accessing infra. developments to unlock mining potential. revised

Assessing need for Infrastructure Development to

unleash Growth Potential

Ganeshan Varadarajan

President Director, PT Adani Global

Contents

(1) Resource Spectrum : Focus on Coal

(4) Satellite Impact of Energy

(5) Local governments to Enable Growth

(2) Development based on consumption

(3) Infrastructure for Enterprise Growth

(6) Infrastructure to Unleash Resources

Infrastructure to unleash Growth Potential

Resource Spectrum : COAL1 Indonesian Coal Distribution Map

Indonesia’s total coal reserves ?

Resource Spectrum : COAL Indonesia's Coal Resources by Quality

Sources: Ministry of Energy and Mineral Resources Indonesia,

1 Medium CV 5000 – 7000 Kcal / kg

2. Low Ash, Low Sulphur : One of the ‘Cleanest Coal’ in world

3. Coal deposit tend to be close to surface with thick seam : Low cost mining possible

4 Open mines and accessible rivers/seas mean low production costs

Indonesia

The Coal reserves of Indonesia has its own advantage, to attract consumption

Contents








Development Based on Consumption

Indonesia Leading The Region

• Largest economy in South East Asia

• GDP size US$834 billion (2011)

• Fourth largest population in world

• Third fastest growing economy in Asia

• BRICS has extended to include Indonesia, Member of N-11

• It has surpassed Australia as a net exporter of coal (thermal)

• South East Asia’s only member of G-20

Source : Center For Global Development

As third largest democracy, Indonesia’s potential will be realized with politicians proactivness


• The consumption arising from highly interlinked world

• Interchange of trade between emerging markets, especially ASEAN

• China and India will make 70% of the worlds total incremental growth in coal

• Indonesia has been already largest Steam Coal exporter of the world

• Indonesia is closer to India & China, This means avg. 5-10 $ less cost per tonnage

Regional Consumption

Indonesia’s Coal is exposed to the right market, highlighting its competitive advantage


• Robust growth rate to be 9.1 % between 2010 and 2015 vs a 6.0% growth rate for the whole export space

• This will lead to more than a third of the export market by 2015, more than quintupling its market share from 1993

• Barring any unfavorable regulation changes in foreseeable future

Indonesian Coal Export Market Over Time

Source : Government data, Reuters, RBS Forecast

Development Based on Consumption Domestic Thermal Coal Consumption

• The consumption is run of population and amplified by industrialization• Domestic consumption should grow by 22% over the 5 years, faster than 9%

production growth•

Fundamental outlook for Indonesian electricity generation by Coal couldn’t have been better

ENERGYSUPPLY MIX 2010

ENERGYSUP LY MIX 2019

Source : PLN, IEA Energy Counsel

Development Based on Consumption Indonesia Energy Generating Capacity Paradox

Source : Indonesian Electricity Guide 2011, PwC

Despite the relative abundance of natural stores of resources, results in per capita

capacity is the lowest in its region To support economic growth electrification ratio at least 90% by 2019 i.e around 190 GW

from current 30 GW

Development Based on Consumption Lessons from History

• Low Take Up

• Primarily due to lack of Distribution Infrastructure

E.g : Coal transportation routes, energy transmission network

• This is necessary to bring feed stock with the generating assets and to consumer

• Especially in region outside Java and East Kalimantan

• Difficulty in obtaining land for Infrastructure Building

• Hurdles in getting land clearance and land use right

• Lack of Robust regulatory framework

• Need of project based financing in international market place

Contents








Infrastructure for Enterprise Growth Infrastructure & Competitiveness

• 15th largest market size factor highlights Indonesia’s growth potential

• Infrastructure performance within ASAN Countries:- Electrification ratio : 11 out of 12 : High level of blackouts- Road & Ports network : 8 out of 12 : higher costs of inter-island cargo tranport

• Infrastructure weakness is one of major concern for firms operating in Indonesia and if fixed growth will reach to higher trajectories

So

urce

: W

EF

201

1 C

om

petit

iven

ess

re

port

Source : The World Bank, June 2011

Infrastructure for Enterprise Growth Link Between Mining and Infrastructure Development

PORTS• Indonesia’s largest archipelago is an

important trade region in world• Connectivity between region should be

developed to expand and accelerate economic development

ROADS / RAIL • Provision of reliable infrastructure is

needed to support distribution of goods and services across the country

• Road improve access to markets, increase productivity and stimulate economic growth

improve access to markets, increase productivity and stimulate economic growth.

Infrastructure investment through

Mining Industry

Electricity Road Ports

Regional Development

Business Competitiveness

Energy Opportunity in Indonesia

• Indonesia lags severely behind its Southeast Asian peers which average in the mid-90% region

• To support economic growth electrification ratio at least 90% by 2019

• Indonesia will exhibit the fastest electricity growth over the next 15 years, generating 4x more electricity by2025, most of it from coal.

This further confirms coal will be the primary energy source and ASEAN energy sector presents enormous opportunities which requires additional resources

Baseline Scenario for Electrification generation - outlook 2025

Scenario 2010 Twh 2025 Twh % Growth

Indonesia 166 480 298

Thailand 156 305 95

Malaysia 116 238 105

Source : IEA’s World Energy Outlook 2010In End 2011 is expected to be 74% as per PLN Sources

Source : IEA , RBS Forecast

Infrastructure for Enterprise Growth

Contents








ASEAN Energy Interconnection

Intra-ASEAN linkages in energy sector offer much potential benefits, both in themselves and as a component of ASEAN economic integration

The cooperation is shifting from simply connecting physical infrastructures to regional power market

‘Beyond the barriers, energy security and market access are

bounding elements between ASEAN countries

Satellite Impact of Energy

Benefits with ASEAN Interconnection

The scope for Indonesian GDP benefiting from introduction of power trading across the archipelago and into ASEAN is seen as very substantial

Source : Preparing for Electricity trading in ASEAN , Year 2005

Satellite Impact of Energy

Indonesia is a country that is currently not making efficient use of its energy resource – Coal

Satellite Impact of Energy Mine Mouth Power Plant

Enabling access to diverse resource through transmission, can deliver resources from remote location in order to increase energy output

1. Coal is subject to transportation costs in which coal hauling costs is almost 80% of total costs

2. Hence for Coal suffers from lack of infrastructure or higher hauling costs i

Mine Power Plant

3. Transport by electrical transmission has fixed cost – hedge against rail costs, facilities, competitive pricing

transmission

hauling

Satellite Impact of Energy Energy Ecosystem

Contents








Local government to Enable growth PPP to Bridge Infrastructure Financing Need

Government funding capacity Rp. 451 trillion (31%)

The remaining Rp. 978 trillion (69%) financing gap is expected from sources like PPP

Public finances under strain, private sector will play a decisive role, couple with local support

Source : Morgan Stanley South East Asia Report

Local government to Enable growth Environment for PPP

SYNERGY

To Promote Infrastructure Development Growth Through PPP

PPP Project

Private Investor Financial Institution/Lender

State / Regional Government

Legal and regulatory Framework

Land Acquisition Fund

Guarantee Fund (PT PII)

Infrastructure Fund (PT IIF) P3CU

Working with all stakeholders to create environment for implementing PPP

projects

Local government to Enable growth Share of PPP’s in Regional Development

Sou

rce

: D

irect

or fo

r P

ublic

Priv

ate

Par

tner

ship

Dev

elop

men

t

Note : Preparation means Pre-FS, FS, Tender, Land acquiring

PPP to inject greater efficiency in various type of infrastructure

Contents








Infrastructure to Unleash Resources Drive for Infrastructure

The four year TSR of emerging market has more than doubled with that of traditional market

This links to wider economic story of mine related growth in emerging markets

Mining companies are looking to vertically integrate to get better control over the price of production inputs and to provide future growth E.g Huadian, China and TATA ,India

As mining industry is a long term game, many emerging mining company’s plan to integrate vertically and many will continue to integrate

Infrastructure.

As companies do this, government can come into picture and can align their national

objectives with infrastructural needs

Source : PwC, Mine 2011 Game has changed, Year 2011

Infrastructure to Unleash Resources Lessons from Other Economies

Mozambique Governments planned infrastructure development for mining industry

Mozambique plans to become a major player in the seaborne metallurgical coal export market within a 5- to 7-year horizon,

assuming infrastructure is in place


Mongolia :- Rail transport has become the primary

method of moving heavy and bulk freight in Mongolia

- 28% of mined coal is exported by rail transport

- Some 1,500 new jobs will be created for Mongolians in addition to increased opportunities in support services and new industry

Railway infrastructure puts Mongolia churning to untapped markets across China and Russia


Queensland Port Expansion

Year 2011 – 2015+ (Mtpa)

AUSTRALIAN PORTS HAVE RESPONDED TO ROBUST ASIAN DEMAND WITH EXTENSIVE INFRASTRUCTURE IMROVEMENT PROGRAMS

Infrastructure to Unleash Resources Lessons from Indian Power Sector

Electricity demand in India India’s planned energy activities

Rail transportation costs over a distance of 1 500 km from the coal mines to demand centers are typically USD 30/t. The mine‐mouth cost of coal is in the range USD 15/t to USD 20/t

Harbor locations, imported coal may cost half to indigenous coal from East India

Thus, For Indian coal per se the most vital area of energy infrastructure is ports and transmission

Infrastructure to Unleash Resources Lessons from Gujarat Local Government

1. The Local government had taken scrupulous care to ensure that the state electricity regulator - unlike in most states - remains truly independent of political pressures

2. Abundant power is major USP of Gujarat amongst many other states in India

At times the cost of transporting coal equals the

cost of the coal, they shifted to Port-Mouth Power plant

Infrastructure to Unleash Resources Mineral Infrastructure

COAL MINE RAIL / BARGING / ROAD PORT

PORTPOWER PLANTTRANSMISSION

INDONESIA

I N D I A

Infrastructure to Unleash Resources Indonesia’s potential to lead infrastructural growth

Moody’s upgrade rating from Ba1 to Baa3

They suggest ratings may further get upgraded if Indonesia progress in addressing infrastructure bottlenecks that contribute to an increase in potential growth; this will also invariably add to governments borrowing

capacity


SCENARIO : Low growth 2010 2011 2012 2013 2014

GDP growth (%) 3.5 4.5 5.5 5.5 5.5

Budget deficit (%GDP) -1.6 -1.4 -1.1 -0.9 -0.8

Public dept to GDP ratio (%) 32.9 32.2 30.8 29.3 27.8

GoI gross financing needed (IDR trillion) 221 223 216 218 248

SCENARIO : Business As Usual 2010 2011 2012 2013 2014

GDP growth (%) 5.4 6.0 6.2 6.2 6.3




SCENARIO : Big Push 2010 2011 2012 2013 2014

GDP growth (%) 5.6 6.4 6.8 7.0 7.2




SCENARIO : Bigger Push 2010 2011 2012 2013 2014

GDP growth (%) 5.6 6.5 7.1 7.4 7.6





• Supporting the improvement of real sector competitiveness

• Enhancing Public Private Partnership:

– Shifting government role to be facilitator or enabler.

– Focus on service sustainability through efficient and effective investment

• Dual Track Strategy:

–Developing infrastructures which accelerate goods and information flow

– Encouraging industrialization program through regional centers development in 6 Priority Economic Corridors

Strategy on Infrastructure Development in Five-year National Development Plan 2010-2014


“To create a se l f-Suffi cient , advanced, just , And prosperous Indonesia”

- MP3EI Vis ion 2025

Closing Remarks

- The natural archipelago and economic growth challenge can be addressed. If bottle neck can be eradicated with the help of investment in infrastructure such as ports, rail, energy transmission but requires better policy frameworks to attract investment and align economic returns with investor risks

- The government of Indonesia needs to promote mine mouth power to utilize abundant low rank coal to achieve growth in remote regions of Indonesia

- Although investment currently dominated by public sector, there is a strong urge towards private sector (IPP, PPP, Corporate etc.)

- The provision of quality infrastructure is a necessary element of any strategy for economic integration and sustainable development in Indonesia

Natural archipelago Challenge

Mineral resources

Economic Growth

THANK YOU

THANK YOU !Q & A

Ganeshan Vardarajan Tel. 062 8822 828 907

Email. [email protected]

www.adanigroup.com

THANK YOU FOR YOUR ATTENTION

Mr. GANESHAN VARADARAJANPresident Director, PT Adani Global

Address: Graha Mustika Ratu, Floor 3rd, Gatot Subrato Kav 74-75, Jakarta South 12780Telephone : 021 – 29226401

Email : [email protected]

INDOENSIA INFRASTRUCTURE DVELOPMENT NEEDS

7% growth target requires:Rp 1.923,7 Trillion (about US$ 161.8 billion) of investments during 2010-2014.

Central Government budget can only cover 29.1 % of total investment need.

Source : Morgan Stanley South East Asia Report