INDONESIA BUILDS INFRASTRUCTURE FOR BETTER FUTURE

Economy of Indonesia, with a strategic location in the heart of the growing markets of South East and East Asia, offers businessmen from Serbia significant opportunities for marketing their goods as well as a favourable environment for the investments. At the same time, there is an awareness that Serbia, with a series of free trade agreements signed with other countries, is well positioned to be a partner to Indonesian business people when they sell their products on the third markets.

This is a message repeated by the Ambassador of Indonesia in Serbia H.E. Mr. Semuel Samson and his associates during a meetings with local potential partners and Indonesian businessmen. Recently, the possibility of such business cooperation was introduced to the management of Belgrade’s “Energoinvest,” led by Director General Mr. Vladimir Milovanovic. The meeting at the headquarters of “Energoprojekt” in New Belgrade was attended also by Borislav Korkodelović, a member of the Board of the Serbian-Indonesian Friendship “Nusantara”.

The above mentioned message of the Embassy of Indonesia comes in time when this large (1.9 million square kilometers) and densely populated country (250 million inhabitants) records a significant growth. Accoring to a variety of forecasts the country will become one of the top ten economic powers in the world in the near future. In the past decade, the average growth rate of Gross domestic product (GDP, the sum of produced goods and services in the country during one year) in Indonesia was 5.3 percent.

Despite a significant slowdown in the world economy due to the global financial and economic crisis, Indonesia recorded a growth rate of about six per cent in a period of five years, ending with 2012, with the exception in 2009 when 4.6 percent was achieved. The quality of growth was important as well. It was the consequence of the significant role of investment and exports, the decline in the level of unemployment and poverty, and more equal distribution of economic prosperity across the country. Indonesia’s public debt, as a percentage of GDP, has declined from 83 percent in 2001 to less than 25 percent in 2011.

Last year, Indonesian economy grew at a rate of 6.23, and during 2013 the Government expects to reach 6.8 percent. Indonesia’s nominal GDP (one that is reduced for the rate of inflation) was 928 billion USD in 2012, and measured by purchasing power parity (PPP, at market prices) was higher than 1.2 trillion USD. Nominal GDP per capita in Indonesia in 2012 was worth 3,797 USD and 4.943 USD measured by PPP.

Indonesian economy is the fifth largest in Asia, and 15th or 16th in the world (depending on the criteria for measuring GDP). Indonesia is a member of the Group 20 (G-20) of the most powerful economies in the world and the major fast growing economies. The country chairs the Asia-Pacific Economic Community (APEC), and will host the conference of the World Trade Organization (WTO) in December 2013.

Indonesia enjoys solid political stability, it is the third largest democracy in the world and its majority Muslim followers are considered as moderates. Authorities are, also, adopting prudent economic and development policies.

Indonesia has the largest economy as a part of the Association of Southeast Asian Nations (ASEAN), the significant political, economic and cultural integration in this part of the continent. ASEAN brings together 10 countries and 600 million people, and as an entity represents the eighth largest world economy.

The outstanding record of Indonesia’s growth was also reflected by domestic companies. Recently, Airbus signed a single agreement with the largest Indonesian airline company Lyon, worth 24 billion UDS for the delivery of 234 commercial jets. In 2012 Lyon already signed a contract with Boeing for the purchase of the aircrafts worth 21.4 USD.

In their performance the companies have been supported by strong, reliable financial sector. In 2012, Rakyat Indonesia, Bank Mandiri, Bank Central Asia, Bank Danamon and Bank BNI were listed in 2012’s Forbes Global 2000, that featured best companies in the world.

In the region, Indonesia has the largest middle class. The projections show that by 2020, Indonesia’s 58 percent of population (from the total of 270 million inhabitants projected for that year) will be classified as the middle class, with annual incomes between 5,000 and 15,000 USD. By 2030, Indonesian market will enable investments worth 1.8 trillion USD.

In 2011, along with maintaining high growth rates, the administration of President Susilo Bambang Yudhoyono inaugurated the 15 year master plan for economic development (MP3EI) to foster rapid, balanced, equitable and sustainable economic development of Indonesia. At the end of this period, Indonesia would be the world’s food production base, a center for the processing of agricultural products, minerals and energy sources, and global logistics.

According to MP3EI, 22 main economic activities should be integrated into eight programs: agriculture, mining, energy, industry, marine economy, tourism, telecommunications and development of strategic areas. The six economic corridors – Java, Sumatra, Kalimantan, Sulawesi, Bali-Nusa Tenggara (NT) and Papua-Maluku islands were identified as well.

The plan prescribes that Sumatra will be a center for the production and processing of raw materials and the use of energy sources, and Java will become the engine of the national industry and services. Kalimantan will become a center of mining and energy resources, and Sulawesi for production and processing of agricultural products, plantation, fishing industry and the exploitation of nickel ore. Bali and NT will become a gate for tourism and supporting provider of food production, while Papua and Centre Maluku were planned for development of food industry, fisheries, energy and mining.

MP3EI is based on the following strategic initiatives:

Encourage the implementation of large-scale investments in 22 main economic areas;
Synchronization of the national action plan to revitalize the real sector;
The development of centers of excellence in six economic corridors;

The basic strategy of MP3EI:

The development of economic potential of the economic corridors;
The development of economic potential of the economic corridors;
Increasing the capacity of labour, science and technology;

There are many reasons for the existence of MP3EI.

The improved public infrastructure will significantly contribute to the reduction of poverty and income inequality across Indonesia. Specifically, it is expected that the improvement of infrastructure, especially transport and power generation, will allow the growth of manufacturing sector and increase employment in it.

Furthermore, by the end of 2018, Indonesia will need more than 320 terawatt hours (TWh or 1012 watts) of power, which represents an annual growth of 8.98 percent. According to it, 77 percent of current electricity will come through the interconnection system Pits (Java-Madura-Bali). Pits is the largest transmission in Indonesia and it is the most important for the economic activity in the country.

The National Electricity generation and distribution company (PLN) currently has 40 million users, half of them being with low-income. The average consumption of this group is 120 kilowatt hours (kWh) per day (approximately enough for a fridge, TV and four bulbs).

By 2018, according to estimations, 68.1 million people will use electircity, which represents an average increase of 2.7 million per year. This will lead to the improved scale electrification, from 64.8 percent in 2008 to 95.5 in 2018.

In 2008, the number “of vehicles per square kilometer” has reached 58, a significant increase from 13 in 1995. A number of motorcycles has increased approximately 67 percent between 2004 and 2008.

In a period of seven years ending in 2011, an average vehicle speed was reduced by about 25 percent, from 26 km per hour (km/h) to 20 km/h, while the number of motorcycles has tripled. About 47 percent of the population spends 20 percent of their income on transportation, while other 16 per cent spends even 30 per cent.

Research shows that in Indonesia, 41 percent of local roads and 24 percent of roads in the provinces are in poor condition. The economic loss due to inefficient transportation system reaches 5.5 trillion rupees (Rp) a year, and the loss caused by poor air quality was 2.8 trillion Rp.

Congested ports and increasing logistics costs are the main constraints for the development of processing industries. The average time for a ship spent in Tanjung Prijok, the main Indonesian port, has been extended from 4.9 days in 2010 to 6.7 days in January 2012. This should be compared with one to two days in the most efficient ports in Asia. Transport container from Tanjung Priok, which is in the northern parts of the capital Jakarta, 56 kilometers far from the industrial zone Cikarang (West Java), costs 750 USD. That is almost 70 percent more than moving a container on the same distance in Malaysia. The difference is mainly due to overloaded roads in Indonesia.

Furthermore, according to data from 2008, approximately 80 million passengers used aircraft in Indonesia, or less than six percent of the total population of the country. With economic growth in the future, the number of passengers in air traffic could increase to more than nine percent per year.

The three largest airports in Indonesia face the overcrowding. At Soekarno-Hata Airport in Jakarta, the overcrowding has reached 68 percent, while at Ngurah Rai Airport in Bali, the figure reached a staggering 300 percent. The airport infrastructure will have to grow by more than 32 percent per year, due to the increasing number of passengers.

In March, the Minister of Transport E. E. Mangindaan announced that this year 12 new airports will be opened. These airports are scattered throughout the archipelago, but most of them are built on remote islands in eastern Indonesia.

Seven more airports will be in function in 2014, while it has been predicted to open five new airports in 2015. Thus, by 2015, a total number of new airports will be 24, which will, in accordance with MP3EI, strengthen the air traffic infrastructure and connections of the country , the minister Mangindaan said.

The plan is to build the infrastructure to support linking the centers of economic growth within Indonesia and among the corridors to facilitate the collection and distribution of goods flowing. It will be done in three phases: from 2011 to 2015, from 2016 to 2020 and from 2021 to 2025.

Total investments in ports, railways, airports, electricity and central water supply systems within the master plan from 2011 to 2025 amount to approximately 437 billion USD (about 4.000 trillion Rp), or half of Indonesian GDP in 2011. It is expected that the funds will come from official loans and grants, government budget, state-owned enterprises (SOEs), private sector, and mixed financing or public-private partnership (PPP). It has been expected that the private sector will participate with 49 percent and the state with 12 percent in the improvement of infrastructure, with 18 percent contributed by the state-owned companies, while 21 percent of investment will be provided through PPP.

The Government states that it has created a business climate and that an unrestricted investment regime exists in Indonesia. The fiscal incentives have been established for the foreign investors; the permitting process for investment streamlined; regime is liberal for bringing out the profit; tax treaties were signed with 50 countries, including South Korea, the country from which a significant number of investors is coming; limits on the value of investments are minimal; while the foreign investors are granted full or majority ownership of investments in most sectors. The Corruption Perceptions Index was 1.07 in 2000 and it reached 2.06 in 2008, and in the last four years, the (KPK) has prosecuted more than 550 cases to trial and executed more than 1400 private and government officials.

It is said that the stability of President Yudhoyono’s government is one of the reasons favourable for investing in Indonesia. That has been proved during the government’s two mandates (2005-2014), by its commitment to the market economy. According to estimations in Jakarta, the international factors and the business community have recognized the political will of the current government to carry out reforms in order to create a better investment climate and reduce corruption.

According to the leading global business school IMD in Lausanne, Indonesia made “spectacular moves”, resulting in a jump for nine ranks at the most recent Annual competitiveness rankings, to 42nd from 51st position in 2008. The World Bank report on the ease of doing business has also seen the improvement of business climate in Indonesia and its corporate governance standards.

In 2012 the government took two more steps to remove barriers to infrastructure development: First, it introduced the rules for the implementation of a new land-acquisition bill, which was adopted by the Parliament in December 2011, and aims to provide more security in solving real estate purchases for infrastructure. Second, set up a support fund PPP.
The National law on land acquisition in August 2012 was reinforced by the Presidential Directive.

The scheduled period for the acquisition of land intended for public projects is 583 days, while before there was no proscribed term. However, in business circles in Indonesia it has been warned that the law is not flexible enough, and that there is no sufficient funds in the state budget for its implementation.

This year, officials are reconsidering investment rules, including a list of industries in which foreign investments are not allowed or partially allowed.

According to the Indonesian Investment Coordination Board (BKPM), domestic and foreign investment in 2012 were worth 32.6 billion dollars. The foreign direct investment (FDI) reached 22.8 billion USD in 2012, an increase of 26 percent from the previous year.

For 2013 the expected investment is 40.6 billion USD, from which 8.3 billion were realized in the first quarter.
Since 2010 Indonesia has been the “Sweetheart” of foreign investors. In late 2011 and at the beginning of 2012 the investment rating of Indonesia was increased by main rating agencies, for the first time since 1997. The fact that the agencies Fitch and Moody’s raised Indonesia’s credit rating has enabled a better bargaining position for investors in construction and road infrastructure in Indonesia when they require funds on the capital markets.

Since 2009, in Indonesia the ratio between the investment and GDP has reached about 10 percent, the highest in the last 18 years. In the period between 2001 and 2007 it was between six and eight percent.

For 2013 it was predicted that the total government investment will be about 20 billion USD. The government also plans to attract other funding for this phase MP3EI in 2013.

In the initial phase the realization of 40 priority projects worth 34.8 billion USD was planned. They are mainly in Java and Sumatra, which are the first and the fourth most densely populated islands in the world.

In November 2012, Indonesia announced that it is prepared to offer 14 infrastructure projects worth a combined 6.1bn USD to the private sector in 2013. Feasibility studies, tender documents and land for these projects are available and scheduled to undergo their tendering process in the middle of this year.

According to the Asian Development Bank (ADB), progress has been already made in infrastructure within the MP3EI program. Last year, the work started on 182 infrastructure projects worth 65 billion USD. Financing came from private companies (44 percent), state-owned enterprises (20), Government (19), and PPP (17). Almost 40 percent of this amount was aimed to less developed eastern provinces. Additional projects have been planned for this year.

In 2013, budget expenditures on infrastructure increased by 55 percent, although ADB estimates that the result will be lower than expected due to chronic delays in the implementation of projects financed from the budget. Having that in mind, the Government is directing state-owned enterprises to become more involved in building infrastructure and is making concerted efforts to accelerate budget execution.

In 2013, the growth of the construction sector was projected by 7.2 percent. During 2012, the growth of the sector was 7.6 percent.

American multinational banking and financial services holding company JP Morgan has estimated that “the roll-out of these major projects could continue to bring positive news-flows to Indonesian infrastructure players (contractors and toll roads)”. During 2012 the movement of their stocks were mostly positive.

The three state-owned construction companies Vijaya Karja (WIKA), Adi Karya (ADKI) and Penbangungan Peruman (PTPP) recorded a strong growth of stock value in 2011 and in the first nine months of 2012. According to JP Morgan, it has been expected that positive news about the Indonesian infrastructure will continue in the first half of 2013.

While infrastructure and industrial investments have taken most of the headlines, the MP3EI also highlights the importance of moving Indonesia’s economy up the value chain and increasing the level of innovation. Through improving education and boosting school and university attendance, as well as expanding the industrial base, Indonesia aims to develop a more high-tech economy, exporting more tertiary goods and becoming less reliant on commodities, the prices for which have fluctuated greatly over the past five years.

Yudhoyono has acknowledged that Indonesia must first overcome some serious challenges if its vision is to be realised. He identified “five diseases that can make us fail”, including slow bureaucratic processes, conflicting interests in regional government (Indonesia has undergone a process of devolution in recent years), obstructive regulations, broken promises to investors and “unhealthy” political factors.

According to the estimations made by the Embassy of Indonesia in Belgrade, the potential agreements on cooperation, trade and investment between Serbia and Indonesia, lies in the agriculture and food research and technology; renewable energy, infrastructure and defense industries. Some of these areas are business specialties of “Energoprojekt” system, one of the largest remaining business systems in Serbia, which continues to perform successfully in a number of countries in the world.

The Embassy of Indonesia believes that the economy of the country offers significant opportunities for Serbian companies to sell their products. On the other hand, they suggest that the Indonesian company “Indofood” which established a subsidiary in Serbia in 2012, controls the distribution of instant noodle “Indomie” in 12 countries in the region. “Indofood” intends to open a factory in Serbia, which would produce and distribute food up to Poland.