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Poor infrastructure conditions are the main factor preventing Indonesia's economy from growing at its potential rate of 8%. Land infrastructure is concentrated on the island of Java, which contributes about 58% of Indonesia's GDP. Compared to other ASEAN-5 countries, Indonesia's main airports and seaports are outdated and, in some cases, overcrowded.
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Indonesia – Infrastructure Bottlenecks_14!02!11!06!16
Poor infrastructure conditions are the main factor preventing Indonesia's economy from growing at its potential rate of 8%. Land infrastructure is concentrated on the island of Java, which contributes about 58% of Indonesia's GDP. Compared to other ASEAN-5 countries, Indonesia's main airports and seaports are outdated and, in some cases, overcrowded.
Poor infrastructure conditions are the main factor preventing Indonesia's economy from growing at its potential rate of 8%. Land infrastructure is concentrated on the island of Java, which contributes about 58% of Indonesia's GDP. Compared to other ASEAN-5 countries, Indonesia's main airports and seaports are outdated and, in some cases, overcrowded.
Important disclosures can be found in the Disclosures Appendix
All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com Contents Highlights 1 Overview 2 Land infrastructure 3 Seaports 12 Airports 17 Electricity 22 Government support 28 Scenario analysis 31 Infrastructure bonds 35 Appendix 1: Sectors closed to foreign investment in infrastructure 40 Appendix 2: Procedures for direct investment in the transport sector 41
Edward Lee Wee Kok, +65 6596 8252 Lee.Wee-Kok@sc.com
Eric Alexander Sugandi, +62 21 2555 0596 Eric.Alexander-Sugandi@sc.com
Jennifer Kusuma, +65 6596 8250 Jennifer.Kusuma@sc.com
Special Report | 06:00 GMT 14 February 2011 Indonesia Infrastructure bottlenecks
Highlights Poor infrastructure conditions are the main factor preventing Indonesias economy from growing at its potential rate of 8%. Inadequate infrastructure also results in high inflation compared to most of Indonesias peers in South East Asia. Infrastructure development has been slow in the past decade and has relied heavily on government spending. The government has not allocated sufficient funding for infrastructure development, while participation from private investors is still far below what is needed. Land infrastructure is concentrated on the island of Java, which contributes about 58% of Indonesias GDP and is home to about 59% of the population. The government is now focusing on developing a trans-Java toll-road system, but land clearance remains an issue. Compared to other ASEAN-5 countries, Indonesias main airports and seaports are outdated and, in some cases, overcrowded. Meanwhile, electricity supply needs to be boosted to meet surging domestic demand. We run scenarios to assess the impact of infrastructure development in the transport and electricity sectors. Under the best of our most plausible scenarios, Indonesias economy will grow in a range of 7.1-7.6% during the 2011-14 period if the private-sector participation rate reaches 50% of what is required and the government increases spending on transport infrastructure by 20% a year (ceteris paribus). Under an alternative scenario, if state-owned electricity company PLN increases annual capex by 20% and private-sector participation reaches 50% of what is needed, growth can reach 6.9-7.5%. Otherwise, we expect the economy to grow by only 6.5-7% during the period. The government is preparing to issue infrastructure bonds to help finance infrastructure projects.
Special Report
14 February 2011 2 Overview Ten years ago, investors in Indonesias real economy would have identified legal uncertainty and corruption as the biggest hurdles to investment followed by the chaotic transition to regional autonomy, weak infrastructure, unfriendly labour laws, and tax and customs issues. Today, all six of these hurdles remain. But while President Yudhoyonos anti-corruption drive has helped to address corruption and excessive red tape, weak infrastructure particularly the lack of trans-Java and trans-Sumatra highways, inadequate power supply and insufficient seaport facilities in the worlds biggest archipelago has become the biggest impediment to foreign direct investment (FDI).
Under the IMF programme from 1998-2004, Yudhoyonos predecessors focused primarily on fiscal prudence at the expense of maintaining the quality of existing infrastructure, let alone building new projects. While this cut public debt to 27% of GDP in 2010 from 80% in 2000, weak infrastructure is preventing Indonesias GDP growth from reaching its potential rate of 8%. Table 1 compares the quality of infrastructure across selected Asian countries.
Partly as a result of infrastructure bottlenecks, real GDP growth has averaged only 5.1% over the last nine years. Household consumption accounts for the biggest share of GDP (around 60%), and contributed 2.6ppt of the 5.1% GDP growth over the period. Investment (23% of GDP) contributed 1.3ppt, with the balance generated by net exports and government consumption. The investment growth rate therefore needs to double in order to raise GDP growth to its potential level.
The government has repeatedly said that Indonesia needs around USD 30bn annually (4% of nominal GDP) in infrastructure investment in the next five years. We believe the economic benefits will exceed the amount invested, as better infrastructure stimulates both household spending and private investment.
In The Super-Cycle Report, we projected that Indonesia could potentially become one of the worlds five largest economies by 2030, given its population and ample natural resources. This is based on an average real GDP growth assumption of 7% between 2010 and 2030. However, this will be difficult to achieve if infrastructure bottlenecks are not resolved quickly, which is crucial to reducing inflation to a more moderate level and facilitating a more even distribution of economic growth across the country.
Table 1: Infrastructure quality in selected Asian countries (Global Competitiveness Report, 2010-2011) Country Singapore Malaysia Thailand China Indonesia India Philippines Roads 6.6 5.7 5.1 4.3 3.5 3.3 2.8 Railroad 5.8 4.7 3.0 4.3 3.0 4.6 1.7 Seaport 6.8 5.6 5.0 4.3 3.6 3.9 2.8 Air transport 6.9 5.9 5.9 4.4 4.6 4.6 3.6 Electricity 6.7 5.7 5.7 5.3 3.6 3.1 3.4 Score (out of 7)* 6.6 5.5 4.9 4.1 3.7 3.6 3.2 * 1 = extremely under-developed; 7 = efficient by international standards Source: World Economic Forum Unless infrastructure conditions improve, it will be difficult for Indonesian growth to reach its potential We believe Indonesias economy could potentially become one of the worlds five largest by 2030
Special Report
14 February 2011 3 Land infrastructure As the largest country in South East Asia, Indonesia has the regions biggest networks of roads and railways (see Table 2). That said, the mere length of these networks can be a misleading measure of the sufficiency of a countrys transport infrastructure for the following reasons: (1) each country has different criteria for road classification; (2) this measure ignores differences in road and rail quality; and (3) it ignores differences in geographical conditions and population distribution.
Indonesias ratio of road distance to square kilometre of area is one of the lowest in the region, indicating that the road system is inadequate to cover the countrys almost 2mn square kilometre land area. The road and railroad systems are concentrated in Java Island, which accounts for only about 7% of Indonesias total land area, while bigger islands such as Kalimantan and Papua still have limited land transport infrastructure.
Roads Indonesias current road system does not provide optimum support for the countrys economic growth. Since 2000, road construction by the central government, typically of roads that run across different provinces, has been negligible (Chart 1). Following the political crisis in 1998, when former strongman Soehartos fall from power raised the risk of secessionist movements in resource-rich provinces, Indonesia introduced regional autonomy. This radically decentralised the central governments powers and responsibilities to 33 provincial and 497 municipal governments. Table 2: Land area, length of roads, and length of railways in selected Asian countries (2009)
Land area (000 km 2 ) Roads* (000 km) Road coverage (%) Railways (000 km) China 9,570 3,860 40 86 India 2,973 3,320 112 64 Indonesia 1,905 473 25 9 Thailand 517 212 41 5 Malaysia 329 100 30 2 Philippines 300 202 67 1 * Including highways and toll roads Sources: CIA World Factbook, CEIC, Standard Chartered Research
Chart 1: Road development by level of government authority Excluding expressways and toll roads
k m National (central government) Provincial Municipal
Source: Ministry of Public Works, Central Agency of Statistics Indonesias road network has hardly expanded in the past decade due to land clearance difficulties Road and railroad systems are overstretched in a country with almost 2mn square kilometres of land area
Special Report
14 February 2011 4 However, the single biggest hurdle to road construction is land clearance. In socialist countries like China, locations can be quickly prepared for infrastructure projects because land is owned by the state. However, in a democracy like Indonesia, relocating people who are living on land needed for projects even squatters, who have no legal right to live there requires government compensation that must be approved by the parliament and the state auditor.
Moreover, the governments infrastructure blueprints are often accessible to politically connected land speculators, who buy the potentially affected land from farmers in order to get much higher prices selling it to the government. Even if 90% of the land for a planned road has been acquired, the un-cleared 10% can prevent the project from being built. Parliament is currently in the process of passing a land acquisition law that will give the state the power to forcibly buy land for public projects; President Yudhoyono is expected to sign this into law in 2011. While this gives the state more legal protection, landowners can still contest such purchases through the courts.
In addition to project implementation hurdles, there is a mismatch between the distribution of roads and the concentration of economic activity. Only about 58% of Indonesias roads are on Java and Sumatra islands, which contribute around 81% of GDP (see Charts 2 and 3). Sumatra is larger than Java in terms of area (25% versus 7% of Indonesias total land area) and has more roads (34% of the total versus Javas 24%). However, about 59% of Indonesias population lives on Java, which contributes 58% of national GDP, while Sumatra contributes only 23%. Meanwhile, the lack of proper road systems in other resource-rich but less populated islands (such as Kalimantan, Sulawesi and Papua) prevents their gross regional domestic product (GRDP) from reaching their potential growth rates.
Poor road infrastructure creates continuous acute traffic congestion in Jakarta, Indonesias capital. Jakarta contributes about 13% of GDP and accounts for around 50% of deposits and 49% of loans in the countrys banking system. However, road development in the city has been much slower than growth in the number of cars and motorcycles (see Chart 4).
Chart 2: Distribution of roads by island, including toll roads (2009) Chart 3: GDP distribution by island (2009) 24% 33% 11% 17% 5% 10% Java Sumatra Kalimantan Sulawesi Papua Other islands
58% 24% 9% 5% 1% 3% Java Sumatra Kalimantan Sulawesi Papua Other islands Sources: Central Agency of Statistics, Toll Road Management Agency (BPJT), Standard Chartered Research
Source: Central Agency of Statistics The national road system is still concentrated in J ava and Sumatra
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14 February 2011 5 From 2005-09, the number of motorcycles rose by 24% annually and the number of cars rose by 22%, while the distance of usable roads actually declined from 7,226km in 2005 to 6,506km in 2009. According to the Ministry of Transportation (MoT), the economic cost of traffic congestion in Jakarta is IDR 5.5trn (USD 0.6bn) per year, while the cost of air pollution is IDR 2.8trn (USD 0.3bn). The ministry also estimates that 63% of Jakartas residents spend 20-30% of their income on transport.
Toll roads The government aims to expedite toll-road development to promote broader economic development. Toll roads are expected to cut intra-city transport times, cutting average transport costs, allowing the smooth distribution of goods, and facilitating economic activity. Indonesia currently has a total of about 742km of toll roads (see Table 3). According to the government, the ideal distance is 3,088km. Therefore, 2,337km of new roads have to be built, at an estimated cost of IDR 216.8trn (USD 24bn). Most toll-road investments are expected to be funded by private investors, as the government has said that it can only build 70.5km, or 2.6%, of the planned toll roads. Before building toll roads, private investors must bid for a toll-road concession from the government (known as a PPJT).
Table 3: Toll-road developments in Indonesia (as of September 2010) Status Number of routes Length (km) Investment cost (IDR trn) Existing 28 741.9 - PPJT granted* 20 768.7 66.8 In the process of obtaining PPJT 4 154.2 10.3 In preparation for bidding 11 475.4 34.2 To be built by the government 3 70.5 6.6 Other planned toll roads 20 877.1 99.1 Total target 86 3,087.8 216.8 * Toll-road concession agreement with the government; Source: Toll Road Management Agency (BPJT)
Chart 4: Population of cars and motorcycles vs. distance of roads in Greater Jakarta
0 2 4 6 8 2005 2006 2007 2008 2009 m i l l i o n s 0 2,000 4,000 6,000 8,000 k i l o m e t r e s Registered motorcycles Registered cars Length of roads (RHS)
Sources: Central Agency of Statistics, Indonesian Police, Toll Road Management Agency (BPJT), Standard Chartered Research Ideally, Indonesia needs to extend its road network by almost 2,400km, triple the current capacity Congestion in the capital, J akarta, creates significant opportunity costs for the national and regional economies
Special Report
14 February 2011 6 61% of Indonesias existing toll roads are in West Java and Banten (two provinces bordering Jakarta that together contribute 14% of Indonesias GDP see Chart 5). Toll-road projects planned for the near future (those in possession of PPJT) will also be concentrated in these two provinces.
The government also targets the completion of a trans-Java toll-road system that will link the western and eastern edges of the island by 2014. This network will span 1,193km and will connect Merak port (in Banten province) to Banyuwangi port (in East Java). As of September 2010, only about 9% of the targeted length of the trans- Java toll roads had been completed.
The central government is currently prioritising the development of 10 sections of the trans-Java toll-road system, stretching 652km from Cikampek in West Java to Surabaya in East Java (see Chart 6). This road network should provide a better alternative to the overcrowded conventional Northern Java coastal (Pantura) road system. As of early October 2010, the Ministry of Public Works had cleared about Chart 5: Distribution of operating toll roads and toll-road projects that have obtained PPJT (as of September 2010)
0 200 400 600 800 West Java & Banten Jakarta Central Java & Yogyakarta East Java Sumatra Sulawesi k m Operating Obtained PJPT and under construction Obtained PPJT but yet to start construction
Sources: Toll Road Management Agency (BPJT), Standard Chartered Research
Chart 6: Existing and planned toll roads in Java (as of September 2010) Sources: Toll Road Management Agency (BPJT), Standard Chartered Research Existing toll roads and planned toll- road construction are still concentrated in West J ava and Banten
Special Report
14 February 2011 7 36% of the land for the 10 sections of the network at a cost of IDR 1.7trn (USD 0.2bn), but another IDR 3.2trn (USD 0.4bn) is required to complete the land acquisition process in 2011. The second section (Palimanan-Kanci in West Java) is already operating; the investment cost to build the remaining sections (excluding the land acquisition cost, which is allocated in the national budget) is estimated to reach IDR 31.8trn (USD 3.5bn).
Bridges As is the case for roads, the central government has been passive in building new bridges over the past decade. In fact, new bridge development has dropped significantly in terms of both numbers and length (see Charts 7 and 8). These declines were mainly caused by sharp cuts in government infrastructure spending, in particular during the tight budget years following the Asian financial crisis, when the government was placed under IMF supervision. As of end-2008, 13% of central government-owned bridges were heavily damaged or in complete disrepair. In terms of length, 17% of the 333km of national bridges were heavily damaged or dysfunctional in 2008.
Given that Indonesias resource-rich islands namely Sumatra, Kalimantan, and Papua have many rivers, maintaining existing bridges and building new ones is crucial to ensuring smooth transport of mining and forest products. Using bridges instead of river transport significantly reduces transport costs and time. Well- maintained bridges therefore help to promote economic growth and reduce logistical bottlenecks that often result in supply-side inflationary pressures. Moreover, without adequate support from bridges, the economic impact of developing new road systems will be less than optimal.
In addition to conventional bridges owned by the central government and local governments, Indonesia has one toll bridge: the 5.4km Suramadu Bridge connecting Surabaya and Bangkalan on Madura Island (both in East Java province). It was constructed from 2003-09 and is the countrys first inter-island bridge. The bridges construction cost was IDR 4.5trn (USD 440mn), financed by the central government and the East Java provincial government (which together contributed about 55% of the total funding) and the Chinese government (the remaining 45%, which came in the form of a soft loan). State-owned company Jasa Marga was appointed to operate the Suramadu Bridge.
Chart 7: Number of new national bridges built Chart 8: Length of new national bridges built 0 1,000 2,000 3,000 4,000 5,000 6,000 Before 1970 1970-79 1980-89 1990-99 2000-08 Sumatra Java Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua
0 20 40 60 80 100 120 140 Before 1970 1970-79 1980-89 1990-99 2000-08 k m Sumatra Java Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua Source: Ministry of Public Works
Source: Ministry of Public Works Construction of new bridges and maintenance of existing ones is crucial to supporting land transport, which is much cheaper than river transport
Special Report
14 February 2011 8 The government plans to build the 29km Sunda Strait Bridge connecting Banten province in Java and Lampung province in Sumatra by 2030. Total funding needed for the bridge is expected to reach IDR 140trn, with most of the financing to come from private investors. The government expects Sunda Strait construction to start in 2013 at the earliest.
Railroads Trains are a popular mode of transport in Indonesia for both passengers and cargo, as they can travel faster than other land transport modes. Yet the poor condition of existing railroads and the slow pace of new railroad construction have resulted in low quality of service (including delays and, in extreme cases, accidents). We believe that the construction of new railroads will help to expedite economic growth, especially if trans-island networks can be built in resource-rich islands outside Java, such as Sumatra and Kalimantan. The government has identified railroad construction as a key priority of its transport infrastructure development programme.
Train transport is heavily concentrated in Java, where about 59% of Indonesias population lives. In 2010, 97% of Indonesias total train passengers were in Java, while the number of train passengers in Sumatra was very low (see Chart 9). Most train passengers in Java are commuters living in Jakarta and surrounding cities (the so-called Jabotabek area); this area accounted for 63% of Javas total train passengers in 2010. This is understandable given Javas higher population that Sumatras. Cargo transport, however, is more active in Sumatra than in Java. In 2010, Sumatra accounted for about 80% of the volume of goods transported by train in Indonesia (see Chart 10).
While the government and parliament passed a law in 2007 to privatise the countrys railroad network and abolish the monopoly rights of state-owned PT Kereta Api Indonesia (KAI), the company is still the countrys sole railroad operator. The government also continues to provide subsidies to PT KAI (for low-income passengers) under the public service obligation (PSO) in the budget.
As of 2009, Indonesias railroad network totaled 4,819km, compared to 472,406km of conventional roads and 742km of operating toll roads. Railroad development is relatively slow, with the network growing by only 1.1% per year on average from 2004-09, versus 4.9% for the road network. The short distance covered by the Chart 9: Number of train passengers mn Chart 10: Amount of goods transported by train 000 tonnes 0 50 100 150 200 250 2006 2007 2008 2009 2010 Java Jabotabek Java non-Jabotabek Sumatra
0 5 10 15 20 2006 2007 2008 2009 2010 Sumatra Java Sources: Central Agency of Statistics, PT KAI
Sources: Central Agency of Statistics, PT KAI Passenger train transport is heavily concentrated in J ava, while cargo traffic is greater in Sumatra
Special Report
14 February 2011 9 nations rail network is not the only problem. The infrastructure is also old and in poor condition, with rails often used for more than 25 years (versus 5-10 years maximum in advanced countries such as Japan).
The MoT is therefore focused primarily on repairing and modernising the countrys outdated rail infrastructure, including changing old wooden rail sleepers to concrete- based sleepers. The ministry is also expanding the network, albeit at a slow pace, including the construction of double-track railways from Jakarta to Surabaya in East Java (expected to be completed by 2014).
The railroad system is still concentrated in Java, the only island in Indonesia with a trans-island network (see Chart 11). Railroads in Sumatra were built more sporadically and are designed to transport goods (in particular coal) from mining sites to seaports (see Chart 12). The government plans to build a trans-Sumatra railroad system linking all provinces on the island, due for completion by 2020. It faces difficulties in meeting the financing requirements for the project, although some investors from China have expressed interest in participating.
Most of Indonesias existing railways are owned by the government through the MoT. As in the case of toll roads, financing and land clearance are the main obstacles to constructing new railroads. To address financing problems, the government is inviting private investors, local governments and co-operatives to participate in the railway development programme.
Chart 13 shows the procedures an investor needs to go through in order to develop public railroads. Different levels of railroads (national, provincial and local) require construction permits and operating licences from the different levels of government. All types of railroad construction and operation must also technically be approved by the MoT. As Chart 14 shows, similar procedures apply for investors wanting to build non-public special-purpose railroads.
Some private investors have expressed interest in investing in new railroad projects. These projects include special-purpose tracks for transporting coal (Muara Wahau to Bengalon in East Kalimantan, Palaci to Bangkuang in Central Kalimantan, and Tanjung Enim in South Sumatra to Srengsem in Lampung); the Sukarno-Hatta airport railway linking the international airport to Jakarta; and a mass rapid transit system in Jakarta, financed by the Japan International Cooperation Agency and expected to start operating in 2016.
The government has liberalised the railroad construction business in order to encourage private investment
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14 February 2011 10 Chart 11: Existing railroad system in Java Sources: Directorate General of Railways of the Ministry of Transportation, Standard Chartered Research
Chart 12: Existing railroad system in Sumatra Sources: Directorate General of Railways of the Ministry of Transportation, Standard Chartered Research
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14 February 2011 11 Chart 13: Procedures to invest in the development of public railroads
Natioa
Minister of Transportation Minister of Transportation Minister of Transportation Governor Governor (with technical approval from the Minister of Transportation) Governor (with technical approval from the Minister of Transportation) Mayor / Regent Mayor / Regent (with technical approval from the Minister of Transportation) Mayor / Regent (with technical approval from the Minister of Transportation) Investor National railroad Provincial railroad Local railroad Business registration Construction permit Operating licence Source: Ministry of Transportation
Chart 14: Procedures to invest in the development of special-purpose railroads
Minister of Transportation Minister of Transportation Governor (with technical approval from the Minister of Transportation) Governor (with technical approval from the Minister of Transportation) Mayor / Regent (with technical approval from the Minister of Transportation) Mayor / Regent (with technical approval from the Minister of Transportation) Operating licence Construction permit Investor National railroad Provincial railroad Local railroad
Source: Ministry of Transportation
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14 February 2011 12 Seaports Because Indonesia is an archipelago, with total sea area of about 3mn square kilometres and 17,508 islands, sea transport is crucial from both an economic and a defence point of view. Yet in our view, Indonesia lacks seaports to cater efficiently to inter-island and international trade. Indonesian seaports are relatively small and outdated compared to other countries in the South East Asia. Improving and upgrading these seaports will help to accelerate economic growth, especially in the eastern part of Indonesia, where land transport infrastructure is limited.
The MoT is responsible for co-ordinating sea transport and managing non- commercial ports, but commercial ports are managed by the state-owned companies Pelindo I, II, III, and IV (which are under the jurisdiction of the Ministry of State Owned Enterprises). Indonesias shipping sector is considered a competitive market, with domestic and foreign shipping companies free to enter. The number of shipping companies operating in Indonesia, transporting both passengers and cargo, rose from 1,269 in 2005 to 1,754 in 2009.
As Chart 15 shows, the number of sea transport passengers fluctuates sharply from year to year in response to factors including domestic GDP growth, crude oil prices, Chart 15: Number of passengers departing by sea transport (mn) Chart 16: Loaded sea cargo mn tonnes 0 5 10 15 20 25 2000 2001 2002 2003 2004 2005 2006 2007 2008 -30 -15 0 15 30 45 % Number of passengers Growth (RHS)
0 100 200 300 400 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 Inter-islands International Sources: Central Agency of Statistics, Port Administration Office
Sources: Central Agency of Statistics, Port Administration Office
Chart 17: Distribution of seaports in Indonesia by class 2009 Chart 18: Distribution of seaports in Indonesia by island 2009 5% 31% 57% 2% 1% 3% 1% Prime Class I Class II Class III Class IV Class V Under supervision of the Ministry of Transport
12% 23% 7% 10% 9% 18% 21% Java Sumatra Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua *Includes commercial and government-managed seaports; Source: Ministry of Transportation
Source: Central Agency of Statistics Indonesias seaport capacity still lags behind ASEAN peers, but its development is crucial considering that the country has over 17,000 islands
Special Report
14 February 2011 13 and airfares. Our study reveals that passenger sea transport growth has negative correlations with both oil prices and the number of air passengers (which implies some degree of substitutability between sea and air transport for some passengers), but has a positive correlation with domestic GDP growth. Meanwhile, sea cargo transport activity has been relatively stable, except in 2007, when it surged as rising oil prices pushed up the cost of air cargo transport (see Chart 16).
As of 2009, Indonesia had 111 commercial seaports operated by Pelindo I, II, III, and IV and 534 seaports managed by the government, ranging from Prime class (the highest ranking) to Class IV. Although Indonesia has 645 operational seaports, only four are classified as Prime (Port Tanjung Priok Jakarta, Port Tanjung Perak Surabaya, Port Belawan Medan and Port Makassar) and 14 are Class I (see Chart 17). While some lower-class seaports can still accommodate large-tonnage ships, Prime and Class I seaports are considered suitable to cater to international shipping activity.
Chart 19: Distribution of unloaded inter-island sea cargo by island (2008) Chart 20: Distribution of loaded inter-island sea cargo by island (2008) Java Sumatra Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua
Java Sumatra Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua Source: Central Agency of Statistics
Source: Central Agency of Statistics
Chart 21: Strategic seaports in Indonesia Source: Ministry of Transportation Only a few Indonesian seaports are considered suitable to cater for international shipping activity
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14 February 2011 14 Seaports serve both passengers and cargo on inter-island routes. They play a particularly vital role in eastern Indonesia, in particular Papua, where the road system does not connect all cities and towns (see Chart 18). However, Kalimantan (especially South Kalimantan) is the countrys most active hub for sea cargo activity (see Charts 19 and 20). South Kalimantan has only two commercial seaports, but the province accounted for 34% of Indonesias sea cargo loaded for inter-island trade and 38% of sea cargo loaded for international trade in 2008, according to the Central Agency of Statistics. Most cargo transported through South Kalimantan and East Kalimantan consists of natural resource-based products such as coal and timber.
In its medium-term plan to 2014, the MoT focuses on upgrading the countrys 25 strategic seaports (Chart 21). The ministry aims to enhance the capabilities of these seaports to service international trade, while reducing Indonesias dependence on international ports in neighbouring countries. The ministry also plans to strengthen 123 feeder ports to support the 25 strategic seaports and facilitate inter-island trade within Indonesian waters.
Among the 25 strategic ports, Port Tanjung Priok and Port Tanjung Perak (Indonesias two largest seaports) are already overloaded and undergoing expansion. The countrys other main seaports can handle current cargo flows but also need to be expanded in the medium term (Table 4). Moreover, compared to ASEAN peers, Indonesias main seaports are relatively small and outdated. Tanjung Priok, for instance, can only cater to vessels of up to 50,000 deadweight tones (DWT); in comparison, the maximum DWT levels are 150,000 for the Port of Singapore, 130,000 for Port Klang in Malaysia, and 120,000 for Laem Chabang port in Thailand.
Table 4: Container cargo handling capacity of Indonesias six main seaports Port name Estimated optimum capacity of container flows per year (million TEUs*) Number of container flows in 2009 (million TEUs*) Development plan Tanjung Priok (Jakarta) 4.0 4.2 Capacity expansion to 9.5mn TEUs of container flows; construction started in late 2010, expected to be completed in 2020 Tanjung Perak Surabaya (East Java) 2.0 2.4 Development of Socah port in Madura (East Java) as part of Tanjung Perak expansion Tanjung Emas Semarang (Central Java)
1.0 0.4 Terminals can still handle current container flows Belawan Medan (North Sumatra) 0.6 0.3 Capacity expansion to 1mn TEUs by 2013 Makassar (South Sulawesi) 0.5 0.4 Terminals can still handle current container flows but are expected to be overloaded by 2013 Banjarmasin (South Kalimantan) 0.3 0.2 Capacity expansion to 0.7mn TEUs by 2014 *Twenty-foot equivalent units Sources: Standard Chartered Research, Warta Gafeksi, various media reports The government is aiming to upgrade 25 strategic seaports by 2014
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14 February 2011 15 Capacity additions are not the only improvements needed at Indonesian seaports. Operational efficiency and quality of service also need to be enhanced. A survey conducted by the ASEAN Port Association in 2008 shows that the efficiency of Port Tanjung Priok and Port Tanjung Perak, as measured by vessel berthing times and waiting hours, is relatively low compared to other major ASEAN seaports (see Table 5). The two ports also scored poorly in terms of quality of service, as measured by the availability of port workers and equipment, the availability of a cargo location system, and clear procedures for settling claims on losses or damages.
To modernise and increase the capacity of existing seaports, the government and parliament passed a sea transport law in 2008 that encourages private investors, local governments and co-operatives to participate in seaport development. Investors can choose to invest through the public-private partnership (PPP) model, establishing joint venture companies with Pelindo or buying shares in Pelindo once Pelindo is listed in the stock market. Chart 22 shows the procedures investors need to follow to develop commercial ports under the PPP scheme; Chart 23 shows the procedures for special port terminals. The government has taken measures to improve the efficiency and service quality of the countrys strategic seaports, including ordering all Prime and Class I seaports to operate 24 hours a day, seven days a week (this started with the four Prime seaports in 2010) and introducing the so-called National Single Window for electronic processing of export-import documents in January 2010.
Table 5: Comparison of competitiveness among major ASEAN seaports in handling cargo ASEAN-wide Port Network Survey 2008
Container cargo handling (per gang hour) Vessel berthing time (hours) Vessel waiting time (hours) Availability of port workers & equipment upon request Availability of cargo location system Availability of procedures for settling claims on losses or damages to life / properties Tanjung Priok (Indonesia) 23.3 boxes 50-57 2 Not always available during peak times No
No Tanjung Perak (Indonesia) 10 boxes 65 2 Shortage of available equipment No No Laem Chabang (Thailand) 35 boxes 8 0.4 Yes Yes Yes Bangkok (Thailand) 21.3 boxes 17.7 1.8 Yes Yes Yes Manila International Container Terminal (Philippines) 28 boxes No answer given No answer given Yes No Yes Subic (Philippines) 27 moves 7 1-1.5 Yes No answer given Yes Singapore 31.3 boxes Varies from vessel to vessel 2 Yes Yes Yes Source: ASEAN Ports Association In addition to capacity expansion, the quality of service and operational efficiency of Indonesias seaports need to be improved
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14 February 2011 16 Chart 22: Procedures to invest in the development of commercial seaports
Minister of Transportati on Minister of Transportati on Minister of Transportati on DGST** Minister of Transportati on Minister of Transportati on Minister of Transportati on DGST** DGST** Minister of Transportati on Governor Governor Governor Governor Minister of Transportati on Minister of Transportati on Governor DGST** Minister of Transportati on Mayor / Regent Mayor / Regent Mayor / Regent Mayor / Regent Minister of Transportati on Minister of Transportati on Mayor / Regent DGST**
Main port Collector / hub port Feeder port Investor Location license Master plan license DLKR & DLKP* license Cons- truction license Opera- ting license Internati onal trade license Dredging reclama- tion license 24 hrs operation license Container terminal license Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation Source: Ministry of Transportation
Chart 23: Procedures to invest in the development of special seaports
Minister of Transportation DGST Minister of Transportation Minister of Transportation DGST Minister of Transportation Minister of Transportation Governor Governor Governor Governor Minister of Transportation Minister of Transportation Mayor / Regent Mayor / Regent Mayor / Regent Mayor / Regent Minister of Transportation
Investor Location licence (incl. spatial plan & safety compliance
Construction licence Operating licence Dredging reclamation licence 24 hrs operation licence Container terminal licence International Inter-province Intra-province Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation Source: Ministry of Transportation
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14 February 2011 17 Airports Air transport is a faster but more expensive alternative to sea transport on inter-island and international routes. Following government deregulation of air transport in 1999, the passenger transport business grew significantly particularly domestic air travel, where the annual number of passengers grew by 34% on average from 2000-04 (Chart 24). The emergence of low-cost carriers drove rapid passenger growth during this period. Yet growth slowed from 2005, possibly due to rising crude oil prices (which increased ticket prices) and the increasing number of domestic air traffic incidents (50 cases in 2005, 85 in 2006, 62 in 2007, 81 in 2008 and 102 in 2009). According to the MoT, Indonesia currently has 15 airlines operating scheduled flights and 30 charter airlines.
Indonesias cargo air transport business is more volatile than the passenger business. There are currently two scheduled cargo carriers (one domestic and one international) and three domestic non-scheduled (charter) cargo carriers operating in the country. As Chart 25 shows, fluctuations in air cargo volume are determined more by domestic cargo than by international cargo, which is relatively stable. Growth in loaded air cargo is driven by factors including oil prices (which has a negative correlation with the amount of loaded cargo) and domestic GDP growth (positive correlation with the amount of loaded cargo).
Air transport (both passenger and cargo) is concentrated in Java, given that 59% of Indonesias population lives on the island and that Indonesias two biggest airports, Sukarno-Hatta and Juanda, are located there. In 2009, airports in Java accounted for about 51% of Indonesias domestic air passenger departures, 58% of international air passenger departures, 45% of domestic air cargo departures, and 81% of international air cargo departures.
As of 2009, there were 27 international airports and 163 domestic airports in Indonesia, ranging from Class I (the highest) to Class V (the lowest) and including special-purpose privately operated airports under the supervision of the MoT (see Charts 26-28). All commercial public airports are currently operated by the state- owned PT Angkasa Pura I and Angkasa Pura II. Non-commercial public airports are operated by the MoT, non-public special-purpose airports are operated by state- owned and private companies, and military airports are operated by the air force. Chart 24: Number of departed aircraft passengers (mn) Chart 25: Number of loaded air cargo (000 tonnes) 0 10 20 30 40 50 60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic International
0 50 100 150 200 250 300 350 400 450 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Domestic International Sources: Central Agency of Statistics, PT Angkasa Pura I and II, Ministry of Transportation
Sources: Central Agency of Statistics, PT Angkasa Pura I and II, Ministry of Transportation Faster income growth will result in a surge in demand for domestic and international air transport in the coming years Air passenger and cargo transport activity is still concentrated in J ava
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14 February 2011 18 About 56% of Indonesias airports are located in the eastern part of the country, particularly in Papua (36% of total airports), where air transport is the only way to reach the interior of the island. The airports in Papua and neighbouring Maluku are small, mostly Class IV or below. As air is the only way to transport goods, cities and towns in Papua tend to have higher food prices (in particular for rice, spices and vegetables) than their counterparts in western Indonesia.
Most of the countrys main airports are already overloaded in terms of handling passengers, so capacity expansion is badly needed (see Table 6). In 2009, for example, Jakartas Sukarno-Hatta Airport, the countrys largest, had to accommodate 69% more passengers than its optimum capacity. The most overloaded of the major airports is Polonia Airport in Medan (North Sumatra), which is only designed to accommodate 900,000 passengers but catered to 5mn passengers in 2009. Some major airports are also overloaded in terms of cargo handling, and their capacity must be urgently expanded (see Table 7).
Chart 26: Distribution of airports in Indonesia by class* 2009 Chart 27: Distribution of airports in Indonesia by island 2009 11% 10% 20% 28% 7% 24% Class I Class II Class III Class IV Class V Under supervision by the Ministry of Transportation
7% 15% 13% 11% 10% 9% 35% Java Sumatra Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua *Includes commercial and government-run airports; Source: Ministry of Transportation
Source: Ministry of Transportation
Chart 28: Main international airports in Indonesia Source: Ministry of Transportation Airports play a crucial role in inter- and intra-island transport in eastern Indonesia Most of Indonesias main airports are already overloaded in terms of passenger and cargo handling
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14 February 2011 19 Table 6: Number of passengers and optimum capacity of Indonesias seven main airports Airport name Number of passengers* in 2009 (million) Estimated optimum handling capacity (million passengers pear year*) Development plan Sukarno-Hatta Tangerang (Banten) 37.1 22.0 Capacity expansion to 60mn passengers a year by 2015 Juanda Surabaya (East Java) 10.6 7.0 Capacity expansion to 14mn passengers per year starting in 2011 by re-opening old terminals Hasanuddin Makassar (South Sulawesi) 5.1 7.0 Completed upgrade and expansion in 2008; current capacity is able to handle passengers Ngurah Rai Denpasar (Bali) 9.6 6.5 Capacity expansion to 13mn passengers by 2013 Polonia Medan (North Sumatra) 5.0 0.9 To be replaced by Kuala Namu Airport (optimum capacity of 8mn passengers) by 2012 Sepinggan Balikpapan (East Kalimantan) 4.0 1.5 Capacity expansion to 10mn passengers; construction period from 2011-15 Adi Sucipto Yogyakarta (Special Region of Yogyakarta) 3.2 1.0 Bidding process for project to expand capacity to 2.5mn passengers started in 2010 * Includes passengers arriving at, departing from or transiting through the respective airport; Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research
Table 7: Cargo flows and cargo-handling capacity of Indonesias seven main airports Airport name Cargo handled in 2009 (tonnes) Estimated optimum cargo-handling capacity per year* (tonnes) Development plan Sukarno-Hatta Tangerang (Banten) 433,180 300,000 Capacity expansion to 1mn tonnes a year by relocating cargo terminals from the east side of the airport to the west side; project to start in 2016 Juanda Surabaya (East Java) 61,871 120,000 Current cargo terminals have sufficient capacity to handle cargo flows Sultan Hasanuddin Makassar (South Sulawesi) 32,420 60,000 Construction of additional temporary cargo terminal was completed in 2010, expanding total optimum annual capacity to 60,000 tonnes of cargo; current cargo terminals can handle cargo flows Ngurah Rai Denpasar (Bali) 64,924 50,000 Capacity expansion by building an additional 6,000 square metre international cargo terminal that will expand total optimum capacity to around 100,000 tonnes of cargo per year by 2013 Polonia Medan (North Sumatra) 34,837 10,000 To be replaced by Kuala Namu airport (optimum cargo capacity of 65,000 tonnes per year) by 2012 Sepinggan Balikpapan (East Kalimantan) 28,978 35,000 Current capacity can still handle cargo flows; Sepinggan Airport has been designated by the Ministry of Transportation as one of 14 airports to be upgraded to international cargo airports by 2015 Adi Sucipto Yogyakarta (Special Region of Yogyakarta) 11,209 5,000 Provincial government of the Special Region of Yogyakarta plans to build new international terminal in Kulon Progo to be started by 2020 * Includes passengers arriving at, departing from or transiting through the respective airports; Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research
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14 February 2011 20 Sukarno-Hatta Airport, Indonesias largest airport, lags behind major airports in other ASEAN-5 countries in terms of its capacity to handle passengers and cargo (see Table 8). Sukarno-Hatta Airports optimum passenger capacity is only about 30% of Singapores Changi Airport and 50% of Bangkoks Suvarnabhumi Airport. Meanwhile, Sukarno-Hatta Airports optimum cargo-handling capacity is only 10% of its counterparts in Singapore and Thailand.
Financing and land clearance issues are the two main hurdles faced by PT Angkasa Pura in upgrading and expanding existing commercial airports and building new ones. The government sees private-sector investment in airports as one solution to the financing problem. To facilitate such investment, the government and parliament passed an aviation law in 2009 that allows private investors to invest in airport development, either through PT Angkasa Pura (by forming joint ventures or buying shares once PT Angkasa Pura I and II are listed on the stock market) or by directly developing new airports under the PPP scheme.
To develop a new public airport, an investor must first obtain a location licence from the MoT, signed by the minister. This licence approves proposals for the master plan, working area (DLKR), area of interest (DLKP), safe operation area (KKOP), and noise pollution levels (Chart 29). Once the location licence is obtained, the investor must obtain a construction licence from the MoT (also signed by the minister). When construction is completed, the investor requests either registered status or an Airport Operation Certificate (AOC); again, this must be signed by the minister. Registered status is given to airports that can cater to planes with maximum capacity of 30 passenger seats or a maximum weight of 5,700kg, and that meet particular requirements on personnel, facilities, and airport operation procedures. An AOC is granted to an airport that can handle planes with maximum capacity of more than 30 passenger seats or a maximum weight greater than 5,700kg, and has met requirements on personnel, airport operation procedures, and flight operation safety management. Special-purpose airports are built by companies with a special need for their own airports, i.e., mining companies that need to transport cargo or staff by air.
The required procedures for investing in the development of special-purpose (non- public) airports are shown in Chart 30.
In its PPP Book 2010, the government gave private investors opportunities to invest in the development of seven airports through the PPP scheme. The MoT estimates Table 8: Comparison of major ASEAN airports (2010)
Estimated optimum number of passengers handled per year (millions) Estimated optimum amount of cargo handled per year (tonnes) Sukarno-Hatta (Indonesia 22.0 300,000 Ninoy Aquino (Philippines) 25.0 600,000 Kuala Lumpur (Malaysia) 40.0 1,200,000 Suvarnabhumi (Thailand) 45.0 3,000,000 Changi (Singapore) 73.0 3,000,000 Sources: PT Angkasa Pura II, Suvarnabhumi Airport, Changi Airport, media reports, Standard Chartered Research Sukarno-Hatta Airport lags behind the main airports in other ASEAN-5 countries The government and the parliament issued a new aviation law to facilitate private-sector investment in airport construction
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14 February 2011 21 that about IDR 7.5trn is needed to build these airports, which are targeted for completion by 2014. They include Kertajati Airport in Majalengka and Banten Airport (both in West Java), New Bali Airport, and New Samarinda Airport (East Kalimantan).
The government is also continuously building new airports. The MoT has allocated IDR 236bn (USD 26.2mn) to build 14 new airports in 2011. Most of them are small- scale domestic airports (Class IV and V) and are located in the less developed eastern part of Indonesia.
The government also aims to upgrade Class I airports to Prime-class international airports. In its medium-term plan, the MoT has designated 14 airports to become international cargo airports by 2015. The execution of these projects is in the hands of PT Angkasa Pura I and II and private investors.
Given slow progress in upgrading Sukarno-Hatta and its other international airports, Indonesia is less prepared to implement the ASEAN open-skies agreement, which will take effect by 2015. The MoT has stated that Indonesia will only open its five key international airports to ASEAN member carriers in 2015, while keeping other airports closed until they are ready to be opened up. The countrys five international airports are Sukarno-Hatta, Juanda, Kuala Namu, Ngurah Rai and Hasanuddin.
Chart 29: Procedures to invest in the development of public airports
Construction licence Airport operation certificate or registered status Ministry of Transportation
Source: Ministry of Transportation
Chart 30: Procedures to invest in the development of special-purpose airports
Investor
Location licence Special airport construction licence Special airport operation certificate Ministry of Transportation
Source: Ministry of Transportation
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14 February 2011 22 Electricity Rapid infrastructure development to support economic growth is also needed in the electricity sector. Although Indonesias electricity production is the highest in South East Asia, it is still relatively low compared to China and India. While Indonesias population is almost of four times Thailands, Indonesias electricity production is only slightly higher than Thailands (see Table 9). Moreover, according to the state-owned electricity company PLN (Perusahaan Listrik Negara), the electrification ratio (the ratio of the number of households that are PLN customers to the total number of households in Indonesia) stood at only 63.8% in 2009. Since PLN is the only company that sells electricity directly to end customers, this ratio is a good proxy for the percentage of households with access to electricity.
Households are the biggest source of electricity demand in Indonesia. In 2009, 40.8% of electricity demand came from household consumers, 34.3% from industry, and 18.5% from businesses (see Chart 31). As households are the biggest consumers of electricity in Indonesia, electricity tariff hikes are politically sensitive, as they reduce households purchasing power. In general, electricity tariff hikes have a negative impact on the economy (both inflation and GDP growth) either via direct transmission to household consumers or indirectly through higher production costs for industries and businesses, which push up inflation. When the government hiked basic electricity tariffs by 10% on average in July 2010, inflation spiked from 0.3% m/m (4.2% y/y) in May to 1.0% m/m (5.1% y/y) in June and 1.6% m/m (6.2% y/y) in July.
Table 9: Electricity production and consumption in 2008 (000 GWh) Country Production (P) Consumption (C) Domestic surplus or deficit (= P C) China 3,221 3,017 205 India 786 601 185 Indonesia 149 129 20 Thailand 139 132 7 Malaysia 92 89 3 Philippines 57 50 8 Singapore 39 37 2 Sources: US Energy Information Administration, PLN Annual Report 2009
Chart 31: Electricity demand by type of consumer (2009) Chart 32: Electricity demand by island (2009) 42% 34% 18% 6% Households Industries Businesses General public
77% 12% 3% 4% 2% 1% 1% Java Sumatra Kalimantan Sulawesi Bali NTB and NTT Maluku and Papua Source: PLN Annual Report 2009
Source: PLN Annual Report 2009 Further investment in electricity generation and distribution is crucial to raising living standards and attracting foreign investors to set up manufacturing capacity
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14 February 2011 23 The countrys electricity market is concentrated in Java, which accounted for around 77.6% of national electricity demand (Chart 32) and 78.7% of national electricity production in 2009. Electricity consumption is heavily concentrated around Jakarta. Among the provinces in Java, West Java and Banten (excluding Tangerang), which are adjacent to Jakarta, have the highest demand for electricity (25.3% of national demand), followed by Jakarta and Tangerang (24.3%).
As Indonesias economy and population continue to grow, PLN estimates that electricity demand will grow by 9.2% a year on average, almost doubling from 134,581GWh in 2009 to 334,400GWh in 2014. PLN also estimates that Indonesia needs to raise electricity production by an average of 3,000MW per year to cope with increasing demand. While Indonesia has a total electricity surplus of roughly 20,000GWh per year (see Chart 33), in reality, many areas of the country (including Jakarta) suffer from electricity deficits that lead to blackouts and rationing of electricity supply. Electricity infrastructure development, in particular new power plants, is therefore badly needed to ensure sufficient and steady future electricity supply.
Chart 33: Electricity production and consumption in Indonesia (GWh)
0 40,000 80,000 120,000 160,000 2002 2003 2004 2005 2006 2007 2008 2009 Production (P) Consumption (C) Domestic surplus ( = P - C)
Sources: PLN Annual Report 2009, Standard Chartered Research
Chart 34: Electricity production in Indonesia by supplier Chart 35: Energy sources of PLNs electricity production 0% 20% 40% 60% 80% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 Produced by PLN from leased generators Purchased by PLN Produced by PLN's own generators
0% 20% 40% 60% 80% 100% 2005 2006 2007 2008 2009 H1-2010 Coal Oil fuel Natural gas Water Geothermal Sources: PLN Annual Reports, 2005 and 2009
Sources: PLN Annual Report 2009, Standard Chartered Research The electricity market is still concentrated in J ava, especially in J akarta and neighbouring provinces Indonesia needs to build new power plants to cope with increasing demand
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14 February 2011 24 PLN alone cannot produce all of the electricity Indonesia needs. Using its own generators as well as leased generators, PLN accounted for 76.9% of the countrys total electricity production in 2009, while the rest had to be purchased from independent power producers, or IPPs (see Chart 34). The role of IPPs has risen steadily they accounted for 23.1% of national electricity production (sold through PLN) in 2009, up from 20.5% in 2005 and 13.1% in 2001. As of 2009, there were 22 IPPs operating in Indonesia (10 of them in Java and Bali) with total generating capacity of 3,997MW. Meanwhile, the share of electricity produced by PLN from leased generators increased from 1% in 2001 to 3% in 2009.
PLN has tried to reduce its dependence on fuel oil as an energy resource by diversifying into cheaper production inputs such as coal. In 2009, around 28% of the electricity produced by PLN was generated by fuel oil, down from 38% in 2005. The share of coal rose to 36% from 25% over the same period. Natural gas accounted for 24%, water 9% and geothermal 3%; these shares remained roughly unchanged over the period (see Chart 35).
While the contribution of fuel oil has declined, PLNs operating costs are still sensitive to changes in oil prices (see Chart 36). As the government still subsidises PLN, rising oil prices imply increasing government subsidies for electricity, putting pressure on budget spending. When the average oil price (WTI) surged from USD 74.9/barrel in 2007 to USD 98.6 in 2008, government subsidies for PLN surged from IDR 36.6trn (USD 4.0bn) to IDR 78.6trn (USD 8.1bn) over the period. As average oil prices returned to USD 63.8/barrel in 2009, government subsidies for PLN were cut to IDR 53.7bn (USD 5.2bn).
Although Indonesia has abundant coal and natural gas, it is often difficult for PLN to obtain steady supplies of these resources for the following reasons: (1) not all power plants are adjacent to natural gas or coal suppliers, and in some cases, the inputs have to be sent from other provinces; (2) transport difficulties disrupt supply, as inter- island coal and gas shipping is often affected by poor weather conditions and sea currents; and (3) PLN must pay high prices for coal and gas purchased from suppliers, some of which prioritise export sales and will only sell inputs at prices above domestic market prices. Chart 36: Fuel cost comparison for PLN and average crude oil price WTI NYMEX
0 500 1,000 1,500 2,000 2,500 2004 2005 2006 2007 2008 2009 H1-2010 I D R
p e r
K W h 20 40 60 80 100 120 U S D
b b l Coal Natural gas Fuel oil Oil price (RHS)
Sources: PLN H1-2010 investor update, Bloomberg Coal and natural gas supply disruptions prevent PLNs power plants from providing a steady supply of electricity
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14 February 2011 25 PLNs electricity-generating capacity has continued to grow in recent years, but at a slow pace of 2.4% a year from 2000-09 (Chart 37). The companys power-generating capacity is concentrated in Java and Sumatra, while other islands still suffer from under-electrification (Chart 38).
PLN plans IDR 66.6trn (USD 0.7bn) of capital expenditure in 2011. Of this, it has set aside IDR 13.4trn (USD 1.5bn) for electricity infrastructure development (power plants as well as transmission and distribution infrastructure) in Java and Bali, IDR 6.3trn (USD 0.7bn) for electricity infrastructure in western Indonesia, and IDR 3.7trn (USD 0.4bn) for electricity infrastructure in eastern Indonesia.
To expedite electricity infrastructure development, the government launched the first phase of its fast-track electricity development programme in 2006. The objective of this program is to build 10 coal-fired power plants in Java with a total capacity of 7,520MW, and 26 coal-fired power plants outside Java (10 in Sumatra, five in Kalimantan, four in Sulawesi, five in East and West Nusatenggara, two in Maluku, and one in Papua) with total capacity of 2,391MW by 2012. These power plants are entirely built by PLN and financed from the companys internal funding (15% of the total funding required) and by the government (via guaranteed loans from state- owned banks), private national banks, a consortium of foreign banks, and the association of provincial development banks. PLN has opted to build coal-fired power plants because coal is much cheaper than fuel oil and natural gas.
In January 2010, the government launched the second phase of the fast-track programme, which aims to provide an additional 10,153MW of electricity generation capacity by 2014. While all of the power plants in the first phase of the programme are to be built by PLN, the second phase foresees a more active role for IPPs. In this phase, PLN will build 5,118MW of capacity and buy the remaining 5,035MW from IPPs, which are expected build new power plants to meet this demand.
The second phase of the fast-track programme is designed to be more environmentally friendly and focuses on renewable energy, with the total construction cost estimated to be double that of the first phase. Of the 10,153MW of capacity being added in the second phase, about 39% (3,997MW) will be generated by geothermal plants, 33% (3,312MW) by coal-fired plants, 15% (1,560MW) by gas-steam plants, 12% (1,204MW) by hydro plants, and the remaining 1% (100MW) by gas. Chart 37: Generating capacity of PLNs power plants Chart 38: Distribution of PLNs power-generating capacity by island (2009) 0 7,000 14,000 21,000 28,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 M e g a w a t t Coal-fired Gas steam Hydro power Gas Diesel Geothermal
72% 17% 1% 4% 4% 1% 1% Java Sumatra Kalimantan Sulawesi Bali, NTB, and NTT Maluku Papua Sources: PLN Annual Reports, 2005 and 2009
Sources: PLN Annual Reports, 2005 and 2009 The government has launched a fast-track electricity programme to expedite new power plant construction across the country
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14 February 2011 26 The financing is expected to come from the state budget, bank loans, two-step loans, the capital markets, and PLNs internal funding. However, we expect financing requirements for second-phase projects to be more difficult to meet than for the first phase, as they are more dependent on the participation of private investors than on support from the government budget. As a result, completion may be delayed from the initial 2014 deadline.
Due to financing problems, land clearance issues and administrative delays, the execution of the first phase of the programme has been delayed from its original timetable. Financing problems are the main factor slowing down the projects. While the first phase was launched in 2006, financing requirements were only fully secured at end-2009. In addition, PLN faced land clearance problems for its power plants in Indramayu (West Java) and Rembang (Central Java). Also impeding progress were the long timeframes needed for branch offices to receive letters of authority to invest from the PLN head office.
As a result of these obstacles, only 930MW of the 4,135MW target for end-2010 had been met as of mid-December. Progress has been much faster in Java than in other regions (Charts 39 and 40), where none of the planned power plants have been completed. As of H1-2010, of the 35 power plants targeted to be built, only one, the Labuan plant in Banten province, had been completed.
The government now expects the first phase of the programme to be completed by 2013 instead of 2012 as initially planned. PLN expects seven new power plants in Java targeted under the first phase to start operating in 2011. These plants will add 4,830MW of electricity supply in Java and Bali.
To support electricity-sector development, the government and parliament passed a new electricity law in 2009 that allows private enterprises, co-operatives and non- governmental enterprises to participate in the electricity supply business. As defined by the law, this business includes generation, transmission, distribution and sale of electricity to consumers.
Thus, under the new law, IPPs are allowed to sell electricity directly to end consumers (which was not permitted under the old law). However, priority for providing electricity to the public is still given to state-owned enterprises (PLN or local Chart 39: Progress of fast-track electricity development programme phase 1, in Java (H1-2010) Chart 40: Progress of fast-track electricity development programme, phase 1, outside Java (H1-2010) 0 1 2 3 Completed 90-99% 80-89% 70-79% 60-69% 50-59% Below 50%
Source: PLN H1-2010 investor update The government and parliament issued a new electricity law in 2009 to facilitate private-sector participation in the sector
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14 February 2011 27 government-owned enterprises). In order to supply electricity to the public, IPPs must obtain electricity supply business licences, known as IUPL. To supply electricity for special purposes, IPPs must obtain operating licences, known as IO (see Chart 41).
The new law allows for the differentiation of electricity tariffs across regions. National basic tariffs are set by the central government and the parliament, while provincial tariffs are set by local governments and local parliaments. The law also prohibits electricity suppliers from setting tariffs that are incompatible with the tariffs set by governments and parliaments; details of this rule will be provided in lower-level regulations implemented by provincial governments.
In 2010, the government issued Presidential Regulation (Perpres) No. 36/2010, which encourages foreign investors participation in electricity-sector development. The regulation allows foreign investors to have ownership stakes of up to 95% in power plants with generating capacity above 10MW, or to form partnerships with domestic companies for power plants with capacity up to 10MW. Foreign investors are also allowed to participate in electricity distribution, maintenance and consulting services (for further details, see Appendix 2).
Regulatory reform and liberalisation in the electricity sector have increased foreign investor participation, especially in power plant construction. Investors from Japan, China and South Korea are the most active groups seeking to build new power plants under the second phase of the fast-track programme. In January 2011, for instance, investors from these three countries competed for a coal-fired power plant project in Rembang (Central Java).
Chart 41: Types of licences needed for electricity suppliers
A presidential regulation issued in 2010 encourages foreign investment in the electricity business
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14 February 2011 28 Government support The government has taken several key steps to expedite infrastructure development in Indonesia: (1) issuing new laws and regulations to facilitate investment in infrastructure projects; (2) allocating more infrastructure funds in the state budget; (3) assigning the Coordinating Board of Investment (BKPM) to provide a one-stop shop licence system for real-sector investors; (4) establishing a government-owned infrastructure project financing company and an investment project guarantor company; and (5) assigning a special task force (the so-called UKP4) to alleviate investment bottlenecks caused by government bureaucratic inefficiencies.
1) Laws and regulations To allow and facilitate the participation of domestic and foreign investors in the real sector, the government and the parliament have ratified new laws on investment in recent years (see Table 10). These laws have been accompanied by government and presidential regulations to allow their implementation.
The broad goal is to encourage the private sector, co-operatives and local government-owned enterprises to invest in the real sector. Under these laws and regulations, the central governments only role is to regulate these sectors, allowing private entities, co-operatives, state-owned enterprises and local- government-owned enterprises to compete freely.
The government and the parliament are also discussing a bill on land clearance for infrastructure development, which is expected to receive parliamentary approval by mid-2011. The bill requires the government to hold discussions with and obtain approval from local communities living in designated areas for infrastructure projects before starting the land clearance process. After approval Table 10: New laws and regulations to facilitate real-sector investment Sector State laws (UU) Government regulations (PP) and presidential regulations (Perpres) Roads and toll roads UU No. 22/2009 on road traffic and transport PP No 44/2009 on toll roads PP No. 56/2009 on railway implementation Railroads UU No. 23/2007 on railroads PP No. 72/2009 on railway traffic and transport PP No. 61/2009 on seaports PP No. 5/2010 on navigation Seaports UU No 17/2008 on sea transport PP No. 21/2010 on maritime environment protection Transport Airports UU No. 1/2009 on aviation PP draft on airports PP draft on electricity supply business PP draft on electricity supply supporting business Power Electricity UU No. 20/2009 on electricity PP draft on cross-border electricity trade PP No. 45/2008 on guidance for providing incentives for investment in regions PP No. 62/2008 on income tax incentives for investment in certain business areas and/or regions Perpres No. 27/2009 on one-stop shop system for investment licence process Investment Real-sector investment UU No. 25/2007 on investment Perpres No. 36/2010 on list of business areas closed to investment and areas with conditions for investment Source: Ministry of Transportation, BKPM, Ministry of Energy and Mineral Resources The government has sought to streamline regulations and reduce bureaucracy in order to promote investment in infrastructure
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14 February 2011 29 has been obtained from the community, an independent appraisal agency will determine the appropriate price at which the land should be purchased from the landowners. The involvement of an independent appraisal agency is expected to minimise price distortions created by land speculators, thereby expediting the price negotiation process.
2) Budget allocation Although the government has repeatedly expressed its commitment to boosting infrastructure development, it can only set aside limited funds for infrastructure in the budget. While government infrastructure spending has continued to increase in nominal terms in the past three years, its share of total government spending has not exceeded 10% in the past five years (see Chart 42). During this period, government infrastructure expenditure has been below 2% of GDP (see Chart 43).
According to the National Planning Agency (Bappenas), Indonesia will need IDR 1,429trn (USD 159bn, assuming a USD-IDR exchange rate of 9,000) for infrastructure development in 2010-14 in order to achieve an annual economic growth rate of 5-7% (see Chart 44). Most of these funds will be allocated to the transport sector (airports and seaports) and the electricity sector (power plants and transmission infrastructure). However, the government can only provide IDR 386trn (USD 43bn), or 27%, of this amount. It expects the remainder to come from the private sector.
The government also faces ongoing problems with delayed infrastructure spending because of land clearance issues, bureaucratic inefficiencies at the central and local government levels, and a lack of skilled project managers. In 2010, for instance, the government only spent 79.4% of its targeted total capital expenditure in the revised budget.
For 2011, the government has allocated IDR 126trn (USD 13.6bn), or 10% of total government expenditure, to infrastructure development. Among the planned projects are the maintenance and repair of 35,059km of national roads, the preservation of 121,027km of central government-owned bridges, continued land clearance for and construction of the Trans-Java toll road, the expansion of Ngurah Rai Airport (Bali), and the construction of the Jakarta MRTs Lebak Bulus- Hotel Indonesia section. Chart 42: Government infrastructure spending versus total government spending Chart 43: Government infrastructure spending versus nominal 0 50 100 150 2005 2006 2007 2008 2009E Revised state budget 2010 State budget 2011 I D R
t r i l l i o n 0 5 10 15 % Amount As %of total government spending
0 50 100 150 2005 2006 2007 2008 2009E Revised state budget 2010 State budget 2011 I D R
t r i l l i o n 0 1 2 3 % Amount As % of nominal GDP Sources: Ministry of Finance, Standard Chartered Research
Sources: Ministry of Finance, Standard Chartered Research The government is constrained in providing sufficient funds for infrastructure development
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14 February 2011 30 3) One-stop shop system Under Perpres No. 27/2009, President Yudhoyono assigned the Indonesia Coordinating Board of Investment (BKPM) to implement a one-stop shop system to expedite licence processing for direct (i.e., real-sector) investors and to reduce bureaucratic red tape. Under this system, 16 ministries have delegated their authority in granting licences and providing non-licensing services to the BKPM. Investors only need to submit their business licence proposals to the agency. The BKPM has also created the National Single Window for Investment to provide online services for investors, including the granting of investment licences.
4) Financing company and project guarantor To help provide financing for real-sector investment projects, the government established PT Sarana Multi Infrastruktur (PT SMI) in 2009 to facilitate infrastructure investment. The company, which is 100% owned by the government through the Ministry of Finance (MoF), creates joint ventures with multilateral agencies, foreign and local banks, state-owned enterprises, and other business entities to invest in infrastructure projects. The government also established the Indonesia Infrastructure Guarantee Funds (PT Penjaminan Infrastruktur Indonesia or PT PPI) in 2010 to act as a guarantor for infrastructure projects in Indonesia. PT PPI is also 100% owned by the government through the MoF.
5) Special task force In his second term in office, President Yudhoyono has established the Presidential Work Unit on Monitoring and Controlling Development (known as UKP4), headed by Kuntoro Mangkusubroto, a former energy minister and head of post-tsunami reconstruction in Aceh. Mangkusubroto has the status of a minister without portfolio and is charged with solving investment problems caused by inefficiencies in government bureaucracy.
Chart 44: Total funding requirements for infrastructure development, 2010-14
0 100 200 300 400 Transportation Electricity Information & communications Roads (including toll roads) Housing Energy Water resources I D R
t r i l l i o n Government Private sector
Sources: National Planning Agency (Bappenas), Data Consult Procedures to obtain investment licences have been streamlined The president has set up a task force to tackle bottlenecks in infrastructure development State-owned companies have been set up to provide financing and guarantee investment projects
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14 February 2011 31 Scenario analysis
1) Investment in the transport sector The base scenario for this analysis assumes that the budget funds allocated for transport infrastructure development increase by a constant 10% per annum from 2011, but that the government can only absorb 90% of the allocated funds (see Table 11). The base scenario also assumes that private investors can only provide 10% of the total funds needed from them. We assume a 100% budget absorption rate for all scenarios except Scenario 1. We also use different assumptions for nominal increases in infrastructure funds in the budget under each scenario.
According to Bappenas, private-sector funds needed for transport development from 2010-14 total IDR 258.3trn, or IDR 51.7trn a year on average. We use an estimate of IDR 51.7trn as the optimum amount for private-sector participation (100% participation). Although Bappenas has identified this as the amount needed to support a 5-7% GDP growth rate, we believe it would have larger multiplier impacts on GDP, allowing for even faster GDP growth.
Meanwhile, BKPM data shows that total direct investment (both foreign and local) in the transport, storage, and communications sector reached IDR 5.0trn in 2009. We estimate that private investment in the transport sector alone reached IDR 3.5bn, or about 7% of the amount needed. We then use a 7% private-sector participation rate as the benchmark in Scenarios 1-5. We use a 50% rate for Scenarios 6-10, and a 100% rate for Scenarios 11-15.
Among these 15 scenarios, we believe that those with a maximum increase of 20% in budget funds allocated for transport infrastructure and a maximum 50% private investor participation rate are more realistic than the others. We believe it would be difficult for the government to increase budgeted transport development funds by more than 50% a year, as most budget funding will continue to be allocated to subsidies and personnel expenditures.
It would also be difficult to increase private investors participation in the transport sector to 100%, in our view. While funding problems (including difficulties in obtaining bank loans) are commonly faced by domestic investors, foreign investors are generally concerned about Indonesias poor investment climate, including land clearance problems, legal uncertainties and labour-market rigidities.
While it is hypothetically possible for the Indonesian economy to grow by 9.7% in 2014 (Scenario 15), we project that GDP growth will be between 6.5% and 7.6% from 2011-14. Under the best of our plausible scenarios, the government will increase spending on transport infrastructure development by 20% per year, and private-sector participation in electricity development will reach 50% of the required level, enabling the economy to grow by 7.1-7.6% in 2011-14. These scenarios are under a ceteris paribus assumption, meaning that other components of GDP (i.e., household consumption, exports and imports) are assumed grow at the rates estimated in the base scenario.
Under the best of our most plausible scenarios for the transport sector, we project Indonesian growth at 7.1-7.6% if the government increases spending by 20% per year and private investors participation reaches 50% of what is required
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14 February 2011 32 Table 11: Impact of investment in transport sector on real GDP growth (ceteris paribus) 2010 2011F 2012F 2013F 2014F Scenario 1 (base): 10% annual increase of nominal allocation in the budget from 2012 (90% rate of absorption) + 7% rate of private participation needed 6.1 6.5 7.0 7.0 7.0 Scenario 2: 10% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 7% rate of private participation needed 6.1 6.6 7.2 7.1 7.1 Scenario 3: 20% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 7% rate of private participation needed 6.1 6.6 7.3 7.2 7.2 Scenario 4: 50% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 7% rate of private participation needed 6.1 6.6 7.4 7.4 7.4 Scenario 5: 100% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 7% rate of private participation needed 6.2 6.6 7.6 7.8 7.8 Scenario 6: No increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 50% rate of private participation needed 6.2 6.6 7.2 7.1 7.0 Scenario 7: 10% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 50% rate of private participation needed 6.2 7.1 7.5 7.3 7.2 Scenario 8: 20% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 50% rate of private participation needed 6.2 7.1 7.6 7.4 7.3 Scenario 9: 50% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 50% rate of private participation needed 6.2 7.1 7.8 7.9 7.9 Scenario 10: 100% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + 50% rate of private participation needed 6.2 7.1 8.2 8.7 8.8 Scenario 11: No increase of nominal allocation in the budget from 2012 + full private participation needed 6.7 7.4 7.5 7.2 7.2 Scenario 12: 10% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + full private participation needed 6.7 7.4 7.6 7.4 7.4 Scenario 13: 20% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + full private participation needed 6.7 7.4 7.8 7.7 7.7 Scenario 14: 50% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + full private participation needed 6.7 7.4 8.2 8.3 8.4 Scenario 15: 100% increase of nominal allocation in the budget from 2012 (100% rate of absorption) + full private participation needed 6.7 7.4 8.8 9.5 9.7 Source: Standard Chartered Research
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14 February 2011 33 2) Investment in electricity sector We use PLNs capital expenditure as a proxy for government spending on infrastructure development in the electricity sector. According to media reports, PLN is estimated to have spent IDR 74trn in 2010 and plans IDR 66.6trn in capital expenditures in 2011.
Meanwhile, Bappenas estimates that IDR 205.8trn (USD 22.9trn) is needed for investment in the electricity sector from 2010-14 to support 5-7% GDP growth. Thus, private investors are expected to spend IDR 41.2trn per year on average. As in our scenario analysis of investment in the transport sector, we believe that investment in the electricity sector has a larger multiplier impact on the economy than Bappenas estimates, allowing for faster GDP growth.
However, in 2009, investment (both foreign and domestic) in the electricity, water and gas sectors reached only IDR 3.8trn, according to BKPM data. We estimate that investment in the electricity sector alone totaled IDR 2.0trn, or about 5% of the annual private investment needed for electricity infrastructure development. We then develop scenarios by assuming different degrees of increase in PLNs capex and private participation rate (Table 12).
In Scenario 1, our base scenario, we assume that PLN can only absorb 90% of its planned capex. The remaining 14 scenarios assume that PLN can meet all of its targeted capex. We also assume different rates of nominal increase in PLNs capex under each scenario.
We believe that the scenarios with maximum PLN capex increases of 20% and maximum participation rates of 50% (i.e., Scenarios 1, 2, 3, 6, 7 and 8) are more likely than the others. We thus expect infrastructure development in the electricity sector to boost GDP growth to a range of 6.5-7.5% from 2011-14. This is under a ceteris paribus assumption for GDP growth, meaning that components of GDP other than investment and government expenditure household consumption, exports and imports are assumed to grow at the rates we estimate in our base scenario. Under the best of our plausible scenarios, PLN will increases capex by 20% per annum and private-sector participation in electricity infrastructure development will reach 50% what is needed, allowing Indonesias economy to grow by 6.9-7.5% in 2011-14. We believe it is plausible for Indonesias economy to grow by 6.9-7.5% in 2011-14 if PLN increases annual capex by 20% and private-sector participation in electricity infrastructure development reaches 50% of what is needed
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14 February 2011 34 Table 12: Impact of investment in electricity sector on real GDP growth (ceteris paribus) 2010 2011F 2012F 2013F 2014F Scenario 1 (base): 10% annual increase in PLN capex from 2012 (90% absorption rate) + 5% private participation rate needed 6.1 6.5 7.0 7.0 7.0 Scenario 2: 10% annual increase in PLN capex from 2012 (100% absorption rate) + 5% private participation rate needed 6.1 6.5 7.1 7.0 7.0 Scenario 3: 20% annual increase in PLN capex from 2012 (100% absorption rate) + 5% private participation rate needed 6.1 6.6 7.2 7.1 7.1 Scenario 4: 50% annual increase in PLN capex from 2012 (100% absorption rate) + 5% private participation rate needed 6.1 6.6 7.4 7.3 7.4 Scenario 5: 100% annual increase in PLN capex from 2012 (100% absorption rate) + 5% private participation rate needed 6.2 6.6 7.6 7.8 8.5 Scenario 6: No annual increase in PLN capex from 2012 (100% absorption rate) + 50% private participation rate needed 6.2 6.9 7.3 7.1 7.1 Scenario 7: 10% annual increase in PLN capex from 2012 (100% absorption rate) + 50% rate of private participation needed 6.2 6.9 7.4 7.2 7.2 Scenario 8: 20% annual increase in PLN capex from 2012 (100% absorption rate) + 50% private participation rate needed 6.2 6.9 7.5 7.4 7.4 Scenario 9: 50% annual increase in PLN capex from 2012 (100% absorption rate) + 50% private participation rate needed 6.2 7.9 6.8 7.8 7.8 Scenario 10: 100% annual increase in PLN capex from 2012 (100% absorption rate) + 50% private participation rate needed 6.2 6.9 7.8 8.7 8.6 Scenario 11: No annual increase in PLN capex from 2012 (100% absorption rate) + full private participation needed 6.5 7.0 7.3 7.1 7.1 Scenario 12: 10% annual increase in PLN capex from 2012 (100% absorption rate) + full private participation needed 6.5 7.0 7.4 7.3 7.3 Scenario 13: 20% annual increase in PLN capex from 2012 (100% absorption rate) + full private participation needed 6.5 7.0 7.5 7.5 7.5 Scenario 14: 50% annual increase in PLN capex from 2012 (100% absorption rate) + full private participation needed 6.5 7.0 7.8 7.9 8.0 Scenario 15: 100% annual increase in PLN capex from 2012 (100% absorption rate) + full private participation needed 6.5 7.0 8.2 8.7 8.9 Source: Standard Chartered Research
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14 February 2011 35 Financing through infrastructure bonds Overview Indonesia will introduce infrastructure bonds to help finance the governments investment plans. One of the infrastructure bonds slated for issuance in 2011-12 is the Islamic infrastructure bond, or sukuk, to be issued by the MoF to finance projects in the approved national budget. We expect the structure of the infrastructure sukuk to be similar to existing government sukuks it will be tradable and have similar coupon levels. The introduction of a new instrument will help to deepen Indonesias Islamic bond market and further diversify the MoFs budget funding sources.
Introduction At the most generic level, infrastructure bonds are securities whose proceeds are earmarked specifically for infrastructure projects. In contrast, government bonds are issued for general fiscal purposes. Infrastructure bonds are typically long-dated (5Y and above) due to the need to match the bonds maturity with the length of time required to complete the infrastructure project.
There are many possible structures. The bonds can be conventional or Islamic, and their principal and coupons can be secured by the assets and cash flow of the infrastructure project. The bonds can be issued by government entities, an infrastructure fund or private companies, and can be guaranteed by the government or by multilateral organisations.
Types of infrastructure financing Financing of infrastructure projects can be done via multiple channels. Typically, governments are heavily involved given the public nature of most infrastructure projects. Governments can raise funds through their annual budgets or borrow from commercial banks. They can also secure loans from multilateral organisations such as the World Bank or the Asian Development Bank.
Private participation in directed financing for infrastructure projects (i.e., financing not from the general budget) has become popular due to the considerable resources required for infrastructure development. To make infrastructure projects financially viable for private investors, the government typically provides grants or concessions to the investors undertaking the projects. Privately sourced funding routes include equity financing (such as an allotment of equity to suppliers of raw materials for the project) and loan financing (where the bank loan is secured against the assets and cash flow from the projects). Project bonds are more popular given their more tradable and longer-dated nature than private equity and bank loans.
The proceeds of project bonds are by nature for a specific use. This is in contrast to a regular corporate bond, whose proceeds are for general usage. A project bond will also typically channel cash flow from the project to service the debt, while a corporate bonds credit status depends more on the general status of the issuer. Most importantly, there is typically an off-taker in the project agreement; this party is the original motivation for the project and can be the ultimate user of the infrastructure or the institution providing the purchase agreement. Demand from the off-taker provides certainty to investors regarding the cash flow required to service the debt.
Infrastructure bonds are the preferred means to direct private investment into the real economy
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14 February 2011 36 Case study: Malaysia Infrastructure bonds are very common in Malaysia. They accounted for about 35% of Malaysias corporate bond issuance during the 2006-10 period, assuming that bond issuance from the construction, electricity, gas and water, and transport, storage and communications sectors is for infrastructure projects (see Chart 45). This amounts to an average of MYR 18.3bn (USD 6bn) per year over the last five years. The governments spending on infrastructure had matched the investment made by the private sector, averaging at MYR 22.5bn per year during the 2006-10 period (based on fiscal expenditure figures, we have assumed that development expenditure on economic services goes towards infrastructure). As Chart 46 shows, the amount translates to about twice the infrastructure spending of the Indonesian government, when expressed as a percentage of the GDP.
Typically, infrastructure bonds are structured similarly to project finance loans. There are designated accounts to ring-fence the projects cash flow and assets so that they can be used to meet debt-servicing requirements. Although government guarantees are not involved, infrastructure projects are usually backed by concession agreements (for example, for toll roads) or power purchase agreements (in the case of IPPs). The ratings and pricing of the infrastructure bond take into account factors including the concession/purchase agreement, the strength of the issuer and the integrity of the financing structure.
The situation in Indonesia Government infrastructure projects in Indonesia fall into one of the two categories: central government projects (i.e., those approved in the annual national budget) or projects undertaken by state-owned enterprises (SOEs) and local governments, which do not need to be pre-approved in the budget. Central government projects are usually smaller in scale and may include maintenance work on existing infrastructure, whereas SOE and municipal projects are typically larger in scale.
Total infrastructure spending in the 2010 budget was IDR 108trn, and the government plans to increase this amount to IDR 126trn in 2011. Meanwhile, Bappenas estimates the countrys total infrastructure needs at IDR 1,429trn over the 2010-14 period. Assuming that this spending is spread equally over the five-year period, the annual infrastructure spending requirement will be IDR 285.8trn. If the Chart 45: Private infrastructure bond issuance as a share of total corporate bond issuance in Malaysia Chart 46: Comparison of infrastructure spending in Malaysia and Indonesia (% of GDP) 0% 15% 30% 45% 60% 75% 90% 1988 1992 1996 2000 2004 2008
MY Govt ID Govt ID Govt + PPI 0 1 2 3 4 5 2005 2006 2007 2008 2009 2010f 2011f MY Govt + PPI Source: Bank Negara Malaysia
Note: PPI refers to public-private investment Sources: Bloomberg, World Bank, MoF, Standard Chartered Research The government and private sector are both instrumental to infrastructure development in Malaysia
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14 February 2011 37 government has to cover the full amount, this translates into IDR 126trn of central government projects (the amount already approved in the 2011 budget) and IDR 160trn of SOE/municipal-level projects in 2011.
One of the first Indonesian infrastructure bond issues planned in 2011-12 is the Islamic infrastructure bond, or sukuk, to be issued by the central government (via the MoF in the case of a bond, or a special-purpose vehicle in the case of a sukuk) to finance budget projects. The MoF is finalising plans to finance infrastructure projects through the Islamic bond market, with the National Syariah Assembly having approved and issued a fatwa in June 2010 (No. 76/DSN-MUI/VI/2010) to formalise the Islamic concept that will form the basis for infrastructure sukuk issuance. Once the issuance structure is finalised, the proposal will be submitted to the president and the parliament for approval.
The concept, Ijarah asset to be leased, is essentially the same as the Ijarah - sale and lease back concept that underpins current government sukuk issuance. The main difference is that at the time of the asset sale (initiation), the underlying asset is only partially existent or completed. This may include the project land, partially developed buildings, or other fixed assets that are to be used or developed as part of the infrastructure project. In contrast, the underlying asset under the Ijarah sale and lease back concept is already complete and has a market value matching the face value of the sukuk. Also, because the projects in the central government budget are mostly smaller in scale, the proceeds of the infrastructure sukuk are likely to be used to finance a pool of projects instead of a single project. It follows that the underlying collateral used to back Ijarah asset to be leased will be a pool of assets, instead of the single asset commonly used to back Ijarah sale and lease back.
For these reasons, the sukuk holders are exposed to project risk (i.e., the risk that the project is not completed and the market value of the underlying asset remains lower than the face value of the sukuk at the time of default). To mitigate the risk, the value of the underlying pool of projects must be set higher level than the face value of the sukuk (for example, a sukuk issued with a face value of IDR 5trn will be backed by a pool of projects valued at IDR 7trn). Moreover, if a project is dropped during the lifetime of the bonds, the value of the underlying asset will have to be maintained by adding new projects to the pool.
Table 11: Comparison of Indonesian government sukuks for general deficit financing and infrastructure projects General budget Infrastructure projects under the general budget Issuer MoF MoF Purpose Financing of general budget deficit Financing of infrastructure projects in the budget Issuance amount IDR 25trn* (institutional and retail sukuk), out of IDR 200.6trn gross debt issuance Total infrastructure expenditure in 2011 budget is IDR 126trn Islamic concept Ijarah sale and lease back Ijarah asset to be leased Underlying asset Fixed asset of the government (of a value matching the face value of sukuk) A pool of fixed assets that will be used in the infrastructure projects (total value of the pool of assets pledged will exceed the face value of the sukuk) Tenor 1-20Y Likely to be 5Y and above Trading Allowed, from issuance date Allowed, from issuance date Placement Auction, private placement Auction, private placement and book-building Taxes 20% on capital gains and interest 20% on capital gains and interest *Our estimates Sources: MoF, Standard Chartered Research One of the first Islamic concepts approved for infrastructure sukuk issuance is Ijarah asset to be leased
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14 February 2011 38 As under the Ijarah sale and lease back concept, the government will periodically pay a coupon to lease the asset from the SPV and gains the right to use or develop the asset for a period of time. At the contract expiry date, it buys back the asset at the predetermined price. The infrastructure sukuk will have a similar risk/return profile to the existing government sukuk, and under the Ijarah concept, the security is marketable from the day of issuance, irrespective of the completion date of the underlying project. We compare infrastructure sukuks with existing government sukuks in Table 13.
Good diversification of debt financing The introduction of infrastructure sukuk will open up a new investment opportunity for investors seeking specific exposure to the infrastructure sector rather than the countrys general economy. If the government is to finance the required IDR 285.8trn annual infrastructure investment through debt issuance, gross debt issuance in 2011 will rise to IDR 360trn (consisting of IDR 201trn of general budget deficit financing and IDR 160trn of infrastructure financing not included in the national budget). Evidently, this will not be market-viable, and the issuance of infrastructure bonds, where the proceeds are for targeted usage and cashflows are ring-fenced, will present a more palatable option for the market.
We expect strong demand for infrastructure sukuks from syariah banks, syariah state pension and insurance funds, and retail investors (should the bonds be made available to retail investors, as they have in India and Malaysia). The total assets of syariah banks in Indonesia are just above 3% of the total asset size of commercial banks, but their growth rate far exceeds growth in commercial banks assets. The assets of syariah banks have quadrupled in the last five years, while those of commercial banks have less than doubled. Similarly, as Chart 48 shows, syariah deposits have recorded stellar annual growth of more than 30% in the last five years, while growth in commercial banks deposits slowed to 10% in 2010. While still small (investment in securities accounted for 5.9% of syariah bank asset in 2010), the demand for Islamic assets and issuance has the potential to continue growing faster than the more mature conventional bond markets.
The introduction of a new sukuk instrument with longer tenors (above 5Y) will also develop the yield curve further and improve the liquidity of the sukuk market. Trading of government sukuks in the secondary market is still choppy, with annual turnover of Chart 47: Total assets of syariah banks are small compared to commercial banks (IDR trn) Chart 48: Syariah deposit base is growing faster (y/y) 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Commercial Banks 20 40 60 80 100 Islamic Banks (RHS)
Syariah banks 10% 20% 30% 40% 50% Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Commercial Banks 3% 4% 5% 6% Bonds as%of syariah bank asset (RHS) Source: Bank Indonesia
Source: Bank Indonesia The introduction of Islamic and conventional infrastructure bonds will deepen the local-currency debt market and diversify the governments funding sources
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14 February 2011 39 just 0.14x the total outstanding value (compared to 2x for conventional government bonds). However, the yield spread between sukuk and conventional government bond narrowed substantially in H2-2010, and we expect the governments commitment to developing the syariah bond market to further reduce the liquidity premium demanded by investors.
Considering the large amount of resources needed for infrastructure development, the government is also preparing the regulatory framework for issuance of conventional infrastructure bonds by the MoF, local governments and SOEs for projects both within and outside the budget. If this materialises, we expect the new instruments to generate strong demand from domestic investors. Domestic retail investors in particular have shown a strong interest in the attractive yields offered by government bonds and sukuks. Institutional players such as pension funds, insurance funds, and corporations are likely to be the main investors, although the instruments classification as quasi-government could result in holding restrictions for some of these investors.
Chart 49: The government sukuk market is heavily front- loaded, with an average maturity of 4 years Chart 50: Sukuk trading is choppy, but premium over conventional yields is falling 0 2 4 6 8 10 12 14 2010 2014 2018 2022 2026 2030 Maturity profile of outstanding government sukuk I D R
t r n
ID sukuk 10Y ID 10Y 6 7 8 9 10 11 12 13 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 I D R
t r n Source: Bloomberg
Sources: Bloomberg, Standard Chartered Research
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14 February 2011 40 Appendix 1: Sectors closed to foreign investment in infrastructure, or open with conditions
Closed to foreign investors Open with conditions Transport Provision and implementation of land terminals Toll-road business (max. 95% foreign capital ownership)
Implementation and operation of weighing stations Construction work for main roads (except flyovers), railways, airplane runways (max. 67% foreign capital ownership) Implementation of motor vehicle type tests Provision of port facilities (max. 49% foreign capital ownership) Implementation of motorcycle periodic tests Airport services (max. 49% foreign capital ownership)
Telecommunications/supporting facilities for shipping navigation Terminal support services (max. 49% foreign capital ownership) Vessel Traffic Information System (VTIS) Integrated engineering services for transport infrastructure (max. 55% foreign capital ownership) Air traffic control services Power Power plants < 1MW (reserved for micro-enterprises/SMEs, co-operatives)
Small-scale power plants, 1-10MW (reserved for micro-enterprises/SMEs, co-operatives)
Geothermal power plants (max. 95% foreign capital ownership)
Nuclear power plants (max. 95% foreign capital ownership)
Power plant maintenance & operation installation service (max. 95% foreign capital ownership)
Power plants > 10,000MW (max. 95% foreign capital ownership)
Nuclear power plants (max. 95% foreign capital ownership)
Power plant transmission (max. 95% foreign capital ownership)
Electricity distribution (max. 95% foreign capital ownership)
Construction & installation of electricity services (max. 95% foreign capital ownership)
Electricity consultation services (max. 95% foreign capital ownership)
Power plant maintenance & operation installation services (max. 95% foreign capital ownership) Source: Presidential Regulation (Perpres) No. 36/2010
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14 February 2011 41 Appendix 2: Procedures for direct investment in the transport sector
Investment Coordinating Board (BKPM) Ministry of Justice, Ministry of Trade Ministry of Transportation Local government Environmental Agency Investment preparation
Location
Environmental
Construction
Operation
Safety and operation management
*Environmental Impact Assessment; Source: Ministry of Transportation
Initial approval Company formation Business licence Business licence Spatial plan Location licence EIA* Building permit (IMB) Location licence Operating licence Operation schedule
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14 February 2011 42 Disclosures Appendix
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
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14 February 2011 43 this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1 Madison Avenue, New York, N.Y. 10010, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS.
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Document approved by Tai Hui Regional Head of Research, South East Asia Data available as of 06:00 GMT 14 February 2011
Document is released at 06:00 GMT 14 February 2011
Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com
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