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INDONESIAN COMMERCIAL NEWSLETTER
October 2009

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INADEQUATE INFRASTRUCTURE DISCOURAGES INVESTMENT


Indonesia fares better than most countries in the world, which has been jolted by the global financial crisis. It managed  to chalk up a 4%  economic growth  in 2009 when many  other countries  suffered a contraction  or  are still  trying to wriggle  out of the mire of the financial crisis .  Indonesia should be able to gain further from the global economic rebound as marked by the improvement of the US and European economic condition. With strong domestic economy Indonesia should be able to attract more investors.

However, it is not easy as it looks to be. Indonesia still needs to remove a lot of hurdles to encourage and facilitate investment. Indonesia needs to improve and built more infrastructure notably power and road infrastructure. The country is still struggling to cope with shortage in power supply. More roads need to be built to facilitate transport.

Crisis in power supply

The country has since 2008 been beset by shortage in power supply marked by frequent blackouts. Even Java and Bali where many large power generating plants have been built in the past years have not been free from blackouts.

Major cities in Java including Jakarta have had their turn of blackouts in the past several months because of failure of a voltage regulator in an electricity relay station in Cawang. The incident caused large losses to the business sector as many factories could not operate fully.

A number of Japanese companies have complained and threatened to leave the country if it could not immediately cope with power supply shortage.  Toward the end of 2008, the Japanese companies sent a letter to the Indonesian Chamber of Commerce and Industry expressing their disappointment saying they suffered around Rp41 billion in two years because of cut in power supply to their petrochemical and plastic factories in Jakarta and Banten.

Textile producers in West Java have also been badly hurt because of cut in power supply. Small industries which have no power generating set in reserve were hit the hardest.

In regions outside Java, the people have been used to blackouts. Until now since 2008, there has been no progress made to cope with the problem especially in other regions such as in Makassar, the largest city in eastern Indonesia, and in Medan, Padang and Palembang in Sumatra. Kalimantan, which is one of the largest producers of energy sources oil, gas and coal - fares no better.

Energy is vital for the economic development. Continued problem in energy supply could result in failure of the government to meet its economic targets. Currently shortage in energy supply is quite serious and is one of the big factors causing a drag in promoting investment in the country.

In 2009, the country's manufacturing sector is predicted to grow 5.6 percent or below the target of 6 percent. Earlier President Susilo Bambang Yudhoyono said he hoped to see the country's manufacturing sector expanding 8.65% in 2009.

Crisis is still a threat   and stalking the country despite the crash program of building new coal fired power plants with a total capacity of 10,000 megawatts. The program has also met a host of problems especially in finance causing a delay in the implementation or completion of some of the projects. Originally the program was to be completed in 2009 but the completion is expected to be delayed for at least one year.
So far, the power plants already completed and fully in operation built under the program have only a total capacity of 900 MW with a number with a total capacity of 500 MW in trial operation.  Early next year a number of other plants are expected to come on line including PLTU Labuan with a capacity of 300 MW and PLTU Rembang with a capacity of 315 MW. PLTU Indramayu should be able to start operation but it is still facing financial problem.

Funds for five of the power generating projects have not even been fully available. The five projects will need US$ 458 million and Rp 1.71 trillion.

The president of state electricity company PT Perusahaan Listrik Negara (PLN)   said the project of PLTU Tanjung Awar-Awar with a capacity of 2x350 MW alone needed US$ 372 million and Rp 1.1 trillion. Other projects including PLTU Tanjung Balai Karimun  needed  US$ 7 million and  Rp 71 billion,  PLTU Bengkalis  needed US$ 8 million and  Rp 132 billion,  PLTU Riau Selat Panjang US$ 9 million and Rp 111  billion and  PLTU Parit Baru US$ 62 million and  Rp 300  billion.  PLN plans to seek loans from China to finance the projects.

With the completion of the program, Java is expected to be free from shortage in power supply in 2010.  However, power consumption in Java grows fast, therefore, capacity expansion will continue to be needed.

There is still a lot of problems in the electricity sector discouraging investment especially in the manufacturing sector. There is no guarantee that the electricity projects could be completed as scheduled. Investors would not risk building their own power plants which will need large investment The power plants planned by PLN  have enough capacity to meet the requirement. The problem is when the projects will come on line.

The government has planned to continue the crash program with a second phase to be launched after the completion of the first. The second phase is also for power plants with the same capacity but it will a mixture of various non oil fired power plants. PT Perusahaan Listrik Negara (Persero) has decided to build the projects in 78 locations. They will include hydropower, geothermal power as well as coal fired power plants. Hydropower plants will have a total capacity of 1,300 MW and geothermal power plants 4,733 MW and the remaining capacity will be contributed by gas and steam powered electric plants. The second phase to be launched in 2010 is to be completed in 2014.

PT Perusahaan Listrik Negara will need around US$ 10 billion for the second phase of the program. PLN is now seeking funds from various sources. It also plans to issue global bonds. The government's guarantee would be needed for loans   especially from foreign financers.  Implementation of projects in the first phase of the program has been delayed on guarantee issue. The government was first reluctant to provide the guarantee. The government suffered heavily when it provided guarantee for power projects with marked up prices in the wake of the 1997 monetary crisis.

The government, however, was forced to provide the guarantee in the first phase of the crash program. The government gave a comfort letter guaranteeing that PLN would meet its obligation to the investors. In the second phase, the government is expected to not only give a comfort letter but also incentives such as tax facility. Incentives are needed amid the tight competition in attracting foreign investment.

Toll road projects

Road infrastructure is also vital to attract investment. Inadequate road facility is among the main factors slowing investment in the regions. The government has made big plan to build a number of toll roads especially in Java. Many of the plans, however, have remained in the pipeline or delayed on a number of factors mainly financial difficulties and difficulty in land clearing.

Currently there are 22 toll road projects totaling 900 km which have been awarded to contractors but the construction has not started. The government has threatened to revoke the license for 11 of the projects. Among the projects are part of the economically vital Trans Java that will link the western and eastern ends of the island.

The new government of President Susilo Bambang Yudhoyono has pledged to finish the construction of three toll road projects in its first 100-days of the administration. The three toll road projects are Kanci-Pejagan, Bogor Ring Road, and the Kebon Jeruk-Penjaringan section of the Jakarta Outer Ring Road (JORR). The three projects are now near completion.

Land clearing has been a major cause of delay in the implementation of toll road projects. The Toll Road Regulator (BPJT) has said that a breakthrough is needed in land clearing regulation. Implementation of 22 toll road projects totaling 900 kilometers in the next five years would be difficult without a breakthrough in regulation on land clearing, it said.

Difficult issues in land clearing concerns financing, implementation schedule and the party responsible. The absence of a clear regulation on land clearing makes it difficult for investors to make plan for toll road construction start planning. So far land clearing was included in the contract that it is not clear who is responsible for land clearing, which could hardly be tackled by investors without the involvement of the government.

In the future land clearing should not be included as part of the contract. The government should be responsible for land clearing. The contractors are responsible only for the construction. The land clearing regulation would be needed not only for toll road projects but also for other infrastructure projects.

In other countries such as China and Malaysia, the government handles land clearing. Regulation on land clearing is strictly and transparently enforced.  Lands to be used for toll road are made public and frozen to prevent speculation.

Test for the government

Electricity and toll road sectors are only two sectors of infrastructure in which the government needs to have enough courage to make a breakthrough in the country's legal system.

The seriousness of the government in carrying out development program in the electricity and toll road sectors will determine success in attracting investment to the country.  Implementation of the second phase of the crash program to build power plants with a capacity of 10,000 MW and implementation of toll roads projects in Java and other regions will be a test to the government's seriousness in attracting investment especially foreign investment needed to drive the country's economic growth.






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FOCUS: INADEQUATE INFRASTRUCTURE DISCOURAGES INVESTMENT

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