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Updated News August 23, 2010

Mon, 08/23/2010 - 15:52


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Government Relations & Economic Development

Huge opportunity from Japanese investment
Ade Elimin and Shunsuke Wariishi. The Jakarta Post, Jakarta – 23/08/2010

In mid-July, the Japan Credit Rating Agency, Ltd. (JCR) raised Indonesia’s rating to investment grade, which reflects growing confidence in the management of Southeast Asia’s largest economy, which has proved resilient.

This is certainly great news for Indonesia, as investment grade rating will boost the confidence of foreign investors in the country, especially since this step is expected to be followed by international rating agencies. Analysts have also said that Indonesia “may be able to get cheaper funds from Japan”, which is its largest creditor.

In a recent visit to Japan, we met with a number of Japanese businesses and attended seminars where we gained insight into the perspective, understanding and expectations of Japanese businesses on investment in Indonesia.

They are generally very eager to invest in Indonesia, given its vast population, relatively cheap labor, increasing GDP level and the strength of its economy, which grew 4.5 percent last year, making it the fourth largest in Asia, despite the global economic downturn.

This eagerness is also due to the shrinking domestic market because of an aging society. The number of people aged 65 or older hit a record high at 22 million, or one in six people in 2009. The labor force population is decreasing at a rate of around 200,000 every year.

Child birthrate was one of the lowest in the world with 7.64 births per 1,000 people in 2009, which means that the Japanese population is decreasing. If the situation continues, the Japanese population is estimated to be halved by the end of this century. Japanese businesses desperately need a new market, especially markets where mid and long term growth are expected.

Japan has been investing in Indonesia for a long time, particularly in automotive, electronic goods and the energy and mining sectors. For Japanese businesses, Indonesia has been the place for low-cost manufacturing as well as the source of various natural resources. In Indonesia, there are about 1,000 Japanese companies which employ approximately 300,000 people.

There is a new trend. Thanks to the increasing income, great population and growth in consumer goods consumption in Indonesia, the area of investment is no longer limited to “traditional” sectors but now also covers retail, media and consumer product sectors.

Japanese restaurant chains (Ootoya, Yoshinoya, Ebisu Curry), minimarkets (7-Eleven), fashion and household appliances (MUJI) have recently emerged on the market in Indonesia. Taisho Pharmaceutical recently acquired Bristol Myers Indonesia. There are many more potential Japanese investors in the pipeline.

The investment of these new players is supported by the successful stories of several Japanese companies. While we stayed in Japan, Nikkei Shimbun, Japan’s most widely circulated daily business paper, reported on Ajinomoto’s plan for a new US$50 million factory in Indonesia.

The new factory is aimed not only at domestic market but also at export to Middle East countries and Pakistan. This news implies that there would be more Japanese businesses which regard Indonesia as a production and export base for halal goods.

Another media source recently wrote about the success of Yakult. Yakult sells millions of bottles per day and provides income to thousands of Indonesian women through the “Yakult Lady” sales force.

Pocari Sweat (Otsuka Pharmaceutical) and Gatsby (Mandom) have also become well-known, successful business cases.

Many Japanese business people have now become aware that Indonesia is a country full of business opportunities, and not a country of political and economic turmoil, natural disasters, and uncontrollable infectious diseases. Perception has changed substantially.

Still, this improved image and the higher expectations in Indonesia will not promise an automatic influx of investment from Japan. Business leaders are always looking for better opportunities and a better business environment.

A comparison with other countries would give us some useful insight into this. Actually, the number of Japanese investments in Indonesia still lags far behind Thailand.

Thailand has as many as 7,000 Japanese companies. They are still attracting many Japanese investors despite the recent political turmoil in Bangkok. Key reasons for this are 1) a clear program and incentive scheme for foreign investors, especially for strategic sectors, 2) well facilitated infrastructure, 3) the variety of supporting industries and services.

By contrast, among the factors that have been the major source of concern and complaints from Japanese businesses in Indonesia are its lack of infrastructure, transparency, laws and regulations. The most pressing issue is law enforcement in the area of taxation. Although most Japanese companies intend to comply with all the regulations, including those concerning tax, the Indonesian authorities often hold a different view. During our trip to Japan, we heard many concerns about these matters. No investor likes uncertainty.

If these obstacles are not solved, Indonesia will lose a huge potential from Japan investors. As mentioned earlier, Japanese companies are eager to expand overseas, and this does not only concern huge businesses, but also second tiers of companies, the middle size companies and domestic players that are also considering foreign investment.

There is also another opportunity up for grabs for Indonesia in regards to Japanese investment. Despite the need for further expansion, Japanese companies lack human resources as the productive age group is decreasing in size.

Many of those in this age group are not very good at speaking English and are very used to living in a homogenous society, which is not very beneficial in terms of effective leadership in overseas business.

This gap can be filled by Indonesians working in Japanese companies at the managerial level and as skilled labor, not only in Indonesia but also abroad.

There are a lot of hopes concerning investment by Japanese businesses in Indonesia, but there are great concerns as well. If the latter can be settled, it will secure future collaborations and mutual benefits for both countries.

Ade Elimin is a partner, and Shunsuke Wariishi is a technical advisor at PricewaterhouseCoopers Indonesia.

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Praise for Subsidy Cuts, Mixed With Concern Over Rising Costs
Muhamad Al Azhari & Dion Bisara. The Jakarta Globe, Jakarta – 23/08/2010

Since its release last week, analysts have lauded the 2011 state budget draft for cutting subsidies to make way for development spending, but some in the business community fear the cuts may be too much, too fast.

Subsidies have been slashed 8.2 percent in the draft to Rp 184.8 trillion ($20.5 billion), down from Rp 201.3 trillion.

“There are two benefits to reducing subsidies,” said Edimon Ginting, the Asian Development Bank’s senior economist for Indonesia. “One, the government can increase spending on infrastructure, which is now insufficient and hampers competitiveness.

“Two, the government can allocate more funds to education, health and social programs, so that economic growth can be followed by balanced social progress.”

Earlier this month, the ADB suggested that Indonesia gradually abolish fuel subsidies and allocate the freed funds to help low-income citizens.

Energy subsidies, which take the lion’s share of all subsidies, were cut 7.1 percent in the draft budget, down to Rp 133.8 trillion from 144 trillion.

Most of the reduction is in electricity subsidies, resulting in the unpopular 18 percent increase in the price of electricity this year and a planned increase of 15 percent next year. In the draft budge, electricity subsidies are cut 25.6 percent to Rp 41 trillion, from Rp 55.1 trillion.

President Susilo Bambang Yudhoyono, who will undoubtedly face criticism for rising energy costs, defended the subsidy cuts in a speech last week, saying they would free up money for development projects. He said the government would ensure the remaining subsidies benefited the poor, not the rich.

The draft budget calls for a 28 percent increase in infrastructure spending, including Rp 121.7 trillion for improving electricity output and more for transportation.

“Just imagine if the government spent Rp 200 trillion on subsidies — we’d have a lot less to spend on infrastructure,” Finance Minister Agus Martowardojo said on Friday.

Gundy Cahyadi, an analyst at OCBC Bank in Singapore, welcomed the proposed subsidy cuts and the accompanying rise in infrastructure spending.

“If the government can succeed in continuing to consolidate its subsidy spending and spend the extra money in other areas, we think Indonesia’s growth prospects should be fairly strong in the medium term,” he said.

Helmi Arman, a Jakarta-based economist with Bank Danamon, said the cuts to the electricity subsidies, which include a subsidy for oil used for power generation, would help reduce the state’s vulnerability to rising oil prices.

“Gradual energy subsidy reductions are the way to go,” Helmi said. “It’s better to implement gradual reductions now while global energy prices are still well anchored. Measured price increases now are better than abrupt increases later.”

Consumer fuel subsidies, intended to defend prices against rising oil prices, rose 4.4 percent this year to Rp 92.8 trillion, up from Rp 88.9 trillion.

Kurtubi, an independent oil analyst, said the government could reduce subsidies without triggering increases in electricity prices if it encouraged state power provider PLN to use gasoline and coal for electricity generation rather than diesel, which it mostly uses now.

Despite the widespread praise for the subsidy cuts, the business community is feeling uneasy about the potential cost increases that loom.

Sofjan Wanandi, chairman of the Indonesia Employers Association  (Apindo), welcomed the cuts as a way to boost infrastructure spending, but urged caution. “We don’t want the cuts to end up burdening businesses, especially industry, because right now we are barely competitive,” he said.

Sofjan previously warned that domestic industries would lose their competitive advantage if electricity prices rose a further 15 percent next year.

He said the government should improve electricity distribution systems and related infrastructure before applying the rise, especially as local industries were struggling to cope with a surge of imported products.

Elsewhere in the draft budget, non-energy subsidies were cut 10.9 percent, bringing them from Rp 57.3 trillion to Rp 51 trillion.

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Wilmar buys more sugar assets in Indonesia, S'pore
Hari Suhartono. Reuters, Singapore – 23/08/2010

Wilmar International , the world's No.1 listed palm oil firm, said on Monday it will buy an Indonesian sugar refinery and a Singapore sugar trading firm to complement the development of plantations in Papua.

The company said in a statement that it has agreed to buy Indonesian sugar refiner PT Jawamanis Rafinasi and Singapore-based sugar trading company Windsor & Brook Trading. It did not provide financial details of the acquisitions.

Wilmar, Singapore's second largest listed company, said Jawamanis has a daily refining capacity of 1,000 tonnes and is licenced for a throughput of up to 1,600 tonnes per day.

Wilmar, which plans to develop a 200,000 hectare sugar plantation in Indonesia's Papua, said the deals are not expected to have material impact on the company's financial position and is expected to be completed by the fourth quarter of 2010.

In July, Wilmar acquired Australia's Sucrogen, the world's No.5 sugar refiner, from Australian conglomerate CSR for $1.5 billion, the largest deal so far this year in the global sugar industry.

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Energy and Mining

Pertamina restarts 230,000 bpd Cilacap refinery
Muklis Ali. Reuters, Jakarta – 23/08/2010

Indonesia's state oil firm Pertamina has restarted its 230,000 barrels per day (bpd) Cilacap refinery in Central Java, a company source said on Monday, after it was shut in mid-July for scheduled maintenance.

The source said Pertamina expects to import less gasoline and diesel in September than in August, following Cilacap's return to production. He gave no details.

"Pertamina restarted the 230,000 bpd Cilacap refinery on Saturday and it is running at between 60 to 70 percent of its capacity," the source said, adding that the refinery is expected to run at full capacity this week.

Pertamina has bought 1.2 million barrels of spot gas oil for August delivery, after importing 3.7 million barrels to meet stronger demand during the fasting period and ahead of the festive season, traders in Singapore have said.

The state energy firm is also likely to buy more gasoline after having bought around 600,000 barrels of spot 92-octane grade, raising its total spot and term imports this month to more than 6 million barrels, higher than expected, traders said.

Pertamina has two crude distillation units in the Cilacap refinery. The other CDU has a capacity of 118,000 bpd.

Indonesia's refineries have a combined capacity of 1 million bpd, but
only supply 70 percent of domestic consumption while the remaining 30 percent comes from imports.

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Pertamina, Kuwait Petroleum sign refinery deal
Muklis Ali. Reuters, Jakarta – 23/08/2010

Indonesia's Pertamina on Monday said it has signed a preliminary agreement with Kuwait Petroleum International (KPI) to build a new refinery in Indonesia with capacity of 200,000 to 300,000 barrels per day (bpd).

The move would help reduce fuel shipments into Asia's biggest gasoline and diesel importer. Existing refineries cannot meet demand in Southeast Asia's biggest economy, where no new refinery has been built since 1995.

Indonesian Industry Minister MS Hidayat said last month that Kuwait Petroleum Corp (KPC) will invest around $8-9 billion to build the new refinery. KPI is a wholly owned subsidiary of KPC.

"The (joint) study will propose the construction of a 200,000 bpd to 300,000 bpd capacity new refinery in Balongan complex in West Java," said Mochamad Harun, a Pertamina spokesman. He gave no timeframe for the project.

Pertamina has said previously it planned to build new refineries in West and East Java in joint ventures with foreign investors, and to boost capacity at its refineries in Balikpapan, Dumai and Balongan.

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Indonesian Court Date Likely in Pukuafu, Newmont Nusa Tenggara Row
Irvan Tisnabudi. The Jakarta Globe, Jakarta – 23/08/2010

Mining company Pukuafu Indah, which own a substantial stake in gold and copper miner Newmont Nusa Tenggara, says it is planning to press charges and file a lawsuit against NNT management over a dispute about share sales.

Pukuafu, which claims to own a controlling stake in NNT, says NNT management failed to comply with its order to cancel a planned initial public offering of shares Pukuafu says it owns.

“NNT has not responded to our legal demands regarding share ownership of the company,” Pukuafu lawyer Wisye Koesoemaningrat said.

Last week, NNT’s president director, Martiono, told Bloomberg the majority of NNT shareholders approved of the management’s proposal to sell shares in an IPO in the first quarter of next year.

Pukuafu claims to have bought a 20 percent stake in NNT in 1986, and Wisye told the Jakarta Globe on Sunday that the company bought an additional 31 percent of NNT from the United States-based Newmont Mining in four stages from 2006 to 2009.

“Pukuafu has the authority to cancel any shareholders’ meeting, because we are the rightful owner of a majority of the company’s shares — 51 percent,” Wisye said.

The meeting, however, took place as scheduled —without Pukuafu representatives in attendance — and resulted in the decision to go ahead with the IPO.

NNT spokesman Kasan Mulyono told the Globe that 82.2 percent of NNT’s shareholders agreed to the decision at the meeting, and that the size of the IPO would be determined later.

Ownerships stakes in NNT are fiercely disputed, and the company rejects the claim that it is 51 percent owned by Pukuafu. It says the purchase of the 31 percent stake never happened, and that Pukuafu only bought a 17.8 percent stake in 1986.

Kasan said ownership of NNT was as follows: Newmont and Japan’s Sumitomo own a combined 56 percent; 2.2 percent is owned by Indonesia Masbaga Investama; 24 percent by Multi Daerah Bersaing (a consortium of local governments and Multicapital, a unit of Bumi Resources; and 17.8 percent by Pukuafu.

In accordance with a 1986 government regulation, foreign companies can own no more than 49 percent of the company by the end of this year, making the majority of the ownership local. In July, the government showed interest in acquiring the remaining 7 percent stake that Newmont is planning to divest in order to conform with the rule.

Pukuafu says it paid Newmont for the 31 percent stake purchased between 2006 and 2009, but that the shares were never transferred.

Wisye claims that Pukuafu Indah has the backing of a December 2009 ruling in the South Jakarta District Court that ordered NNT to annul purchases made by the MDB consortium and allow Pukuafu to acquire the 31 percent stake by Aug. 4 of this year.

That order, however, proved fruitless, as the shareholders’ meeting concluded that Pukuafu was not a majority shareholder, as it controlled only 17.8 percent of shares.

Wisye has also rejected the 2.2 percent ownership stake of IMI.

Furthermore, he suggested the planned IPO would violate the 1986 regulation, because it could not guarantee that a majority of NNT shares would be domestically owned.

When asked if the IPO would result in the violation of the 1986 regulation, NNT’s Kasan declined to comment.

NNT operates the lucrative Batu Hijau copper and gold mine in Sumbawa. According to company data released for the end of 2009, the mine has estimated deposits of 11.57 million ounces of gold, 40.97 million ounces of silver and 11.47 billion pounds of copper.

NNT said in a statement last month that its gold production rose 87 percent in the first half of the year from the same period last year, to 335,000 ounces, while copper production rose 42 percent to 278 million pounds.

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Pertamina Geothermal in Need of Rp18 Trillion
Kompas.com, Jakarta – 23/08/2010

PT Pertamina Geothermal Energy (PGE), a subsidiary of state oil and gas company PT Pertamina, needed US$2 billion, the equivalent of Rp18 trillion, to build a geothermal power plant with an installed capacity of 1,000 megawatts.

"They money is expected as loan from the United Kingdom, France, Germany, Japan, and the World Bank, and the project completed in  2014," PGE President Director Abadi Poernomo said after providing Pertamina with an assistance for people in Ibun subdistrict,  Bandung regency, on Sunday afternoon.

He said building of the geothermal power plant which will be built soon, Karaha Bodas with a capacity of 30 megawatts (MW), will be followed by the building of similar projects, including in  Lahendong in North Sulawesi, Sibayak, Ulubelu, in Lampung, Lumutbalai, Hululais,  Kotamubagu, and Sungai Penuh in Jambi. According to him, under decision of Energy and Mineral Resources Minister no 32/2010, as the price of geothermal power (PLTP) for state electricity company PT PLN had been set at 9.7 cents per KWH, the construction of the project is quite reasonable.

The problem, he said, is the reach of the network from PLN to the points of the PLTP, which is actually not too far from the existing geothermal resources, and the still non-existing interconnections in Sumatra and in other islands, and the Java-Sumatra power grid. Pertamina Geothermal Energy (PGE) established in 2006 had already used by the government to develop 15 geothermal concessions in Indonesia. Some 90 percent of the shares of the company which provides pollution-free energy, is owned by PT Pertamina, and 10 percent by PT Pertamina Dana Ventura.

Right now Pertamina has the right of managing 15 geothermal concessions with a total potential of 8,480 MW, which is equal to  4,392 MMBOE. Of 15 concessions, 10 are being run by PT PGE itself, namely, Kamojang with 200 MW, Lahendong 60 MW, Sibayak 12 MW, 

Ulubelu, Lumutbalai, Hululais, Kotamubagu, Sungai Penuh and Iyang Argopuro, and Karahabodas. Three of the areas have already been producing with a total capacity of 272 MW, or 12,900 BOEPD, and the rest run jointly by a partner producing a total of 922 MW.

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Govt says no to converting peatland into plantations
Adianto P. Simamora. The Jakarta Post, Jakarta – 23/08/2010

Forestry Minister Zulkifli Hasan has turned down a request by the Central Kalimantan provincial administration to develop 127,000 hectares of peatland production forest for oil palm and mining sites.

The request was made by Central Kalimantan Governor Agustin Teras Narang and Katingan Regent Duel Rawing.

“Zulkifli rejected the request because peatland forests in Katingan are to be allocated for conservation projects,” Hadi Daryanto, the ministry’s director general of production forest development told The Jakarta Post on Saturday.

Central Kalimantan has the largest area of peatland of all the provinces. The peatland stores huge amounts of carbon.

Last month, UN climate adviser and philanthropist George Soros visited Katingan to inspect peatlands in the area, but Hadi was quick to point out that Soros’s visit had nothing to do with the government’s rejection.

The governments of Indonesia and Norway signed a letter of intent (LoI) on a climate deal in May requiring Indonesia, the world’s third-largest forest nation, to slow down forest loss. In return, Indonesia would receive US$1 billion from Norway under a climate change scheme.

The government would stop issuing new permits to convert natural forest and peatland for two years starting in 2011 with the pilot project for the moratorium to be announced in October at the latest.

A source told the Post that Central Kalimantan would likely host the pilot project.

Indonesia has 120 million hectares of forest, but the country’s deforestation rate hovers at 1 million hectares per year.

Zulkifli has repeatedly claimed he had not issued any permit to convert peatland for commercial purposes since he took office last year.

The 2007 Spatial Law prohibits the conversion of peatland with a depth of more than 3 meters.

Hadi said the ministry would implement new forestry mechanisms to shift income from selling timbers to ecosystem restoration projects. “Indonesia is the first country to implement the so-called innovative forestry mechanism,” he said.

The conservation projects would be held in former logging areas to restore damaged ecosystems and biodiversity.

Concession holders can reap money from trading in carbon in the forests, environmental services or opening ecotourism sites in the area.

“They could still be allowed to harvest timber, but it would not be their core business,” he said.

The permit for ecosystem restoration projects would be valid for 60 years and could be extended for another 35 years.

The ministry is looking to allocate 500,000 hectares per year for ecosystem restoration activities.

A map issued by the ministry indicates that conservationists could run ecosystem restoration projects in 40 million hectares in the country.

So far this year, the ministry has issued permits to PT Restorasi Ekosistem Indonesia (REKI) in Jambi and South Sumatra with 98,000 hectares and another 86,450 hectares to PT Orangutan Habitat Restoration Indonesia in the East Kutai district of East Kalimantan.

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Coal for Fast-Track Program Assured
ANTARA News, Jakarta – 22/08/2010

The coal supply for the government’s 10,000 megawatt “fast-track” program was assured, the head of the project’s coordinating team, Yoga Pratomo, said on Sunday, with domestic coal suppliers guaranteeing 95 percent of needs.

“Only 5 percent is still in the tender process and it will be finished soon,” he said during a media tour of the Labuan steam power plant, one of the plants in the fast-track program.

The program aims to increase the country’s electricity-generating capacity by 10,000Mw. Capacity is now well below demand, resulting in frequent rolling blackouts across the country.

Yoga said the supply contracts would last for 20 years.

He said the program, which is projected to be completed by 2013, required at least 30 million tons of coal a year.

The required coal was low in calories and cost $400 to $550 a ton.

“With such relatively low-priced coals, the cost of electricity production can be cheap,” Yoga said.

“I predict when the entire 10,000Mw fast-track program is finished there will be a saving of Rp 100 billion ($ 11.1 million) per day, or Rp 35 trillion per year, in electricity usage.”

Yoga said 50 percent of the coal supply needed for the project, or 15 million tons a year, would be supplied by local miner Arutmin, with the rest being supplied by Bara Mutiara Prima, Titan Mining Indonesia and Hanson Energi.

“So all of the coal needed for the project will be from domestic suppliers,” he added.

Yoga said that by the end of this year, 2,000Mw more power will be provided, with a further 4,300Mw coming on stream next year.

Last November the government asked domestic coal producers to set aside 30 percent of their output for 2010 for the fast-track program.

The Energy Ministry predicted that domestic demand for coal this year would be 65 million tons, of which 85 percent would be needed to run power plants throughout the country.

The government is limiting coal exports to 150 million tons this year to ensure supply during the upgrade.

The ministry predicted that production for this year would total 230 million tons.

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Transportation

World union asks RI to reform transport sector
Ridwan Max Sijabat. The Jakarta Post, Jakarta – 21/08/2010

The International Transport Workers’ Federation (ITF) has called on Indonesia to reform its transportation sector to minimize cases of accidents and improve poor labor conditions.

Hanafi Rustandi, a member of the newly elected ITF executive board, said Friday that the increase in rail and air accidents along with poor labor conditions in the transportation sector were among the crucial issues discussed at a recent ITF congress in Mexico City.

“Land transportation has suffered mismanagement for decades, plane crashes have frequently occurred in the past five years and millions of public transportation workers are underpaid and left unprotected. All this has a lot to do with the absence of pro-safety policies and poor infrastructure,” he told The Jakarta Post.

Hanafi said in his paper presented at the ITF congress that transport workers in Indonesia needed stronger international solidarity to push the government to reform the sector and improve the social welfare of more than 47 million transport workers.

“More than 30 million transport workers earn US$2 a day and this pay is way under the government-set minimum wage and millions of stevedores and seafarers are employed in poor work environment in seaports and fishing vessels,” he said.

Hanafi, who also chairs the Indonesian Seafarers’ Union (KPI), slammed the Indonesian government for its slow response to the HIV/AIDS pandemic in the country’s eastern region, especially in Papua and Maluku, which he said was linked to prevalent illegal fishing fleets employing HIV-positive seafarers from Thailand, Myanmar and the Philippines.

The government has built two hospitals in Tual, Maluku, and Merauke, Papua, for people with HIV/AIDS,” he said, adding that Papua had the highest HIV infection rate in Indonesia.

David Cockroft, re-elected as ITF secretary-general to serve until 2014, vowed to strengthen the global solidarity among transport workers to help improve their bargaining position.

“We have geared up to organize globally across the ITF as a whole. We have included young workers, prioritized women transport workers and highlighted the issues of the precarious and unprotected,” he said when introducing the federation’s action plans for the next four years.

Indonesian Prosperous Labor Union (KSBSI) chairman Rekson Silaban said transportation was also discussed in the recent International Labor Conference in Switzerland in June since it generated many job opportunities. However, the meeting only resulted in a recommendation for developing countries to pay more attention to poor infrastructure, labor condition and HIV/AIDS infections in the workplace.

“International solidarity among labor unions is needed to press the government to pay serious attention to the more than 40 million transportation workers,” he said.

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Infrastructure

A Breakthrough In RI’s Infrastructure Financing
P. S. Srinivas. The Jakarta Post, Jakarta – 21/08/2010

On Aug. 9, 2010 a new Indonesian financial institution was formally launched — PT Indonesia Infrastructure Finance (IIF). Its objective is to provide long-term rupiah financing and advisory services to private infrastructure projects in Indonesia.

The establishment of this new institution is an important milestone in the overall process that the government has initiated to funnel more investment into infrastructure.

Indonesia has among the lowest levels of access to infrastructure in East Asia. Following the 1997 financial crisis, infrastructure investment in Indonesia fell from over 7 percent of GDP to just over 2 percent in 2001. Since then, infrastructure investment has risen to over 3 percent of GDP, but this level is insufficient to meet the growing demand from existing infrastructure users, much less to address the needs of the large segments of the population who do not have access to basic infrastructure services.

China and Vietnam, by contrast, spend nearly 10 percent of their GDP on infrastructure. Inadequate infrastructure is now widely seen as a key constraint to sustained economic growth and poverty reduction in Indonesia.

 The government of Indonesia estimates that total infrastructure investments that will be required during the period 2010–2014 are a staggering US$145 billion.

Of this amount, the government expects to obtain nearly two-thirds — $93 billion — from the private sector.

This will require a concerted effort by the government to provide an overall institutional and regulatory framework that the private sector feels comfortable with.

To achieve this target, innovative ways of raising infrastructure financing based on market-friendly policies and international best practice, customized to the Indonesian context, are necessary.

The government has taken a number of steps to attract private investment in infrastructure including establishing a supportive regulatory and institutional framework.

However, as in many other countries, “fast tracking” private investment has not been possible. There are several — and by now well known — reasons for the slow progress including weaknesses in: quality of project preparation prior to bidding, lack of clarity and consistency of risk-sharing and guarantee  arrangements, the private sector’s inability to deal with risks such as land acquisition, and lack of long-term domestic currency debt to finance projects.

These shortcomings have been well recognized by the government and a number of initiatives are being taken to address these.

Indonesia is now in the process of seeking country-specific solutions, and pieces of the jigsaw puzzle of policies, institutions, and financing that are necessary, are falling into place.

A major challenge to mobilizing private financing into infrastructure is the shortage of long-term rupiah resources.

Commercial banks are the dominant financial institutions with over 80 percent of financial sector assets, but almost all of their deposits are less than one month in maturity.

With such a short duration, banks are naturally constrained in the tenor of loans they can offer and unable to provide long-term financing needed for sustained private investment in infrastructure.

Rupiah financing is also an important risk mitigation mechanism in private infrastructure projects.

Electricity bills and road tolls are paid in rupiah; therefore, financing projects that earn rupiah revenues with rupiah debt reduces exchange-rate risks.

Local financial institutions also have limited experience in financing infrastructure assets.

IIF is designed to address these constraints and provide long-term rupiah financing to private infrastructure projects.

It is a non-bank financial institution with an initial equity capital of $160 million provided jointly by the government, the International Finance Corporation (IFC), the Asian Development Bank (ADB), and the German development cooperation agency DEG.

The World Bank and the ADB have provided loans of $100 million each, which will act as a layer of subordinated debt for IIF.

This initial capital will allow IIF to raise nearly Rp 25 trillion additionally from the markets that it could then use to finance private infrastructure.

IIF is also open to equity participation by more private investors. The government of Australia has provided IIF grant support.

IIF is commercially oriented with private sector governance, and mandated and equipped to mobilize local-currency financing with appropriate terms, tenor and price for the development of creditworthy infrastructure projects in three ways: by using its balance sheet structure and good credit rating to borrow from the private debt market to lend funds to projects on appropriate terms for infrastructure projects; by providing financial products to enhance the credit of individual infrastructure projects and thereby mobilize additional private financing for those projects; and  by using its staff of highly experienced infrastructure financiers to provide advisory services to help identify and arrange bankable infrastructure projects, and provide policy support.

The launch of IIF is the culmination of a five-year effort that began during Indonesia’s infrastructure summit of 2005.

The hope is that its contribution will mark the beginning of its new journey in attracting private investment into infrastructure — a journey that will see Indonesia having the kind of infrastructure that will enable it to advance to the next level of its development, sustain rapid economic growth, and further reduce poverty.

The writer is lead financial economist, at the World Bank office, Jakarta, and led the Bank team that worked on IIF.

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Information and Communications Technology

Muslim Social Networking Site Becomes Increasingly Popular
Bernama. Padang – 23/08/2010

The Indonesian-based social networking site specially made for the Muslim community, CMnet, had become increasingly popular among Internet users since it was released on August 6, Antara news agency reported.

CMnet that can be accessed at www.cybermoslem.net is the first social networking site for Muslims in Indonesia with the facebook and twitter system combined with edited-opensource system.

"CMnet has now 3,700 members not only from Indonesia but from other countries as well, including the United States, Malaysia, Hong Kong, Egypt, Kuwait, and some European countries," founder of CMnet, Dolla Indra (25), said here on Sunday, adding that his site had been visited 5,894,954 times.

Apart from the positive interest, Dolla said, the site was also target of 5,000 hackers. In fact, CMnet had once been attacked by a hacker that made the site inaccessible for several hours. Therefore, Dolla said he had recently upgraded the CMnet system to avoid hackers and made it stronger and more stable.

Dolla hoped the government would support his effort to develop CMnet as a web-based application in Indonesia.

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