Indonesia Infrastructure and Property projects Outook 2011

INDONESIAN COMMERCIAL NEWSLETTER

December 2010

PROSPECTS OF INFRASTRUCTURE AND PROPERTY PROJECTS, 2011

Infrastructure

Indonesia is expected to continue to see a period of high economic growth in the coming several years, but it will need the support of adequate availability of infrastructure. Infrastructure development has come to the fore in the government policy after the success in creating political stability, good security and prudence in monetary and fiscal policy which has facilitated healthy economic growth in the past several years.

In the coming years, development of infrastructure by the government in this case the public works ministry will be focused in economic corridors in six locations Corridor I in northern coastal areas of Java, Corridor II in eastern areas of Sumatra, Corridor III in southern Kalimantan, Corridor IV in Trans-Sulawesi, Corridor V in Bali-Nusa Tenggara, and Corridor VI in Papua. The six corridors are considered most potential to contribute to boosting the country's economic growth.

The infrastructure projects for the economic corridor are multi year projects of the government to be completed in 2014. The objectives are to facilitate distribution of commodities such as crude palm oil CO) and rubber from Sumatra and manufactured food products and motor vehicles form Java.

The projects will include improvement of the quality of existing infrastructure such as road repairs and construction of new roads. In 2011, the government has target to build a number of infrastructure projects such as the Merak and Balaraja flyovers to provide access to ports and ring road lead to the Tanjung Priok port of Jakarta.

Meanwhile, development of infrastructure under the Public-Private Partnership scheme is expected to have greater contribution. There are five infrastructure projects under the PPP scheme. They are:

" Projects of power generating plant of PLTU Jawa Tengah, with a capacity 2 x 1000 MW, worth around Rp 30 trillion.

" Drinking water project of Way Sekampung, Bandar Lampung, Kisaran worth Rp 400 billion

" Project of Medan - Kualanamu - Tebing Tinggi toll road worth around Rp 4.7 trillion

" Drinking water project of Umbulan, East Java , worth around Rp 1.9 trillion

" Passenger railway project of Manggarai - Soekarno Hatta airport worth around Rp 10 trillion

" Port project of Tanah Ampo Bali, to expand its quay and facility to be able to serve international tourist vessels worth around Rp 350 billion

" Drinking water project in the regency of Maros, South Sulawesi, worth around Rp 110 billion.

" Drinking water project of Tukad Unda, Bali, worth around Rp 400 billion.

" Drinking water projects of Jakarta, Bekasi, Karawang/Jatiluhur, worth around Rp 1.8 trillion.

However, only three of the projects are considered ready for implementations. The three are the power generating project of PLTU Jawa Tengah, the Umbulan drinking water project and the Manggarai- Soekarno Hatta airport railway project with total value of around US$ 3.5 billion. The tender for the projects were to be held early this year.

Toll Roads

Implementation of tens of toll road projects failed in 2010 largest over difficulties in land clearing.

There are 24 toll road projects have been delayed until early 2011 including 9 toll road projects part of the Trans Java toll road project, 6 projects of the Jakarta Outer Ring Road (JORR)-2 project and 9 other separate toll road projects The 24 projects total 949.35 km in length with an estimated investment of Rp111.748 trillion.

The public works ministry has completed re-evaluation of the 24 projects. Re-evaluation covered feasibility of the projects and financial capacity of the toll road contractors the re-evaluation came to a conclusion the 24 projects are feasible and implementation will start in 2011

The public works ministry will amend the Toll Road Agreement (PPJT). The revision includes restructuring of the shareholders, land procurement schedule, construction and completion financial matters and stipulation in case the contractors failed to meet obligations based on the PPJT,

Other toll road projects that are likely to be auctioned in 2011 include Kualanamu - Medan toll road project in North Sumatra. The Kualanamu-Medan toll road project will be financed under the private - government financing scheme with the private investors to provide 55% and the government 45%.

The government will be responsible for the implementation of the Medan-Lubuk Pakam - Kualanamu section with the private partner to be in charge of the remaining part up to Tebing Tinggi. The government will provide Rp 1.75 trillion of the total cost and the private partner Rp 2.6 trillion.

Construction of the toll road project is expected to start this year to be completed in 2012 to coincide with the completion of the new international airport of Kualanamu that would replace Polonia airport of Medan.

The problem over land clearing that has been the main stumbling block in the implementation of toll road projects is expected to be sorted out if the bill on land clearing has been passed into law. The bill has been proposed to the House of Representatives in December, 2010.

Investment in the infrastructure sector is safer at present with the operation of the Infrastructure Guarantee Company (PPI), which has offered such guarantee for the Kualanamu - Medan toll road project.

Electricity

In 2010, progress in the development of the country's electricity sector was marked with completion of a number of projects of power generating plants overcoming deficit in power supply in some regions. The new power plants are part of the first phase of PLN fast track program to build coal-fired power plants with a total capacity of 10,000 megawatts. The program is expected to fully complete in 2012 delayed from the original schedule of 2010. The first phase is to be followed with the second phase to be completed in 2014 or 2015.

Deficit in power supply in Java is expected to be fully overcome this year with a number of new power plants expected to come on line. The growing consumption will required more plants to come on stream to increase the production capacity.

The domestic consumption of electricity grows by 7% a year as against increase in supply of only 4%. The need for power reserve is 30% of the consumption but PT Perusahaan Listrik Negara (PLN) has only a reserve of 20%.

In 2011, PLN hopes to put into operation new power plants adding 3,000 MW to its total capacity. In 2012, more power plants are expected to come on stream with a capacity of 4,000MW.

The second phase of the crash program of the government to be carried out by PLN will be the construction of power plants with a total capacity of 10,153 MW. The power plants will include hydropower plant (PLTA) with a capacity of 1,204 MW, geothermal power plants (PLTP) with a capacity of 3,947 MW, coal-fired power plant (PLTU) with a capacity of 3,312 MW, combined cycle power plants (PLTGU) with a capacity of 1,560 MW, and gas fired power plants (PLTG) with a capacity of 100 MW,

Implementation of the second phase of the program will be split between PLN and independent power producers (IPP) with PLN to have a share of 5,118 MW and IPP having a share of 5,035 MW in capacity.

A number of the projects under the second program are already under construction such as the PLTU Asahan 3 with a capacity of 2x87 MW to be completed in 2014, PLTU Parit Bari with a capacity of 2x50 MW to be completed in 2013, PLTU Sampit with a capacity of 2x25 MW to be completed in 2014, PLTA Upper Cisokan with a capacity of 1,000 MW expected to come on stream in 2015.

A number of other power generating projects to come on line in 2013 include PLTG Kaltim with a capacity of 2x50 MW, PLTU Takalar with a capacity of 2x100 MW, PLTU Bengkulu 2x55 MW, and PLTP Sungai Penuh Jambi 2x55 MW.

Total investment for the second phase of the program including for transmission systems is estimated at US$ 16.34 billion including US$ 15.96 billion for power plants and US$ 380 million for transmission systems.

The projects will be financed with loans and bonds funds.

Implementation of the project so far is not as smooth as expected also because of difficulty in financing. By December 2010, there were still projects with a total capacity of 7,000 MW had yet to be carried out under the first phase of the crash program.

In 2011, deficit is power supply is not expected to be fully overcome. Electricity requirement in 2011 is estimated at 180 GWh as against supply of 165 GWh.

Operating burden of PLN will remain high with the soaring prices of oil and oil is still used for many power plants of PLN.

It was estimated in 2009, the production cost of PLN was Rp 318 per kWh with gas as fuel, Rp 1.383 per kWh with oil as fuel and Rp 362 per kWh with coal as fuel.

Property

Property sector in 2000 especially in the Greater Jakarta began to grow in 2010 after a slump in 2009. Demands for commercial office spaces in the Jakarta's Golden Triangle area of Kuningan, Thamrin and Gatot Subroto and for shopping malls, apartment buildings and industrial estates in the Greater Jakarta area are quite strong.

The trend is expected to continue through 2011. Many big property buildings including apartment and office buildings are scheduled to be completed in 2011 and 2012. Many others are in the process of construction to be completed later.

Demand for office buildings is stronger followed by demand for residential buildings and industrial estates. Meanwhile, retail sales are sales is predicted to be sluggish as the market has been almost saturated with no significant increase in the buying power of the people.

The prospect of property sector is more encouraging with many foreign investors seeking to do business in the country. Many foreign investors believed there are less business risks in the country. Property investors from Singapore, South Korea, Hong Kong and Japan began feasibility studies for new projects in 2010.

Foreign investors are attracted partly because of the relatively cheap prices of property buildings in Indonesia. In comparison property in Malaysia, the prices of property buildings in Indonesia are much cheaper. Meanwhile, foreign property buyers see Indonesia as profitable investment destination because of high return on property of more than 10% a year.

Indonesia still attracts foreign investors although the regulation is tighter in the country on foreign property ownerships. The country's regulation gives only 25 year right to use property compared to international standard of 70 years.

Investment inflows to the country is expected to remain strong through 2011 because of a number of supporting factors such as political stability and favorable security and conducive monetary and fiscal policy marked with the relatively stable inflation. There is less risk of sudden reversal of foreign capital flows and concerns of possible political and economic instability in 2011.

The Organization for Economic Cooperation and Development improved the level of Indonesia's country risk from 5 to 4 (scale 0-7) in April 2010 on its good macro economic growth, political stability and favorable security. In March 2010, international rating agency Standard and Poor's (SP) raised Indonesia's long-term foreign currency debt rating to BB from BB- and maintained long-term local currency debt rating at BB +.

Industrial Estate

Among the sub-sector of property, the sub-sector of industrial estate grew the fastest in 2010 after being in the doldrums from 1998 until early 2010. Fast growth for industrial estates began later in 2010. Many foreign companies built factories in industrial estates in the Greater Jakarta area. In 2010, additional use of industrial estate spaces reached 420 hectares or doubling sales in 2009 increasing the occupancy rate to 65% from 61% in 2009.

The government regulation No 24 of 2009 also contributed to increase in demand for spaces in industrial estates. The regulation requires new factories to be located in industrial estates. In 2010, demand for new space in industrial estates rose 187% to 385 hectares from the previous year. The increase in demand pushed up the prices significantly.

The selling price of plots in industrial estates rose to an average of Rp 720,000 per square meter or US$ 80.2 per sq.m. On the average

Demands came mainly from foreign investors operating in the automotive, steel and food processing industries. Despite the growing demand, there was no expansion of industrial estates or new industrial estates because there was almost no new tenant using the spaces that wide area has remained unoccupied over the past decade.

Demand for space is expected to remain strong through 2011, but industrial estates in the Greater Jakarta area have no more land for expansion.

Lands appropriated for industrial locations in Jakarta, Bogor, Bekasi, Karawang, Tangerang, and Serang will remain unchanged at 8,662 hectares. A supply of new industrial lands available in the first quarter of 2011 is relatively small at 7 hectares in Bogor.

Investors building factories not turning out much pollution choose to take locations in Bekasi, Karawang, and Purwakarta, and those planning to build factories that produce much pollution chose location in Cilegon.

Office Spaces

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