the restgrowth of the middle class, ic growth has been the consumer goods industry, with of the world,” Irwan D Mussry, president and CEO of Timeand the new tastes that go domestic demand rising significantly for food and bev- International, a luxury watch line carrier, told OBG.along with it, has createdgreat opportunities for the erage (F&B), pharmaceuticals, cosmetics, textiles and COMPANIES: The F&B market is dominated by a num-consumer goods industry. footwear, and tobacco products (see analysis). Exports ber of large players. Indofood Sukses Makmur, part of have also been growing, with the bar increasingly high the Salim Group, is one leading outfit, and includes for Indonesian producers as they seek to meet regula- branches in consumer branded products, wheat flour tory and food safety standards in Western markets. production, agribusiness and distribution. It currently These are challenging and potentially highly rewarding holds around 75% of the country’s noodle market. Oth- times for the consumer goods sector. er companies include Tiga Pilar Sejahtera Food, Charoen F&B: One star performer in recent times has been the Pokphand Indonesia, Mayora Indah, Siantar Top and F&B sector, where rising incomes, an expanding pop- Nippon Indosari Corpindo. GarudaFood is another play- ulation and widening tastes have led to a surge in er, with its offering of a minority stake for sale in May demand for all types of products. Indeed, while Indone- 2011 provoking widespread interest abroad. sia’s income demographics are characterised by a large Indeed, foreign interest in the consumer goods mar- gap between rich and poor, the recently accelerated ket jumped considerably in 2011, although historical- growth of an urban middle class – estimated to include ly there have been few foreign players on the ground. around 30m people – has created great opportunities. The challenges in obtaining product registration have These consumers have increasingly adopted non- usually led to foreign interests being served via manu- traditional tastes too, which has been a boon for facturing agreements with Indonesian partners. Among importers. As a majority Muslim country, production of foreign-Indonesian joint ventures in consumer goods halal products is another factor in company success. are Unilever Indonesia, Nestle Indonesia, Kraft Ultrajaya PRICING: At the same time, however, 2011 has seen and Coca-Cola Amatil. In retail, Carrefour is present, with rising production costs affect many companies’ mar- the largest retail group being Matahari Putra Prime. gins. Indeed, while revenue from four key F&B manu- THIRSTY WORK: In the first half of 2011 the F&B sec- facturers increased 78% in the first half of 2011, the tor grew around 3% year-on-year, a slower rate com- overall profitability from operating margins dropped 223 pared to growth in previous quarters. Predictions from basis points over the same time, to 11.09, year-on-year. the Indonesian F&B Association were for second-half Lower-income Indonesians are highly sensitive to 2011 to see F&B sales up 50.1% from R261trn ($31.3bn) changes in price, which, when combined with an increas- in second-half 2010 to Rp392trn ($47bn). Factors ingly competitive market, has meant many producers affecting the surge include the presence of both Mus- absorb these extra costs, rather than pass them on to lim and Christian festivals in the second half of theIn the first half of 2011, the customers. Those companies targeting higher-income year, which traditionally see a jump in consumption. Thefood and beverage sector groups, however, have generally continued to do well, fast of Ramadan, for example, is particularly good forgrew about 3% year-on- as they are able to be more flexible on prices. beverage sales, such as energy drinks. Working againstyear. Analysts expected a Still, price is not always the primary concern. “The this, however, has been the continuing rise in costs, withsurge in the numbers for prices for our products are well balanced internation- the Indonesian Beverage Industry Association (ASRIM)the second half, due to thepresence of Christian and ally, but through surveys of our customers we see price stating mid-year that raw material price hikes of 20-Muslim religious festivals in in the luxury products market is not the main priority; 25% might be on the way, with corresponding rises forthat period. far more important for our customers is that products consumers and some dents in profitability and sales.
  • 126. INDUSTRY ANALYSIS 151 Beverages are a huge potential growth area, though. investment from domestic outfits. Despite the chal- Distribution of goodsFigures from ASRIM show that Indonesia has the low- lenges, the sector has seen a compound annual growth remains a challenge inest current per capita beverage consumption rate, at rate of 11% between 2003 and 2010, with 21% of the Indonesia, favouring larger companies that can86 litres per year, of any country in ASEAN. This breaks market controlled by foreign companies. effectively integrate theirdown into at 33 litres per year for carbonated drinks, COSMETICS: In cosmetics, international companies supply chains.and 53 litres per year for packaged water. (Alcoholic include Unilever, PZ Cussons and P&G, while local play-drinks are counted separately). By comparison, Thai- ers include Mustika Ratu, Mandom Indonesia and Mar-land’s total annual per capita beverage consumption tina Berto. Competition between local and foreignis 89 litres and the Philippines’ is 122 litres. groups has been increasing in 2011, thanks to a new-PHARMACEUTICAL INSIGHT: In pharmaceuticals and ly active regulation removing a requirement for foreigncosmetics, competition looks set to increase in 2012 companies to have special marketing licences for theirwhen Procter & Gamble (P&G) adopts a stronger Indone- products. As of mid-2011 market share was dividedsian profile with a new plant opening. The company’s roughly 55-60% local to 40-45% foreign. Ministry ofmain competitor will likely be Unilever, which has had Industry figures show the cosmetics sector was worthconsiderable success in Indonesia since beginning oper- some Rp11trn ($1.32bn) in 2010, with the ministryations in 1933. Local players include Pyridam Farma and predicting this would hit Rp11.88trn ($1.43bn) in 2011.the country’s largest manufacturer, Kalbe Farma. TEXTILES & FOOTWEAR: Ministry of Industry figures For pharmaceuticals, the first half of 2011 saw a show 15% quarter-on-quarter growth in textiles andrash of new product launches and a 5% reduction in textile products in the second quarter of 2011, withsales prices on March 1, agreed between the Ministry the ministry expecting this rate to continue in the thirdof Health and industry leaders; traditionally, the min- quarter. Overall year-on-year growth in 2010 was 1.74%.istry has set prices for medicines. Sales in first-half The sector is also a major contributor to Indonesia’s2011 reached Rp20.9trn ($2.5bn), according to the exports, with the first quarter of 2011 seeing totalIndonesian Pharmaceutical Manufacturers Associa- national export sales of textiles and textile productstion. The second half of 2011 is widely predicted to be reach $5.7bn. Ministry figures show expected first-halfless busy however, as consumers traditionally switch 2011 sales to total $7.5bn, a rise of 28% year-on-year.expenditure to food and beverage items around the In footwear, the appreciating rupiah has had anMuslim and Christian festivals. impact on some exporters, which have seen their prod-INVESTMENT & REGULATIONS: At the same time, ucts become less competitive. One outcome has beenhowever, there are concerns over a declining level of a switch by some manufacturers to the domestic mar-investment. In 2010, investment reached $800m, down ket where they see more profitable opportunities. Goingfrom $3bn in 2005. Government regulations limit for- forward, the consumer goods industry seems likely toeign ownership in the sector to 75%, with companies continue to prosper. Distribution remains a challengeoften encountering difficulties in finding an Indonesian in Indonesia, favouring larger companies that can inte-investor willing to put forward the remaining 25%. For- grate their own supply chain. Indeed, government pol-eign companies must also have a packaging facility in icy is increasingly favouring larger players, seeing theseIndonesia if they do not plan to manufacture there. While as more likely to meet increasing investment, qualitymoves are being made to change these regulations, in and safety standards requirements. A period of merg-the meantime some investors are taking a wait-and- ers and acquisitions may therefore be coming up forsee approach. Domestic investors are forging ahead smaller players, with foreign outfits also likely to bethough. First-half 2011 saw Rp1.11trn ($133.2m) of playing for these increasingly attractive businesses.
  • 127. 152 INDUSTRY ANALYSIS Automotive sales are seeing a massive increase, especially in Java Roadrunners Buying an automobile is an option for increasing numbers of citizensIn 2010 the economy With demand growing for all kinds of vehicles, Association of Indonesian Automotive Industries,passed the crucial per Indonesia’s automotive sector is fast becoming a the annual total was some 275,000 units sold, ris-capita GDP level of $3000 major international player. As economic expansion ing to around 301,000 by 2000. By 2010, however,per annum, the thresholdin many markets where puts more money in people’s pockets and bank lend- the figure had leapt to 764,710. For the January-Julypurchases switch from ing becomes open to an increasing numbers of cit- 2011 period, figures from the Association of Indone-motorbikes to automobiles. izens, vehicle sales look set to continue a rapid rise sian Automotive Industries put total sales at 506,743 for many years to come. Meanwhile, Indonesia’s inter- units, with Indonesia surpassing its South-east Asian national status as an automotive centre is being rival in the market, Thailand. Over the same period, enhanced by the continually diminishing trade bar- Thailand sold just 504,915 units, meaning Indone- riers in the ASEAN and overall Asia-Pacific region. sia is now ASEAN’s largest car market. The sector still faces many challenges though, Car production also accelerated. In just five years, particularly at a time of only modest global econom- output increased by 40.3%, from 500,710 in 2005 to ic growth alongside major disruption to the supply 702,508 in 2010. In the January-July 2011 period, total chain following the Japanese earthquake, tsunami and production reached 467,418 units, indicating a like- nuclear crisis in March 2011. Congestion is an issue ly year-end total of around 800,000. for cities such as Jakarta, where infrastructure often ROOM FOR EXPANSION: There is still a lot of room lags behind demand for transport. Despite these for growth, with several factors strong indicators of downsides, the sector continues to flourish, with a the potentially huge future market for auto sales. record year behind it and continued growth in sight. One such factor is the current geographic distri- RISING NUMBERS: Perhaps the biggest factor bution of the market. In 2010 Jakarta alone account- behind the strength of the Indonesian auto sector ed for 26.5% of all sales, and once the rest of Java is is the domestic market, which recently became the added in, some 68.1% of all sales were made on the ASEAN region’s largest car market. Due to Indone- island alone. Indeed, the majority of car plants are sia’s large population, latent demand has always in West Java, specifically in Karawang and Bekasi, been potentially massive. Low incomes, however, two areas east of Jakarta. The only other areas of the have historically kept car sales the preserve of the country managing more than 1% were North Suma- well-off, while lower-income citizens saved their tra, with 4.5%; Bali (3.1%); East Kalimantan (3%); Riau, money for a motorcycle or scooter. (2.9%); and South Sumatra (2.5%). As Indonesia’s Yet recent years have seen sustained economic economic growth spreads, these regional markets growth in the country, along with expansion in the are likely to see a surge in the sale of automobiles. middle class and in consumer loans. The economy Another factor is Indonesia’s potential as an export even managed 4.5% GDP growth in