investing in indonesian infrastructure may 2005 15[1]

Investing in Indonesian Infrastructure A Guidebook for European Companies

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Consultants and Authors of this Report: Mr François CHERER (SEMA, Belgium; [email protected]) Mr Bruno DERCON (PT Novaticon Indonesia, Indonesia; [email protected]) Mr S.V. DIVVAAKAR (Ace Global Private Limited, India; [email protected]) Mr Agus Ahadi DERADJAT (Ali Budiardjo, Nugroho, Reksodiputro, Indonesia; [email protected]) SEMA Belgium Rue de Stalle / Stallestraat, B-1180 Brussels Tel: +32-2-333-55-11 - Fax: +32-2-333-55-22 Email: [email protected] Website: www.atosorigin.be This report has been produced with the assistance of the European Union under the Asia-Invest programme. The views expressed herein are those of the consultant and can therefore in no way be taken to reflect the views of the European Union.

Foreword. This Guidebook is the result of a study on infrastructure investment for European investors in Indonesia. The Guidebook has been prepared under contract for the European Commission with funding for both the research and production of the Guidebook financed by the Asia-Invest Programme of the EuropeAid Cooperation Office.

This Guidebook and the research behind it are the work of SEMA BELGIUM. In the course of their research, the consultants held interviews with government officials and business executives in Indonesia and in several busi-ness centres of the EU Member States in order to validate current financial and factual information, and to gain an insight into the perceptions, motivations and experiences surrounding European investment in Indonesia from both viewpoints.

The Guidebook attempts to deal with the various topics that are likely to be relevant to potential investors and also includes useful internet and email addresses in order to allow investors to update their information.

The material in the Guidebook is solely provided for the guidance of those contemplating investment, but it is no substitute for professional advice, which should be sought before taking any specific action. The information in this document is believed to be correct as of April 2005 but no responsibility is taken for its accuracy.

This report has been produced with the assistance of the European Union under the Asia-Invest Pro-gramme. The views expressed herein are those of the Consultants and can therefore in no way be taken to reflect the views of the European Union.

Study on Infrastructure Investment in Indonesia

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The Asia-Invest II Programme is an initiative of the European Commission to promote and support business co-operation between the EU and Asia. The Programme provides assistance to business organisations to facilitate mutually beneficial partnerships between companies, in particular small and medium-sized enterprises (SMEs), in the EU and South and South-East Asia and China; as well as to strengthen the business environment to increase trade and investment flows between the two regions. Asia-Invest Programme European Commission EuropeAid Co-operation Office B-1049 Brussels, Belgium Tel: +32-2-298 4873 Fax: +32-2-296 5833 Email: [email protected] Web site: www.europa.eu.int/comm/europeaid/projects/asia-invest

EUROPEAN UNION Delegation of the European Commission to Indonesia, Brunei Darussalam and East Timor Wisma Dharmala Sakti, 16th floor Jalan Jenderal Sudirman 32 Jakarta 10220, Indonesia Postal address : PO Box 6454 JKPDS, Jakarta 10064, Indonesia Tel: (62 21) 570 6076 Fax: (62 21) 570 6075 Email: [email protected] Website: delidn.cec.eu.int/en The European Business Chamber of Commerce in Indonesia (Eurocham) was established in Jakarta on 11 May 2004 as an association to represent the views of the business community of the member states of the European Union in Indonesia. The founding members consisted of 25 companies and 4 national chambers or business associations. Eurocham’s principal objectives are to facilitate contact and communication within the European business community in Indonesia and to commence and establish constructive dialogue with the Indonesian authorities and the Indonesian business community in order to detect and nurture business relationships. For those interested to join and become a member of the Chamber, it will be obligatory for a member to be or remain members of its respective bilateral organisation. EUROCHAM - The European Business Chamber in Indonesia

World Trade Centre, 10th Floor Jalan Jenderal Sudirman Kav 2931 Jakarta 12920, Indonesia Tel: (62 21) 521 1650 Fax: (62 21) 521 1651

Email: [email protected] Website: www.eurobusiness.com

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I. Executive Summary.

From Recovery to Reconstruction. 2004 has been a threshold year for Indonesia, after the turbulent years that followed the 1997 financial crisis and the 1998 downfall of the Suharto regime. The first and flawless di-rect presidential election and a GDP growth again above 5% are indications that a process of painful political, social and economic recovery has seen the worst and that the gains of this process – more democracy and a more robust economy – may now be consolidated. There is indeed cause for optimism.

GDP per capita figures have recovered to 1995 levels, notwithstanding the fact that the population grew by 20 million people and that unemployment among the labour force dou-bled. Inflation is under control and the exchange rate has stabilised in a rough trading band.

This is remarkable if one considers the disastrous headline news from Indonesia in the past five years, with regard to military violence in East Timor, civil violence in Aceh, Kalimantan, Sulawesi, Ambon and Papua. Added to this came terrorist attacks and natural disasters, in-cluding the massive impact of the Tsunami of 2006, which killed an estimated 285,000 peo-ple and caused damage to the extent of US$ 4.5 billion.

With a new administration under President Susilo Bambang Yudhoyono, Indonesia’s policy focus is now to move beyond economic recovery and towards reconstruction of its productive economy. The new Government maintains the basic policy commitments of the previous administration, based on three key goals: (1) maintaining macro-economic stability; (2) con-tinuing the restructuring and reforming of the banking and financial sector, and (3) increasing the level of investments, exports and employment creation. A strengthened Ministry of Fi-nance and an independent Bank Indonesia have gained credibility in safeguarding the first two goals – as reflected in the slow but steady upgrading of Indonesia’s sovereign rating from CCC+ in 1998-’99 to B+ (S&P) in late 2004.

However, the starting base line for Indonesia’s economic reconstruction is a low one. In-vestment halted as a result of the 1997 crisis, and got subsequently stifled by political, social and legal bottlenecks. Meanwhile, Indonesia’s manufacturing competitiveness vis-à-vis other low-income countries such as Vietnam and China declined considerably. Other constraints include high public debts and budget pressures The Government faces a budget deficit in the range of 4% of GDP. Due to the Tsunami, it has been granted a temporary moratorium on debt repayments by the Paris Club. Budget shortages will be covered by new government bonds and bank financing, by further privatisations and asset sales and by donor country as-sistance, as approved in the January 2005 CGI meeting of donor countries and multilateral agencies.

These financial constraints make government-led investment unlikely to grow in the next few years. The Government has barely stabilised the banking system and still has substantial amounts of money tied up in the sector. Government actions will be limited to easing invest-ment bottlenecks and to re-allocate subsidies more productively. Re-channelling private sav-ings, which includes savings in pension funds, towards longer-term investments with an adequate risk-return profile is therefore a high priority. Infrastructure could become good can-didates. Finally, another major constraint has been the weak investment environment due in large part to serious flaws in the legal and regulatory framework and to unpredictable law en-forcement.

Notwithstanding these obstacles, there have been areas of excellent performance in the In-donesian economy, with many companies showing excellent results. A number of consumer companies, car makers and plantation companies have done very well. Property investments

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have resumed and the Jakarta Stock Exchange Index rose by 175% from early 2003 to Feb-ruary 2005. Indonesia’s recovery has been supported not only by local consumption, but also by local production.

Indonesia has also benefited from the economic boom in China in recent years, giving it a trade surplus of US$ 1 bn in 2004. Rising commodity and energy prices have increased ex-port earnings.

The 2005 – 2009 agenda. The Government has set out three major objectives for the coming years: improving the in-vestment climate, solving infrastructure bottlenecks, especially in electricity generation and transportation, and developing a rural development strategy that will diversify agriculture into higher-value added activities and stimulate growth in the rural non-farm economy.

Infrastructure investment At the recent Infrastructure Summit, the Government presented a number of reasons for pushing infrastructure development with the help of private investors: needs have been un-der-serviced to due to under-investment since 1997, investment in major infrastructure pro-jects will accelerate economic growth and employment.

Furthermore, the Government sees infrastructure as a key issue for improving the productive structure of the economy.

The government had been trying since 2000 to revive infrastructure investment. The IMF-funded austerity programme of 1997-1998 had obliged it first to put on hold and then cancel twelve large infrastructure programmes, including large power generation and toll road pro-jects. Later, terrorist attacks and political instability were among the reasons for further post-ponement of infrastructure projects.

The Infrastructure Summit of January 2005 revived an ambitious agenda to implement policy and regulatory changes to enhance Public-Private-Participation for infrastructure develop-ment and funding. The Government also expressed a willingness in principle to look again into possible government guarantees, albeit not in the form of new sovereign blanket guaran-tees.

An analysis of the infrastructure “road-map” including a list of 91 projects presented by the government leads to the following observations: 90% of the projects are located on Java and the Jakarta-West Java region is the best market for infrastructure investments for private in-vestors. Projects in other areas in Java are more time-sensitive and should avoid execution delays during their pay-back period. Projects in other areas in Indonesia are less attractive for private investors.

The legal and regulatory framework for investment in infrastructure Since the 1990s, the government has strived to promote the participation of the private sec-tor in the provision of infrastructure by creating an enabling policy, legal and regulatory framework. The previous government had already taken significant steps in several areas: a new telecommunications law had been enacted in 1999, paving the way for the introduction of competition in the sector, and new laws had been passed in the oil and gas sector in 2001 and in the toll road sector in 2004.

In 2002, the Government had also issued a new law on electricity that allowed privatization and competition in electricity supply. However this law was annulled by the Constitutional Court who deemed electricity supply should remain a state monopoly. The government is


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drafting a new law, the contents of which are not yet known. It will be important to see how it will reconcile the Constitutional Court’s ruling and the government’s objective to introduce competition in the power sector.

At the Infrastructure Summit, the government stated its policies and agenda to reform laws and regulations affecting infrastructure investment. These include the establishment of inde-pendent regulatory bodies to oversee the functioning of the different sectors, a move towards competition between operators where there is scope for competition, or where there is a natural monopoly, create competition for the business and the definition of clear tariff setting rules.

The Government also plans to amend the existing Foreign Investment Law with the intention of simplifying the existing licensing procedures and providing improved legal certainty to in-vestors. One of the main objectives of the new law is to eliminate discrimination between for-eign and domestic investors.

The new law will also reform the role and functions of BKPM from a licensing body to a regis-tration body, in addition to its promotion role as an Investment Promotion Agency.

The effective implementation of this ambitious reform agenda will be a critical element of the overall action plan towards revitalising investment in infrastructure. It will entail not only the enactment of new laws but also the effective implementation of regulations.

Sector analysis A detailed evaluation of sector size and growth potential for the power, telecommunications, transportation, and water and sanitation sectors is provided in the report. The main conclu-sions and issues relevant to investment decisions are the following:

Power Demand growth is brisk for the coming 5 years, but not dramatic; With the previously shelved and re-introduced IPPs to deliver about 7 GW and with a number of projects on PLN’s own account added to this, large region-wide black-outs may be avoided; Pressure towards more comprehensive energy reliability may remain weak in the coming years : the annulment of the Electricity Law prohibits competition; demand can be just met with scheduled production expansion; The planning of capacity expansion on Java which can accommodate new indus-trial investments is absent; Capacity expansion outside Java is very urgent, as black-outs are common. However, there is only limited pressure on PLN to divert attention away from its core market of Java-Bali; The provision of integrated gas supply infrastructure is crucial for energy reliability and supply stability; As long as the existing legal and regulatory framework is in place, PLN will remain the sole buyer of power, and it will likely insist on being a partner in all new IPPs; The current uncertainties in the institutional and regulatory environment are likely to discourage potential investors.

Telecommunications Demand growth is to remain strong for a long time to come, but the growth figures will be-come increasingly manageable for the established companies; Deregulation and privatisation have already been achieved to a large extent, making new entrants more likely to happen as a result of buy-outs, strategic alliances and the introduction of patented substitute technolo-gies; Deregulation is also achieving the construction of a more hybrid and reliable backbone and gateway infrastructure; this is likely to result over time in better pricing for national long-distance traffic; In effect, telecommunications investment is no longer decided by the Gov-ernment alone but by a limited number of established companies; The regulatory infrastruc-ture accompanying deregulation is still far from complete, leaving most industry initiatives in the hands of established and dominant players which implies that they will have a strong

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voice in setting new technological standards; Investments in new data technologies is on-going on Java’s urban centres; better access to telecommunication services in remote / rural areas may be expected over time due to technological advances in wireless technologies and as a result of competing backbones traversing the larger main outer islands; rural access is unlikely to benefit from substantial government investments; The Infrastructure Summit did not substantially address the telecommunications sector by only proposing the Palapa O2 Ring Backbone project.

Transportation Demand growth for transport infrastructure is strong and over time solid; Overall, the gov-ernment reasonably projects a transportation growth of 17.2% p.a. if the economy achieves to grow at 6.6%; Capacity extensions of terminal infrastructure is urgent, although efficiency improvements may buy enough time for better planning; The planning of integrated and com-plementary transportation networks, which should include the development of high-speed inter-city and suburban amenities, is not carried out with sufficient thoroughness and sense of priority.

At the Infrastructure Summit, the Government presented investment proposals which were mostly projects that had been shelved during the crisis; The selective approach shows more pragmatism than concerted planning, although the rates of return on these projects have not drastically changed; The pay-back of most infrastructure investments on Java simply de-pends on steady demand growth and unlikely on multipliers due to an increased inter-connectivity of transportation networks; The longest pay-back is to be expected from inter-city amenities, rates-of-return depending heavily on a late pay-back (e.g. within the last five years of the concession period); State-owned Enterprises control most investment decisions; Revenues of most of the projects are in local currency; Local-currency long-term investment vehicles, such as a Transportation Fund, are non-existent as for now.

Water and sanitation Demand growth is substantial, but demand elasticity is not always large, due to the availabil-ity of supply alternatives; The Water Resources Law stresses a comprehensive approach to water management, but it is not clear how this will impact municipal water management which is presently fragmented; Most PDAMs are neither financially nor organisationally ready or open even in principle for genuine public-private partnerships; Private-sector water provi-sion is fraught with past failures, except for small packaged deals for industrial and up-market residential developments; The pay-back of most water infrastructure investments is very uncertain due to the financial condition of most PDAMs, but also due to the absence of independent arbitration mechanisms in relation to tariff setting and for attributing responsibil-ity in case of service failure; The present emphasis on private-sector participation is more about the raising of construction finance and the securitisation of the repayment of this fi-nancing, rather than about the injection of management expertise; due to the weak credit worthiness of PDAMs but also of local administrations (which cannot give viable multi-year commitments), the guarantees on repayments are likely to be more political than strictly fi-nancial; All revenue is in local currency.

EU’s position in the Indonesian infrastructure sector. The presence of EU companies in the four main infrastructure sectors (energy, telecom, transportation and water) is significant.

In the oil and gas sector, EU companies like BP, Shell and Total are among the largest for-eign investors in Indonesia. EU companies have been the dominant foreign investors in the


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water supply sector, with Ondeo Services (formerly Lyonnaise des Eaux) and Thames Water operating water distribution companies in Jakarta.

EU companies have had a significant presence in the telecom sector until 2002, but several companies (France Telecom, KPN, Deutsche Telecom) have exited or reduced their pres-ence in Indonesia. However EU companies still dominate the telecommunications equipment market, with the strong presence of Alcatel, Ericsson, Nokia, Pirelli and Siemens.

In the power sector, EU companies have a significant share of the equipment and supplies market, with firms like ABB, Alstom and Siemens.

Generally, he EU is highly regarded as a source of technology, best practices, capital goods and investments in all infrastructure sectors. EU companies in Indonesia are present across the spectrum of activities: investors/operators, equipment suppliers, technology solution pro-viders, and consulting/engineering.

EU companies met in the study are generally optimistic about the market opportunities in In-donesia over a ten-year horizon. Companies that are present in Indonesia remain positive

about their investment prospects in Indonesia. Companies that are providers of equipment and services are more optimistic than operators. Some companies who did not state positive intentions on investing in Indonesia attributed their low or reducing interest to their global strategies, which saw a withdrawal from Asia, and concentration on other emerging markets in Europe and Latin/South America.

Key issues in enhancing investment in infrastructure. EU companies cite major risks in implementing infrastructure projects, arising from uncertain-ties related to land acquisition, overlap and conflict among various implementing regulations and laws issued by the central and regional government, non-market tariff setting by regula-tors, the duality of the government’s role as an operator and as regulator.

EU companies also point to poor governance and corruption as important issues.

The most important concern of foreign investors including EU companies in Indonesia is the lack of confidence in the judicial system to resolve disputes legally, under the provisions of contracts.

Furthermore, EU companies engaged in infrastructure activities stress the following key is-sues that are seen as major factors affecting investors’ adherence to the government’s re-cent initiatives, as exposed at the recent Infrastructure Summit: Lack of an overall government policy on the private provision of infrastructure; Lack of a comprehensive “Mas-ter Plan” for each key sector of infrastructure with a clear indication of the private sector’s role; Lack of a firm institutional framework for the implementation of infrastructure policies and projects.

Recommendations for prospective EU investors. Investing in infrastructure projects in Indonesia can be envisaged best by companies who have prior experience in the country. The following options are recommended:

European companies with strengths in competitive sectors (mainly power and telecoms) should actively build or strengthen alliances both with Asian investment companies and with European financial institutions.

European companies with strengths in sectors which are dependent on donor finance and/or heavily controlled by Indonesian State-owned Enterprises (i.e. transportation, including O&M of terminals; water and sanitation) will unlikely identify a significant number of viable invest-

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ment opportunities. It therefore implies the necessity for long-term aid-based engagements in accessing immature market environments at municipal and sub-national levels in general. In the short term, this may mean no more than small projects and/or feasibility study work.

Infrastructure investment will clearly lead to opportunities for studies, engineering services, supply, construction and operations and maintenance. Supply contracts will be easier to a access in sectors where competition is better established (power and telecoms). The proce-dures for fairer tendering and for reasonable forms of dispute resolution are here better es-tablished compared to sectors where competition is low (transportation and water).

Sectors which lower levels of competition may see foreign investment participation, but more likely in packaged development schemes which will include large Indonesian companies, in-cluding State-owned Enterprises. Participating in such foreign or foreign-local investment set-ups may still be beneficial for European companies, as long as scale-advantages or rela-tively risk-free sub-contracting modalities can be ascertained. Of special interest here are future multi-year construction contracts, e.g. for gas pipelines and potentially in the rail sec-tor.

With regard to business opportunities where know-how is more heavy on issues of opera-tions and maintenance (municipal water, toll road management, but also the management of air and sea terminals), investors need to be cautious and learn from past experiences. In case of new turn-key investments with a B.O.T. component, it is advised to focus on new ventures and not on ventures which need to receive revenue flows from existing operations. All O&M operations where revenues are in Rupiah and/or defined by tariffs set by third-party agencies are also high-risk.


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II. Table of Contents. Foreword ................................................................................................................................... 3 I. Executive Summary. ............................................................................................................ 5 II. Table of Contents ............................................................................................................... 11 III. List of Abbreviations and Acronyms ................................................................................... 13 Chapter 1. Indonesia’s Economy: Review and Outlook. ......................................................... 15 1. The 2005 Agenda : From Recovery to Reconstruction. ...............................................................15

1.1. Strengthening Fundamentals...................................................................................................15 1.2 Goals of the New Cabinet versus External Expectations. .......................................................16 1.3. A Weak Investment Climate.....................................................................................................17 1.4. Bright Spots. ............................................................................................................................19 1.5. Present Budgetary and Monetary Conditions...........................................................................21

2. The 2005-2009 Agenda: an Outlook...............................................................................................23 2.1. The Government Programme. .................................................................................................23 2.2. Work Ahead: Improving Indonesia’s Fundamental Structure. ..................................................24

Chapter 2. Infrastructure Investment in Indonesia. ................................................................. 27 1. Rationale for Private Investment in Infrastructure Development................................................27

1.1. Rationale of the Government of Indonesia...............................................................................27 1.2. Rationale of Public Private Partnership in Infrastructure Investment........................................29

2. Rationale of The Government Infrastructure Policies..................................................................32 2.1. Background of the Summit Appeal for Private Investment. ......................................................32 2.2. The Infrastructure Agenda of the New Cabinet. .......................................................................32 2.3. The $ 145 bn Question : Matching Infrastructure and Financing Needs...................................36

3. Micro-Economic Impact of the Government Policies...................................................................39 3.1. A Sub-National Supply and Demand Analysis. ........................................................................39 3.2. Sub-National Risk Environment for Infrastructure Investments. ...............................................45

Chapter 3. The Legal And Regulatory Framework, and the Financial Framework for Private

Participation in the Provision of Infrastructure. .................................................................. 47 1. Legal and regulatory framework....................................................................................................47

1.1. Overall framework....................................................................................................................47 1.2. Foreign direct investment in the infrastructure sector...............................................................49

2. Financial framework. ......................................................................................................................54 2.1. Equity. .....................................................................................................................................55 2.2. Debt. ........................................................................................................................................56 2.3. EC Programmes ......................................................................................................................58

Chapter 4. Sector Profiles. ...................................................................................................... 59 1. Energy Sector..............................................................................................................................59

1.1. Size of the Sector, Growth Potential and Outlook. ...................................................................59 1.2. Legal and regulatory framework ..............................................................................................66

2. Telecommunications. .................................................................................................................71 2.1. Size of the Sector, Growth Potential and Outlook. ...................................................................71 2.2. Legal and regulatory framework. .............................................................................................75

3. Transportation Sector.................................................................................................................78 3.1. Size of the Sector, Growth Potential and Outlook. ...................................................................78 3.2. Legal and regulatory framework ..............................................................................................82

4. Water and Sanitation Sector. .....................................................................................................92 4.1. Size of the Sector, Growth Potential and Outlook. ...................................................................92 4.2. Legal and regulatory framework ..............................................................................................96

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Chapter 5. Positioning of EU companies in the Infrastructure Sector. ................................. 101

1. A Review of EU Companies operating in Infrastructure Sectors. ............................................. 101 2. The positioning of European Companies. ................................................................................. 102

Chapter 6. Key Issues in Enhancing Investment in Infrastructure......................................... 105

1. Assessment of the Business Environment. ............................................................................... 105 2. EU investors’ Expectations. ......................................................................................................107

Chapter 7. Recommendations for Prospective European Investors. .................................... 109

1. Capabilities in Project Finance.................................................................................................. 109 2. Capabilities in Infrastructure Development, but no particular strengths in Project Finance...........................................................................110

3. Partnering. ................................................................................................................................ 112 Annex 1. Legal and regulatory framework............................................................................. 115 Foreign Investment in Indonesia ..................................................................................................... 115

The Foreign Investment Law ........................................................................................................115 Government Procurement Mechanism ......................................................................................... 120 Other Matters................................................................................................................................ 122

SCHEDULE 1 - NEGATIVE LIST ................................................................................................... 126 ANNEX A1: List of Business Fields Completely Closed to Investment ......................................... 126 ANNEX A2: List of Business Fields Closed to Investment for Companies with Foreign Capital and/or Foreign Legal Entities. ..................................................................... 126

ANNEX B: List of Business Fields Open to Investment by Way of Joint Venture between Foreign Capital and Domestic Capital........................................................................... 126

ANNEX C: List of Business Fields Open to Investment Under Certain Conditions........................127 ANNEX D: Sectors/Types of Business Reserved for Small-Scale Enterprises ............................. 127 ANNEX E: Sectors/Types of Business Open to Medium-Scale or Large-Scale Enterprises in Cooperation with Small-Scale Enterprise under the Partnership System ....................................127

SCHEDULE 2 – FIELD OF BUSINESS AVAILABLE IN THE INFRASTRUCTURE SECTOR ..........................................................................................128

SCHEDULE 3 – PMA COMPANY ESTABLISHMENT................................................................... 132 ANNEX 1: Setting Up a PMA Company........................................................................................132 ANNEX 2: Form of Model I Application ......................................................................................... 136

SCHEDULE 4 – PROCUREMENT AND TENDERS....................................................................... 139 ANNEX A: Selection of Vendors for Procurement......................................................................... 139 ANNEX B: Tender Procedures for Infrastructure ..........................................................................141

SCHEDULE 5 – COURT PROCEEDINGS IN INDONESIA .................................................................. Annex 2. Directory of Major Indonesian Companies in the Infrastructure Sector.................. 148 Annex 3. Selected List of Consulted Persons, Companies and Institutions.......................... 154 Annex 4. Bibliography and Sources of Information. .............................................................. 158


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III. List of Acronyms.

ADB Asian Development Bank ASEAN Association of South East Asian Nations BAPPENAS National Development Planning Agency BKPM Investment Coordinating Board BOO Build Operate Own BOT Build Operate Transfer BPJT Indonesian Toll Road Authority BPS Indonesian Central Statistics Office BUMD Regional Government-owned Enterprise BUMN State-owned Enterprise CGI Consultative Group on Indonesia DPR House of Representatives DPRD Local Council EC European Commission EIB European Investment Bank EU European Union FDI Foreign Direct Investment GDP Gross domestic Product GoI Government of Indonesia GR Government Regulations IBRA Indonesian Bank Restructuring Agency IMF International Monetary Fund IPP Independent Power Producer JABOTABEK Jakarta-Bogor-Tangerang-Bekasi Region KABUPATEN District Government SMEs Small and Medium Enterprises SOE State-owned Enterprise IRRs Implementing Rules and Regulations JAMALI Jawa, Madura, Bali KADIN Indonesia’s Chamber of Commerce KEPRES Presidential Decree KKPPI Committee for the Acceleration of Infrastructure Development KPK Anti Corruption Commission LPG Liquefied Petroleum Gas MOF Ministry of Finance MOHA Ministry of Home Affairs MSRI Ministry of Settlements and Regional Infrastructure NBFI Non-bank Financial Institution PDAL Waste water Utility Company PDAM Local Water Company PLN State Electricity Company PPI Private Provision of Infrastructure PPP Public-Private Partnership PROPENAS National Development Plan Rp Rupiah TELKOM State-owned Telecommunications Company

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Chapter 1. Indonesia’s Economy: Review and Outlook. This chapter investigates the present economic environment of Indonesia and indicates key social and political issues in relation to economic development. In the first part, a review is presented on macro-economic fundamentals, country risks, micro-economic bottlenecks and financial burdens. The second part briefly indicates the programme and the challenges ahead of the newly elected President Susilo Bambang Yudhoyono and his Cabinet, which will govern the country from 2005 to 2009.

However, many investments in infrastructure have longer time horizons than the time span of a single cabinet. Decision-making, construction, operations management and cost recovery can take time spans of 10 to 40 years. An economic analysis should therefore identify longer-term developments and longer-term fundamentals. As a result, the following discussion looks often back to the years before the 1997 crisis and, when necessary, even to the 1970’s and 1980’s.

1. The 2005 Agenda : From Recovery to Reconstruction. 1.1. Strengthening Fundamentals. 2004 has been a threshold year for Indonesia for overcoming the turbulence following the 1997 financial crisis and the 1998 downfall of the Suharto regime. The first and flawless di-rect presidential election and a GDP growth again above 5% are indications that a process of painful political, social and economic recovery has seen the worst and that the gains of this process – more democracy and a more robust economy – may now be consolidated. There is indeed cause for optimism.

Table 1-1 shows that GDP-levels per capita have recovered to 1995 levels, notwithstanding the fact that the population grew with 20 million people and that unemployment among the

labour force doubled. The table also shows that inflation is now relatively under control and that the exchange rate has stabilised in a rough trading band. That exchange rate has actually proven itself more vulnerable to in-flows and outflows of foreign currency, as part of debt settlements or as a result of confidence issues. The pegging and soft-pegging policies practiced by National Banks in other East Asian export economies has not been a key policy issue of Bank Indonesia. Nonetheless, the indicators show that the Indonesian econ-omy has left the storms of the late 1990’s and arrived in slightly more predictable waters. This is remarkable if one considers the disas-trous headline news from Indonesia in the past five years, with regard to military violence in East Timor, civil violence in Aceh, Kalimantan, Sulawesi, Ambon and Papua. Added to this came terrorist attacks and natural disasters, including the massive impact of the Tsunami of 2006, which killed an estimated 285,000 peo-ple and caused damage to the extent of US$ 4.5 bn.

Box 1-2. A painful political, social and economic recovery. In the past few years, a number of issues have found consolidation in Indonesia : Democracy: albeit in an often chaotic way, Indonesia has set into motion processes of de-militarisation, democratisation and decentrali-sation. For all of these processes, progress is only half-way. Legal and institutional changes are still subject to numerous turf battles be-tween interest groups.

Financial stabilisation: the IMF-assisted res-cue operation of the Indonesian financial sys-tem has stabilised the banking system. The severe impact of this operation on inflation, in-terest rates, government debt and the country’s sovereign rating is slowly subsiding.

Social-economic recovery: earlier poverty alleviation programmes, set up during the peak crisis years with loans and grants of the major multilateral lending agencies, averted an im-plosion of local consumption. At present, the economy is characterised by strong consump-tion levels which are supported by an im-proved overall local confidence. A strong world commodity market in the past four years has undoubtedly assisted this recovery.

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Table 1-1. Macro-Economic Indicators. (various sources) 1992 1995 1998 2001 2004

GDP annual growth (%) 7.2% 8.2% -13.1% 3.5% 5.1% GDP per capita (current US$) 754 1,043 487 675 1,178 Population (mio) 186 195 204 209 216 Unemployment rate (%) 4% 4.5% 6% 8% 9.5% Consumer price inflation (%) 7.5% 9.4% 58.5% 11.5% 6.4% US$-Rupiah average conversion rate 2,050 2,250 9,600 10,400 8,900

The 2004 increase in the GDP per capita is related to economic growth and a recovering exchange rate but also to a re-basing and re-weighting of the GDP calculations. The latter has increased the GDP levels by up to 17% compared to earlier calculations. At the previous weighting, GDP per capita (current US$) would have hovered around US$ 1000 in 2004. The new measurements relate to new economic activities, such IT, but also to under-measurements in the past. The relative resilience of the country during the acute crisis years warranted such closer look. The re-basing has also lowered many other ratio’s, such as debt to GDP.

1.2 Goals of the New Cabinet versus External Expectations. With the emergence of a new administration under President Susilo Bambang Yudhoyono, Indonesia’s policy focus is now to move beyond economic recovery and towards reconstruc-tion of its productive economy. The Cabinet includes strong pro-business ministers and pro-claims a programme that heralds tackling corruption, improving legal certainty and accelerating investment.

The new Government still underwrites the basic policy commitments of the previous admini-stration, which were formulated in mid 2003 when the Extended IMF Fund Facility was about to end. The Megawati Government published an Economic Policy Package, also known as the White Paper, that contained measures focused on three key goals: (1) maintaining macro-economic stability; (2) continuing the restructuring and reforming of the banking and financial sector, so as to assure financial reliability and (3) increasing the level of invest-ments, exports and employment creation. A strengthened Ministry of Finance and an inde-pendent Bank Indonesia have already gained credibility in safeguarding the first two goals – as for instance reflected in the slow but steady upgrading of Indonesia’s sovereign rating from CCC+ in 1998-’99 to B+ (S&P) in late 2004. Nonetheless, as Figure 1-1 shows, Indone-

Regional Sovereign Credit Ratings and Country Risk

1997

1998

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2000

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(S&

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atin

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Figure 1-1. (Standard and Poor; OECD)


Guidebook page 17

sia sovereign ratings and country (political) risk remain very poor, even when compared to most of the other Asian medium-low-income export economies. Moreover, concrete meas-ures on investment and employment have remained weak or controversial. The starting base line for economic reconstruction is thus a very low one.

1.3. A Weak Investment Climate. Investment in Indonesia halted as a result of the 1997 crisis, but got subsequently stifled by political, social and legal bottlenecks. In absence of much new investment, economic growth in general and demand and con-sumption growth in particular have been util-ising the existing infrastructure amenities and existing industrial production capacity. These have been at best replaced when needed due to aging but rarely added to. As shown in Figure 1-2, consumption has in-creased its share of GDP persistently in the past decade, while government consump-

Indonesia : Macro-economic IndicatorsA Consumption Recovery

0%10%20%30%40%50%60%70%80%

1992 1995 1998 2001 2004Consumption as % of GDPInvestment as % of GDPGovernment Expenditures as % of GDP

Figure 1-2. (Various Sources)

Box 1-2. Long-term issues : Stable development policies against a backdrop of a poor economic climate. The working agenda of the new Cabinet actually builds upon a 30-year pre-crisis tradition of executing fundamental (and often sound) development policies. This agenda has for long focused on the sustained investments in relation to education, health and other basic services, especially in rural areas, on building urban and rural infrastructure and on selectively removing investment barriers. The crisis caused both budgets and centralised authority to vanish, but not necessarily the basic technical and managerial capabili-ties to execute such programmes. At the financing side, the Government has set out with reallocating poorly targeted fuel subsidies to rural and social investment programmes. At the policy side, it organised the Infrastructure Summit to signal the start of a concerted administrative agenda, aimed at reverting or halting the rolling out of previously decided business-unfriendly laws, working away institutional bottle-necks to investment and channelling through a priority package of infrastructure investment valued at US$ 22.5 bn. Time is running fast, however. As the President, his Cabinet and the Parliament are facing new elections in 2009, the time frame for achieving progress is now less than 5 years. The risk spectre is moreover complex. Table 1-2 indicates a number of a number of risk benchmarks and Indonesia’s relative position. In relation to competitiveness, investment climate, governance, corruption and economic and political freedom, Indo-nesia has only scored better in the last category, both compared to the past and relatively in relation to other developing countries. The problems have not been overcome in the past years and sometimes become worse. A single Cabinet term is unlikely to overcome all weaknesses.

Table 1-2. (EFIC 2005) Organisation Indicator Indonesia's Score/Ranking Institute for Management Development

Competitiveness World competitiveness ranking in 2004 of 58 out of 60 countries. Down from 57 in 2003.

UN World Investment Report/

Investment Cli-mate

Investment climate ranking of 138 out of 164 countries.

World Bank/ Governance Ranked in worst quartile of surveyed countries for political stability, rule of law and control of corruption; second lowest quartile for democratic accountability and government effectiveness.

Heritage Foundation/ Economic Free-dom

Economic freedom rating in 2004 of 3.76 out of 5, meaning 'Mostly Unfree'. Slightly worse than 3.43 score in 2003.

Transparency Interna-tional/

Corruption Corruption perceptions index in 2004 of 2.0 on a scale 10 ('highly clean') to 0 ('highly corrupt'). Corruption seen to be 'pervasive'. Corruption ranking is 133 out of 145 countries.

Freedom House/ Political Freedom Placed in the ‘Partly Free' category - ‘3' for political rights and ‘4' for civil liber-ties on a scale of 1 (Free) to 7 (Not Free). Improvement evident since the down-fall of Suharto in 1998, when Indonesia was classed ‘Not Free'.

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tion and investment declined. Meanwhile, Indonesia’s manufacturing competitiveness vis-à-vis other low-income countries such as Vietnam and China, has declined considerably as well. While rural and informal sector wages are still 10% below pre-crisis levels, industrial and service-sector wages have shot up 40% since (World Bank 2005).

Yet it is generally accepted that business impediments are well beyond relatively high wages. In comparison to other countries competing in low-wage manufacturing, productivity is lag-ging due to a long-list of issues. A business confidence survey conducted in 2004 indicates bottom-of-league performance for Indonesia with regard to policy uncertainty, corruption and labour regulations. Especially for large companies, these issues are serious compared to in-vestment conditions in other East Asian countries, as Figure 1-3 shows. The compounded effect of the crisis and the continued decline in terms of business attractiveness have made large international companies either halting investments or in a few cases exiting.

These problems are obviously reflected in the foreign investment statistics. Even though overall investment levels, as a contribution to GDP, did not decrease dramatically, FDI dropped significantly in recent years, as indicated in Table 1-3. Moreover, the Investment Board figures in Figure 1-4 point to a continuous decline of local and foreign investment ap-provals in the manufacturing and non-financial service sector, both in terms of overall value and in value per approved project.

Figure 1-3. (World Bank 2005) Indonesia's Constraints to Investments

0

20

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80policy uncertainty

corruption

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tax administrationfinance

electricity

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Figure 1-4. (BKPM 2005; figures are ap-provals and exclude divestments)


Guidebook page 19

Table 1-3. Investment Indicators. (Various Sources) 1992 1995 1998 2001 2004 Investment (current US$ bn) in GDP 27 49 13 30 48 FDI (current US$ bn) 11 40 14 15 10 Government debt / GDP (%) 25% 25% 73% 87% +55%*

FDI values are obtained from BKPM, the Investment Coordination Board, and exclude substantial in-vestments in oil & gas, mining and the financial sector, both banking and insurance; that means that large bank buy-outs by foreign groups are not included in the figures. *See note under Table 1-1 on re-basing.

1.4. Bright Spots. Notwithstanding these many obstacles, it must be noted that in recent years there have been good and even star performers in the Indonesian economy, with many companies showing excellent profit margins. A number of consumer companies, car makers and plantation com-panies have done very well. New property investments, first in the retail sector and recently also in the residential and office segments, are once again changing the skyline of Jakarta. The Jakarta Stock Exchange Composite Index rose impressively from 400 in early 2003 to close to 1100 by the end of February 2005, a rise of 175%. The sectoral indices give more-over additional information. As Figure 1-5 shows, the infrastructure sector, which includes telecommunications, performed slightly better than the overall composite index, while the consumer index lagged. The real top-performer has been the mining index, containing also oil and gas activities, although price surges here have been to a certain extent speculative, anticipating supply shortages due to high international demand and to environmental restric-tions curtailing future prospection.

In the short run, Indonesia has also been benefiting from the economic boom in China in re-cent years, giving Indonesia a trade surplus of US$ 1 bn in 2004. Rising commodity prices, for instance of steel, and rising energy prices, particularly of coal and gas, have increased

Box 1-3. Compounded problems. Other factors aggravate the lack of manoeuvring space for Indonesian policy makers : Debt. As Table 1-2 shows, Government debt ballooned during the crisis years, especially as a result of the recapitalisation of the Indonesian banking system. This makes government-led investment unlikely to grow in the next few years. Debt problems will be further highlighted in Section 1.5.

Legal Issues. Outdated, incomplete and often self-contradictory laws and regulations are common-place, a problem likely aggravated by the recent splintering of the legislative chambers along multiple party lines. The government has no parliamentary majority which can be taken for granted. The Minis-try of Justice has become more prudent is scrutinising new proposed laws, but law reform is hampered by the lack of resources and within the parliamentary administration.

Judicial Failures. The judicial system is often unreliable and corrupt and moreover increasingly inde-pendent. It has often made a mockery of commercial cases, by declaring healthy foreign companies bankrupt although on grounds of simple business disputes, by accepting bankruptcy petitions, by issu-ing asset liens on surreptitious grounds and by negating elementary rules of jurisprudence. Although the Supreme Court is slowly reforming itself, the lower courts have still a long way to go.

Decentralisation. The regulatory framework governing administrative and political decentralisation is incomplete and still partly untested. It was introduced in a single swipe in 2001 and modified starting 2005. Power is now to be consolidated away from lower-level districts to the level of provinces. This is balanced by introducing direct elections of local and provincial heads of administrations over the next few years.

Budget Pressures. There are unexpected budgetary and organisational burdens due rising oil prices, costing the government at least US$ 5 bn this year even after a first round of subsidy cut. The Govern-ment promised to compensate cuts by pro-poor programmes, but these are difficult to organise. Of course, the 2004 Tsunami requires reconstruction work to be paid for, estimated to require over US$ 1 bn of government funds over the next few years.

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export earnings. Moreover, local consumption growth has taken advantage of a flood of cheap Chinese imports. Overall though, the import-export balance shows that Indonesia’s recovery has been supported not only by local consumption, but also by local production. Figure 1-6 shows that Indonesia’s trade balance for goods and services (excluding oil and gas) was negative in 1995 and 1996. This condition has been solidly reversed into a healthy surplus for the past six years. The downside, of course, is that the severe decline in imports is also related to an absence of capital investments, a situation further aggravated by the fact that exports have hardly recovered from their peak in 1997, if measured in present-day US dollars. Finally, net service payments have been unchanged over the past years, hovering around US$ 15 bn p.a. Nonetheless, Indonesia’s current account (trade balance of goods minus the negative net service balance) has still remained positive.

Jakarta Stock Exchange Indices

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Figure 1-5. (IndoExchange.com; The Economist)

The price surge of listed commodity stocks has been prevalent worldwide, as the Indices above show. However, these surges have been speculative, with regard to possible supply shortages. Actual price levels as tracked by The Economist (all items) have not surged to the same extent.

Figure 1-6. (BPS 2004; constant US$ bn); pre-2003 values inflated by 3% p.a. with 2003=100. The calculation for the graph below applies a simple deflator related to theUS core inflation rate and not the trade-weighted deflator related to real Rupiah ex-change rate. After the volatility of the late 1990’s, the Rupiah stabilised in 2000,strengthened some 10% in the 2002, but lost again 10% to 15% since. (World Bank 2005))

Indonesia Export-Import Balance

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Guidebook page 21

1.5. Present Budgetary and Monetary Conditions. The Government is still facing a budget deficit in the range of 4% of GDP, of which 1% is for current financial expenses. Due to the Tsunami, it has been granted a temporary moratorium on debt repayments by the Paris Club. Budget shortages will be covered by new government bonds and bank financing (63%), by further privatisations and asset sales (7%) and by donor country assistance, as approved in the January 2005 CGI meeting of donor countries and multilateral agencies.

The combination of GDP growth of around 5% in 2004, grace periods on official government debt and a continued non-expansionary budget policy explains the declining Government debt position relative to GDP as shown earlier in Table 1-3. Official G-to-G and multilateral borrowing has continued at a pace of about US$ 2 bn a year, but repayments have reached a level between US$ 4 to 5 bn. Private sector debt repayments (and divestment) were heavy in the years 1998-2001, but have turned around and there is now into a small trickle of new inflows. As a result, Indonesia’s capital account (flows of official and private capital) has re-mained negative. Or in simple words : by continuing to sell more than it buys, the country is continuing to pay off external debts.

This then explains the severe difficulties for the Government to give sovereign guarantees in the near future. The Government has now barely stabilised the banking system and has still substantial amounts of money tied up in the sector – money which the Government itself is liable is to foreign creditors. Therefore, it has almost no liberty to underwrite new large in-vestment ventures.

Box 1-4. Government Debt versus Private-Sector Debt.

Present public debt is strongly related to the IMF operation is which the Indonesian Government rescued the Indonesian banking system.

Outstanding external public debt was US$ 135 bn in 2003. About one-third is private debt and one-third is bilateral government debt. The balance of the debt is due, in roughly equal parts, to multilateral lenders and to short-term creditors (e.g. as a result of export credit facilities). Overall debt service payments totalled US$ 21 bn in 2003. However, this apparent balanced picture is the result of the rescue operation of the lo-cal banking system set up in 1999 by the Government and the IMF. In effect, the Government subsumed the liabilities of collapsing banks in exchange for their shares and for often rather worthless third-party collaterals. As Figure 1-7 shows, the steady increase of Government debt achieved in bringing private sector debt again under control.

The Government has indeed tied up some US$ 70 bn in a variety of guarantee instruments and equity bonds in order to rebuild the capital base of most local banks. The net impact to the Government is found in the interest the Government pays on the bonds, benefiting bank income. The Government has been recouping around US$ 2 bn a year through share auctions, but continues to pay US$ 4 bn on interest payments and will do so for years ahead.

50 39

67 8417 45

81 5414 30

1993

1998

2003

GoI Priv.External Debt Positions and Flows.

Figure 1-7. In US$ bn. (Bank Indonesia, World Bank; out-flows have been divestments, capital flight and write-offs.)

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Finally, in the absence of expansionary policies from the Government, there has been a steady strengthening of monetary indicators, with interest rates at an all time low. As earlier indicated, economic growth and real earnings have fuelled consumption, with banks taking in more deposits and extending more consumer credits. Bank deposits increased by 30% in the past 4 years, while Bank Indonesia encouraged banks to issue bonds to further attract lend-ing capital. However, liquidity was predominantly invested in either consumer credit, which, for durables, rose by 350% in the same period, or in Bank Indonesia money certificates. Lending towards investment and for working capital increased by less than 70%. The lack of lending has therefore not created excessive liquidity, as the banks have been using income from recap bonds and money certificates very cautiously. Table 1-4 shows that 2004 net ex-cess liquidity is in the range of US$ 1.5 bn or 0.6% of GDP.

Table 1-4. (in US$ bn; World Bank 2005; based on data of September 2004; 1 US$ = Rp 9100) Liabilities and Commitments Liquids Assets Available Deposits (primary and secondary reserves at BI)

15 Placement at BI (current account reserves, money certificates)

21

Committed (undisbursed loans) 14 Lending in the interbank markets 11 Others 3 Marketable securities (non-

government bonds) 1

Total 32 Total 33 Net Excess Liquidity 1

1.6. In Short: Which Boom Next ? It is clear that future lending is unlikely to come from government sources nor can the Gov-ernment underwrite extensive risks to near-term lending. Government actions will be limited to easing investment bottlenecks and to re-allocate subsidies more productively. Re-channelling private savings, which includes savings in pension funds, towards longer-term investments with an adequate risk-return profile is therefore a high priority. Infrastructure could become good candidates. But the needs for longer-term invest-ments by household and firm are high and moreover various :

• households are still re-investing in new durables, such as cars, and in homes, or are replacing them; likewise firms will need to replace aging production facili-ties and to add to it;

• households and firms will also need to invest in education and training, as the crisis years re-duced spending on educating the young, while experience of older workers has often is be-coming obsolete; this contingent liability on human capital devel-opment is reflected well in the youth unemployment numbers, now measuring around 25%.

Indonesia : Which Boom Next ?

0%

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Figure 1-8. (Various sources. Past figures have been ad-justed are inflation-corrected (2003=100), by a simple measure of 3% p.a. reflecting US core inflation.)


Guidebook page 23

Long-term saving will undoubtedly increase, as Indonesia will see its baby-boom generation arrive at early mid-age. Savings in fixed and other assets predictably then peaks in prepara-tion of future retirement. In 2000, Indonesia had 53 million people aged between 30 and 50 which most often had to postpone saving as a result of the crisis. By 2010, BPS (2002) pro-jects that there will be 70 million people in this age group. The long-term policy goal of any democratically elected government would be to provide secure saving instruments to this de-cisive group of voters. However, while the fundamentals are in place to start working at these savings instruments, the new democratic institutions are less than ready to set up the institutions assuring long-term asset security.

Admittedly, Indonesia has had good experiences with letting benign technocrats tinkering on such issues. During the Suharto era, they excelled at keeping fundamental social-economic policies on track (education, health, infrastructure and investment) while at the same time they were able to overcome recurrent crises and shocks. They also made the country recep-tive for the worldwide private investment boom in emerging countries of the 1990’s – albeit they admittedly failed in setting up secure institutions. As Figure 1-8 summarises, the tech-nocrats again achieved in recent years to overcome the debt crisis. Therefore, the question comes up which new challenge they take up now. Setting up long-term savings and invest-ments vehicles would be a plausible choice.

2. The 2005-2009 Agenda: an Outlook. 2.1. The Government Programme. The Government is at present therefore facing two possibly contradictory challenges: to swiftly provide the structural improvements in the investment environment of the country; and to stimulate actual investments as soon as possible, in order to accelerate growth. Institution building and growth acceleration should happen simultaneously. At the same time, the new Administration promised pro-poor and rural growth.

Essential policies to achieve these the Government’s goals were formulated early 2005 (World Bank 2005) :

• improving the investment climate, especially of labour-intensive manufacturers;

• solving infrastructure bottlenecks, especially in electricity generation, efficient trans-portation, and port facilities and procedures; and

• developing a rural development strategy that will diversify agriculture into higher-value added activities and stimulate rapid growth in the rural non-farm economy.

Project average growth for 2005-2009 is set at 6.5%, development expenditures would dou-ble to 6% of GDP by 2007, government debt decline to 35% by 2009 and the budget deficit reduced by 75% to –0.5%. Unemployment would start to decline by 2007. Text Box 1-5 lists a series of policy issues which are to be addressed.

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2.2. Work Ahead: Improving Indonesia’s Fundamental Structure. The question is now whether the above policy goals are consistent with the long-term fun-damentals. The Indonesian Business Chamber KADIN produced a Road Map in mid 2004, aimed at undoing the damage to business and investment which has accumulated in the wake of the financial and political crisis as well as a result of the rapid decentralisation proc-ess. One of the central tenets supporting these proposals was, as already mentioned before, the perceived collapse of competitiveness of the Indonesian manufacturing vis-à-vis other low-income countries. However, there are good reasons, as quoted in Text Box 1-6, to say the suggested picture of a sudden loss is inadequate, and that Indonesia is experiencing much an on-going and slow economic transformation, from a resource-based economy to a more complex one in which consumption has become an important driver and trade linkages more diverse and dynamic.

An important aspect of this transformation process is the consolidation of a three-pronged spatial-economic structure which will remain important for many investment decisions to come:

• The Greater Jakarta conurbation, which includes the whole of Western Java has shown the resilience of a genuine cluster economy. Concentrations of capital, knowl-edge and relatively advanced demand have helped it to outperform other areas of the country in terms of investment and trade. It has, however, not achieved much with re-

Box 1-5.The Government Programme (2004-2009) (Bappenas 2005)

Improving the Investment Climate.

Accelerating Infrastructure In-vestment.

Support and Widen Rural Devel-opment.

Introduce a new Investment Law, emphasising the principles of registration and protection of law and no longer of approval

Improve public management of infrastructure, with the central government moving from a ser-vice provider to a regulator role

Increase public expenditures on agricultural research and over-haul agricultural extension ap-proaches

Enforce the accountability of tax and customs administrations

Work out new and clearer roles among decentralised authorities in managing infrastructure

Secure land ownership

Re-focus labour regulations towards stimulating job creation

Strengthen and reform the inter-governmental fiscal structure, with scope for sub-national bor-rowing

Secure sustainable water re-sources management

Re-focus sector investment laws towards endorsing competition and fair and transparent price setting

Tackle corruption in procure-ment

Improve rural infrastructure

Improve the local market effi-ciency and curtailing add-on costs set indiscriminately by lo-cal administrations

Restore private-sector participa-tion, through privatisation and competition

Increase rural access to infor-mation and communication technologies

Further strengthen of the finan-cial sector, through supervision and diversification (bond mar-ket, institutional investments, microfinance)

Mobilise finance for infrastruc-ture, by re-focusing government spending and by mobilising domestic finance

Improve natural resource man-agement

Massively improve legal en-forcement and judicial prac-tices, especially in commercial law cases.

Develop risk and guarantee policies addressing long-term investment risks

Provide microfinance to support rural non-farm sources of em-ployment and income

Improve overall coordination between government agencies

Create consistent regulatory frameworks in relation to tariff setting and arbitration.

Maintain food security through openness


Guidebook page 25

gard to matching this private-sector performance with gains in the public realm, for in-stance in the form of more sophisticated public services. These have remained largely a pipe dream for now.

• Java has for now strengthened its function as industrial heartland of the archipelago. It has kept the advantages of local market access and market knowledge and of the economies of scale brought along with its own high population (61% of Indonesia). It is, however, not well prepared to compete in an environment of decreasing trade bar-riers and non-trade barriers, with relation to its ASEAN neighbours, with China and within the globalised economy in general. For instance, Malaysia has also easy ac-cess to and an historical bond with Sumatra and Kalimantan and will thus compete with Java in order to satisfy consumption demand there.

• The resource-based economy has remained a strong economic engine, notwithstand-ing the many environmentally unsustainable practices. The beneficiaries have been Sumatra, Kalimantan, Sulawesi and Papua. Exploitative practices and outright smuggling have left however a low wealth dividend with local populations, nor have large exploitation companies fostered the growth of local administrations capable of managing urban and SME economies.

The policy goals of the new Cabinet line well up against this structure and its respective problems : Jabotabek’s entire economy would gain immediately from better public amenities and a more market-responsive development and management of these amenities; Java is to tap into Jabotabek’s economies of scale if it is connected rapidly by means of better infra-structure; and islands outside Java require rural development and infrastructure supporting the rural economy in order to counterbalance and eventually overshadow the profitable but often destructive outcomes of the resources industries. The programme of the new Cabinet has thus a sensible basis in line with long-term fundamentals of the country. The main chal-lenges are the many institutional and budgetary obstacles. The main external risk would be a significant worldwide economic slowdown. The main internal risk is a bungled execution, for which there is a long-list of potential causes.

Text Box 1-6. The on-going transformation of the Indonesian economy. Indonesia’s foremost long-term source of growth has not been in manufacturing. From 1970 to 1990, Indonesia’s non-resource based manufactured export growth was below 1% p.a. The quoted growth rate of all other Asian tigers, including Malaysia, Thailand, Korea and China, was however higher than 1% p.a. (Radelet, Sachs & Wha Lee [1997]; tigers are defined as countries with a GDP per capita growth of at least 3% p.a. from 1970 to 1990; out of 78 countries studied worldwide, only 13 were classified as ti-gers). Recently and with the help of strong commodity prices, the resource-based industries have again assisted Indonesia’s post-crisis recovery.

Indonesia’s manufacturing sector did show persistent high real growth rates of around 11% p.a. during the 25 years preceding the 1997 crisis (World Bank 2005). This compared very favourably against growth rates in agriculture (average 3.1%) and in other sectors (e.g. infrastructure, services, finance; av-erage 7%). The growth rate of the manufacturing sector was however most affected by the crisis and tumbled back to 5% in the period 2001-2003. Therefore, not the sector contracted, but the addiction to expansion was forcibly curtailed. Worse even, the expansion drive lead to a long-standing neglecting of efficiency and productivity within the manufacturing environment. The crisis provided the inevitable ex-ternal shock to this poor productive structure, with most notably the labour intensive industries shedding most capacity and jobs (700,000 jobs since 2000).

(continued)

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(continuation) The manufacturing sector as a whole has not shrunk over the past 10 years. The structure of GDP, com-pared sector-wise, has remained largely unchanged between 1997 and 2003 (BPS 2004). However, the supply chains have changed, with exports from Java decreasing but inter-island trade increasing. This is evident in Figure 1-9. It appears indeed that the non-resource based manu-facturing sector, special-ised in the production of consumables, has lost in-ternational market share, but has made up this loss by fulfilling new demand in Indonesia. This fits also with the expressions of fear for trade liberalisation with China, as the manu-facturing sector perceives that it cannot meet the economies of scale and the overall productivity levels of its Chinese competitors, even when supplying to the local market.

Java: national industrial heartland, againChange in sea cargo 1999-2002 (ton)

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Figure 1-9. (BPS 2000, 2004; Jabotabek++ stands for the harbours of Jakarta, West Java and Banten; “Other Java” includes Bali)


Guidebook page 27

Chapter 2. Infrastructure Investment in Indonesia. In this chapter, a clearer understanding is sought on the justifications for new infrastructure investments in Indonesia, including the justifications to seek the help of private investors. The first section sets out the rationale to enlist private investors and operators in the provision of infrastructure services and looks how Indonesia’s perspectives and international experiences link up. The second section looks at the internal consistency of the infrastructure investment proposals put out by the new Cabinet and takes a cold look at where private-sector interests and private-sector capital might go. The third and final section elaborates on the micro-economic consequences of accelerating infrastructure investment, especially with regard to differential needs found in a large country such as Indonesia.

This chapter should therefore clarify to which extent the new Cabinet is offering a solid busi-ness case : will supply and demand be better in balance, what about financial viability, in terms of access to finance and financial risk, and will the social-economic impact be clearly positive ? These questions are essential in order to appreciate the risk-return profiles of long-term infrastructure investment in Indonesia.

1. Rationale for Private Investment in Infrastructure Development. 1.1. Rationale of the Government of Indonesia. At the occasion of the 2005 Infrastructure Summit, the Government presented a number of reasons for pushing infrastructure development with the help of private investors :

• Under-serviced needs and demands. Statistics show Indonesia to score markedly lower in service provisions compared to other emerging economies, particularly those in East Asia. Table 2-1. summarises these benchmarks :

Table 2-1. Indonesia’s Service Provisions Compared (World Bank 2005a)

Sector Unit Indonesia Malaysia China Phillipines Tolls Roads km 562 1,127 4,735 168 Total Road Network Km/1000

people 1.7 2.9 1.1 2.6

Power (to households) % (pop.) 53 (85) 96 98 80 Telephone Lines % (pop.) 10 (18) 57 33 23 Improved Water % (pop.) 78 ? 75 86 Sanitation % (pop.) 55 ? 38 83

One should be careful, however, with accepting these statistics at face value. Espe-cially the electrification rate of Indonesia, which reflects official statistics of PLN, the State Electricity Company, does not tally with the Government Social-Economic Sur-veys (Susenas), which lists 85% of households as having access to PLN power (BPS 2003). Also the teledensity data are too low, undercounting rapid growth of mobile subscribers, of which Indonesia has now close to 30,000,000 (various company re-ports). At the end of this chapter, estimates of real demand will be looked into, as real demand is limited by spending power and thus always lower than needs. However, demand also depends on relative user efficiencies, such as several low-income fami-lies sharing one electricity meter or one telephone line. This behaviour increases real access to amenities compared to what simple statistics such as “lines (meters) per

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household” suggest. Especially in high-density areas, for instance in Java, such take-up efficiencies are not be discounted and imply that the willingness to pay (de-mand elasticity) for new connections is lower than what simple numbers would sug-gest. Only significant wealth increases among low-income families would increase demand for new fixed connections which have typically specific fixed costs.

• Supply gap due to under-investment since 1997. It is obvious that the economic crisis halted infrastructure spending almost completely. In 2002, Central Government spending on infrastructure, broadly defined (including housing and irrigation) and in US$, was one fifth of the spending in 1994, as Table 2-2 indicates : Table 2-2. Development Spending in Indonesia (World Bank 2005a)

1994 2002 2004* Government US$ bn (nominal) 7.8 1.6 2.2 % of budget 57% 28% 30% % of GDP (current) 3.9% (4.8%**) 0.9% (2.3%**) 1.0%

1994 2001 Private Sector US$ bn (nominal) 9.0 0.5 Public & Private US$ bn (nominal) 16.8 2.7

* approved budget; ** against GDP figures prior to re-basing

• Accelerating economic growth and employment. The present Cabinet is decided to provide both macro-economic acceleration and micro-economic improvements through infrastructure investment. Growth acceleration is to be achieved by again in-creasing the contribution to GDP of investment in general to 30%-levels. Major vehi-cles will be infrastructure provision and housing construction. Achieving 30%-levels of the investment contribution to GDP is also vital in order to bring unemployment rates down. The proclaimed target is to up infrastructure spending to 5% of GDP, as was the case in the mid 1990’s. This increase is on top of spending for Operations and Management (O&M) of existing infrastructure amenities. Achieving an increase of 5% of GDP would require a contribution of approximately US$ 15 bn per year to a constant GDP growing of 6.6% p.a. This equals to an output value (effective invest-ment value) of at least US$ 30 bn per year. Furthermore and as already acknowledged in the 2003 White Paper, the Government sees infrastructure as a key issue for improving the productive structure. World Bank figures suggest that the avoided costs and the increases in consumer surplus could amount to almost 5% of GDP, for the combined sectors of power, water, roads and telecoms. However, micro-economic reforms would then need to entail both construc-tion of new infrastructure and the increase of tariffs for most users in line with real costs. Only then would infrastructure contribute to making the productive structure of the economy more efficient. In short, if infrastructure investment can add, year-on-year until 2009, 4% to GDP and can deliver efficiencies of up to 5% of GDP, then there would be a clear-cut case of economic acceleration.

• Pushing private investment. First, Table 2-2 already indicated that private sector spending on infrastructure virtually collapsed by 2001. Figure 2-1 shows selected BKPM investment approvals from 1990 to 1997 for EU companies and for companies worldwide thereafter. The figures concern proxy sectors related to infrastructure, whereby the upshot in 2002-2003 in the transportation segment stands as an outlier – it concerns the sell-off of assets, for instance of carmakers, to foreign shareholders,


Guidebook page 29

as a result of debt-restructuring. The downtrend after 2000 is thus clear and this fact alone justifies a policy focus on private investment. Furthermore, the need for contin-ued budgetary and monetary stability is obvious, as was explained in the previous chapter. Finally, potential foreign capital and foreign investors have been targeted at the Summit, as domestic capital is considered insufficient and as local banks are still structurally weak.

The 2005 Summit rather highlighted expectations for foreign capital contributions compared to the need for structural improvements for public-private partnership in infrastructure in-vestment, notwithstanding the fact that the run-up workshops held in August and December 2004 had emphasised structural reforms, i.e. deregulation, liberalisation and financial risk management. It is not clear whether there has been a change of emphasis on behalf of the new Government. Statements from sectoral Ministries and popular suspicions against both the Vice-President and the Coordinating Minister for the Economy, who are said to favour national business interests, would lead to conclusions that local companies are favoured. But the public statements from these key politicians merely ask for a level playing field for local companies. Moreover, policy documents from the Ministry of Finance and from Bap-penas, such as the Infrastructure Roadmap (2005) indicate that structural reforms remain high on the agenda. The fact that the Summit coincided which parallel funding appeals at the CGI meeting of 19-20 January and the international donor conference for the Tsunami response held in Jakarta may have lead to an over-emphasis on fund-raising concerns rather of reform agendas. The jury on still out on this issue and the proof will be in the pudding. 1.2. Rationale of Public Private Partnership in Infrastructure Investment. Private sector participation in general allows to mobilise fresh capital and to free up public budget resources towards other and more targeted uses. Furthermore, international compa-nies can deliver a breath of technological expertise as well as first-rate management know-how which can directly benefit end-consumers of public infrastructure. By employing the best companies directly to provide infrastructure, it is in principle possible to lessen the transaction costs between producers and consumers to the benefit of consumers. Competi-tion between service providers also allows the market to work out effective prices in relation to acceptable services. Finally, financial investors benefit from competition to work out the risk-return profiles of categories of projects and of project locations. All in all, private sector

All Foreign Investment Approvals by Proxy Sector (and estim ates for EU)

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1997

1998

1999

2000

2001

2002

2003

2004

(US$

bn)

Transport,Storage &Communication

Construction

Electricity, Gas& Water Supply

Foreign Investment Approvals by Proxy Sector from 14 EU Countries

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1990

1991

1992

1993

1994

1995

1996

1997

(US$

bn)

Figure 2-1. (BKPM)

EU – Asia-Invest


participation in infrastructure development should benefit both the productive structure of a country and the users-consumers of the amenities. The residual concerns for government intervention are then to provide in public service obligations, that is infrastructure provision not catered to by the market, and to set up institutional regulatory framework in order to guarantee effective competition and fair pricing to the benefit of consumers. This is, in a nut-shell, the theory of private-sector participation in the provision of public amenities.

The reality is of course that when markets are immature, also competition will be but imma-ture. No government endorsed regulator can change such a market condition overnight. Nonetheless, if supply and pricing are inefficient and unfair, then the regulator, and by exten-sion, governments are blamed to be half-hearted about private participation in public ser-vices, even though the root problems are in the immature market conditions. It is thus not surprising that the recent experiences with public-private partnership in emerging economies have been a bit of a roller coaster.

During the 1990’s, the private sector became increasingly involved in the provision of public infrastructure. In Latin America, the dominant mode was through privatisations. In developing Asia, the preference was for build-operate-transfer or build-operate-own concessions. Worldwide, over US$ 900 bn has been invested up to date in about 2500 private infrastruc-ture projects. From the years 1997 to 2001 about 50 projects were cancelled, representing a lost value of about US$ 25 bn. These cancellations have been most prominent in the news, but are small in relative and cumulative value. Indeed, as Figure 2-2 shows, for every few disasters, there have been many good experiences. Moreover, the boom-and-bust curve does not exclude the possibility of a first wave or a first trial with projects with happened to be low-hanging fruit. The lessons-learned for future PPI, as listed by the World Bank (Baietti 2001), are indeed multiple and still in full digestion :

• Policy Lessons. o The need for further deep reforms in relation to competition, financial disci-

pline; this includes provisions for accountability, transparency and for checks and balances with regard to corporate governance;

o Further development of the modalities of private participation so as to clarify risk-return expectations; this needs building on sector-specific experiences and it requires finding balances between the respective needs for economies of scale in privately managed networks, widely upheld standard procedures and adequate decentralised oversight; and

o Further development of the modalities of private participation with regard to the separate roles and functions for private development management, private operational management and private financing.

• Lessons for Investors. o The need to close the financing gap, brought about by the sudden collapse of

confidence in PPI around 1998, and to re-open diverse funding channels; o The need to set up alternative cost-sharing modalities, especially in the initial

stages of project development; o The need to bring in again credit insurers into the financing market; o The need to mix local and foreign financing adequately; and o The need to develop local credit insurance for sub-national government risks.

While the hurdles look impressive, investor confidence towards private participation in infra-structure development is growing again, as Table 2-3 shows. Especially East Asian firms are eager to take up again the challenge. This bodes well for the future, in the sense that multi-ple initiatives, especially in the Asian region as a whole, will refresh experiences and poten-tially re-institute public and investor confidence.


Guidebook page 31

Table 2-3. Firm Expectations on Future Stakes in Infrastructure Investment. (Baird 2005, from 2004 World Bank-JIBC-ADB Survey)

Global Firms East Asian Firms Increase stakes 67% 88% Sustain stakes 24% 8% Decrease stakes 10% 4%

Text Box 2-1. The ups and down of PPI (Private Participation in Infrastructure). Figure 2-2 shows some salient facts on the PPI experience worldwide.

• PPI peaked in 1997 and by 2003 fell back to 33% of its historical peak. This is true worldwide and for the Asian region.

• The decline of PPI has been more outspoken in Asia compared to other regions. PPI in Asia fell back to 28% of its peak level, while PPI in other regions only by to 43%. Nonetheless, PPI in Asia fell immediately back to a base level of between US$ 10 bn and US$ 15 per year. PPI elsewhere had not stopped falling back in 2003.

• Toll roads in Mexico are the largest single package of cancellations, in 1997. But the cancellations in Asia, albeit only totalling US$ 9 bn, have been a more recent and a more pro-tracted process.

The numbers for Figure 2-2 are to interpreted with care. The World Bank lists 6 cancellations for Indonesia in 1998, totalling US$ 2.3 bn and thus excludes a number of projects such as power plants which were then cancelled and now revived, e.g. Tanjung Jati C. Nevertheless, the figure shows well that private investment in infrastructure in Asia, and not only in Indonesia, is not yet back to old strengths.

The reasons for the strong decline of PPI in Asia are various. First, the crisis cut down real (dollar-denominated) spending power. Secondly, PPI projects in Asia were greenfield projects and had no positive cash-flow allowing owners and operators to give a second thought to the changed market environment. Latin American privatisations offered such a time frame, making many international operators sticking to their in-vestments. But, in the end, interest here went also south. Thirdly, government bureaucracies and state-owned enterprises saw the fall-back as a vindication that the market could not overcome shocks or even deliver in general. Fourth, regulating institutions had no time to develop the necessary skills to manage adverse condi-tions. They often proved themselves de facto receptive to political intervention. Fifth, many market environ-ments were in fact still immature when privatisation started and, with investment lagging, remained immature longer than expected. And finally, international and high-quality producers-suppliers in several infrastructure segments, such as power, telecoms, water and EPC provision for civil works effectively reacted on all these adversities through M&A’s or just exited, making the market increasingly oligopolistic. With less but larger suppliers around, the likelihood for competition decreased. Not surprisingly, a perception, true or not, emerged in developing countries that the prospect of paying less transaction costs as a result of private par-ticipation had been replaced with the likelihood of paying increasing agency costs for the technology and the finance access controlled by larger companies. Of course, privatisation debacles such as Railtrack in Britain and Yukos in Russia have galvanised the public perception that the promises of better service delivery through private-sector ownership and management of public amenities are in fact empty promises and that in reality mismanagement and asset-milking prevail.

Private Participation in Infrastructure Projects 1990-2003

-15

0

15

30

45

60

75

90

105

120

135

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

(con

stan

t US$

bn)

PPI-WorldwidePPI in AsiaCancelled PPI-WorldwideCancelled PPI in Asia

Figure 2-2. (Harris 2003; Baird 2005; World Bank PPI data)

EU – Asia-Invest


2. Rationale of The Government Infrastructure Policies. 2.1. Background of the Summit Appeal for Private Investment. Indonesian Government agencies have been trying since 2000 to revive infrastructure in-vestment. The IMF-funded austerity programme of 1997-1998 had obliged the Indonesian Government first to put on hold and then cancel twelve large infrastructure programmes, in-cluding large power generation and toll road projects. Two years later, pre-crisis estimations by Bappenas for infrastructure needs in the range of US$ 150 bn were put back on the long-term agenda and the expectation was revived for the private sector to finance 70% to 80% of this amount (Jakarta Post, 23 March 2000). Bombings of the Jakarta Stock Exchange (2000) and in Bali (2002) and the demotion of a President Abdurachman Wahid were but some of the many reasons putting these intentions again on ice for a few years.

The Infrastructure Summit of January 2005 revived the agenda. The Coordinating Ministry for Economic Affairs presented the Infrastructure Investment Demand and Source of Funds for 2005-2009 as shown in Figure 2-3. The old plans, the old numbers and to a good extent the old projects were put again on the table.

Figure 2-3. (Coordinating Ministry for Economic Affairs 2005)

Infrastructure Demand 2005-2009 Proposed Source of Funds US$ 4 bn Aceh reconstruction demand (World Bank 2005)

US$ 25 bn National State Budget

US$ 30 bn Domestic Funding Sources (incl. National Banks)

US$ 10 bn Multilateral and Bilateral Donors US$

22.5 bn Private Sector – Batch 1 (“91 Projects”)

with 36 priority projects for 2005 tendering worth US$ 6.5 bn

US$ 145 bn

US$ 90 bn

US$ 80 bn

US$ 57.5 bn

Private Sector – Next Batch

2.2. The Infrastructure Agenda of the New Cabinet. The incoming Government assured to make infrastructure investment a key policy goal. It proclaimed a 100-day programme, with following objectives in relation to infrastructure de-velopment (Infrastruktur 2004) :

• Implement basic policy changes to enhance Public-Private-Participation for infrastruc-ture development and funding, through a concerted revision of 14 laws and regula-tions identified as bottlenecks;

• Build upon the 2000-2004 development plans, as for instance outlined in the White Paper, and accelerate tender procedures;

• Revive and strengthen the Inter-Ministerial Committee for Infrastructure Development Acceleration Policies (“KKPPI”);

• Establish a national public-private sector working group;

• Establish a more detailed agenda of priorities and commitments for Mid-Term Devel-opment within 3 months.


Guidebook page 33

During the Summit, the Government also expressed its willingness in principle to look again into possible government guarantees, albeit not in the form of new sovereign blanket guaran-tees.

At the time of writing this report, there has been merely fragmentary progress on the above issues. Admittedly, Central Government agencies have been working around the clock on responding to the Tsunami impact in Aceh, where the administrations of the Province and of the capital city Banda Aceh had been practically wiped out. The Inter-Ministerial Committee announced that most regulations are in their final drafting stages, although newspapers com-mentators strongly doubt such progress. The reform of the Committee has also not yet been achieved.

It should also be noted that the administration did not propose a new central Authority to carry out tender and contract tasks in a streamlined, one-stop fashion. Line ministries re-main fully responsible for their respective sectors and have indeed been putting out new ten-

Text Box 2-2. The Infrastructure Roadmap of Bappenas. The State Ministry of National Development Planning, Bappenas, published the Infrastructure Roadmap which gives details on intended regulatory and policy changes. These are summarised in Table 2-4.

Table 2-4. (Bappenas2005)

Guarantee Framework for re-ducing uncertainty.

Entry policies reducing regula-tory obstacles and facilitating fair competition.

Reliability in procedures and institutional frameworks for price determination.

Offer policy certainty, guaran-tee a stable macro-economic environment and achieve a de-creased country risk, rather than negotiating short-term blanket comfort letters to cover invest-ment risk

Ensure predictability in rules and policies, including with re-gard to tariffs and market ar-rangements

Introduce selective risk sharing for essential investments, through selective subsidies, in-centives, public-private land sharing, etc.

Introduce government endorsed enforceable contract formats

Strengthen the rule of law, im-prove on good governance and combat corruption

Strengthen inter-ministerial coordination in order to provide overall fair standards and to share understanding of individ-ual sector risks

Strengthen inter-agency coop-eration and clarify individual authorities of agencies in order to smoothen policy formulation and implementation

Unbundle service delivery into manageable components and liberalise access to infrastruc-ture provision

Build on recently approved laws allowing the gradual intro-duction of competition (Tele-communications Law of 1999; Oil and Gas Law of 2002; Road Law of 2004; and an upcoming re-edited Electricity Law re-placing the one nullified by the Supreme Court)

Introduce fair competition for entry and for price determina-tion, through deregulation, BOT formats and concession / dele-gated management models

Simplify procedures for tariff setting, by rationalising and de-politicising price-setting proc-esses

Promote comprehensive plans to achieve effective cost-recovery

Establish regulatory bodies overseeing fair processes of tar-iff determination

Additional policies announced by Bappenas are the establishment of an Infrastructure Development Fund and a public-private sector stakeholder forum (“Consolidate Indonesia Infrastructure Forum”). Finally, the Infra-structure Summit ended with a Government pledge to hold a follow-up conference by November 2005, in order to measure progress and to announce new initiatives.

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der announcements. In absence of solid progress on any of above policy objectives, the Co-ordinating Ministry for the Economy has put out simple directives in order to keep the upcom-ing tender processes minimally transparent.

Out of the departments has recently emerged, in a matter-of-fact way and most often due to earlier on-going programming, a priority list of 15 first-stage and 21 second-stage projects, worth US$ 6.5 bn. Tender processes have started in February 2005 and would continue in pack-ages throughout most of the year. Figure 2-3 shows the different pro-ject sectors which are targeted. Ta-ble 2-5, on next page, shows the full project list, which contains two newly announced projects with a combined value of approximately US$ 800 mio.

91 Infrastructure Projects (phasing)

-

2.0

4.0

6.0

8.0

10.0

12.0G

as

Pow

er

Toll

Road

s

Por

ts

Wat

erS

uppl

y

Tele

-co

ms

(US$

bn)

Rest of Batch 1 ("US$ 22.5") Priority 2Priority 1

Figure 2-3. (KKPPI 2005)

Text Box 2-3. Tender Information. The present status of the tender procedures can be checked on the website of the PPKKI, the Committee on Policy for the Acceleration of Infrastructure Development. The status of the priority tenders and the approxi-mate calendar schedule of respective priority tenders are accessible, in English, on :

• www.kkppi.go.id/projlistfeb2005.php?pgstate=Y&enid=&langsel=I&subid=&secid=

• www.kkppi.go.id/toCD/image/tendersched.jpg The status report on the first website contains also contact addresses of the executing agencies.

The general website of PPKKI, in English, is :

• www.kkppi.go.id/index.php?pgstate=Y&enid=&langsel=E&subid=&secid=

The first weblink above indicates that the project list was not updated since February 2005, when the priority projects were announced.


Guidebook page 35

No Project Sector Priority 1 Priority 2 Rest Batch 1

1 Duri - Dumai - Medan Phase I Gas 393 2 Duri - Dumai - Medan Phase II Gas 225

2b Semarang-Cirebon-Tuban transmission Oil 81 3 East Kalimantan - Central Java Gas 1,476 4 East Java - West Java Gas 348 190 5 Kepodang - Tambak Lorok Gas 105 6 Sengkang - Makasar Gas 110 7 PLTU Tanjung Jati A Power 1,311 8 PLTU Serang Power 500 9 PLTU Tanjung Jati C Power 1,311

10 PLTGU Pasuruan Power 556 11 PLTU Cilegon Power 444 12 PLTU Paiton 3 - 4 Power 889 13 PLTU Sibolga Power 91 14 PLTU Amurang Power 109 15 West Java LNG Terminal (PLN) Gas for Power 251 16 Sumatra - Jawa Interconnection Power 217 17 PLTU Parit Baru Power 109 18 Mine mouth PLTU Kalsel Power 110 19 Ciranjang - Padalarang Toll Roads 199 20 Bekasi - Cawang - Kampung Melayu Toll Roads 396 21 Waru - Wonokromo - Tj Perak Toll Roads 340 22 Waru - Tj Perak Stage 1 (Waru - Juanda) Toll Roads 86 23 Gempol - Pandaan Toll Roads 735 24 Jakarta Outer RR W1 Toll Roads 89 25 Ciawi-Sukabumi Toll Roads 420 26 Cikampek-Cirebon Toll Roads 812 27 Surabaya-Mojokerto Toll Roads 197 28 Kanci-Pejagan Toll Roads 148 29 Pejagan-Pemalang Toll Roads 275 30 Pemalang-Batang Toll Roads 164 31 Batang-Semarang Toll Roads 355 32 Kertosono-Mojokerto Toll Roads 181 33 Pasuruan-Probolinggo Toll Roads 192 34 Pandaan-Malang Toll Roads 172 35 Gempol-Pasuruan Toll Roads 167 36 Semarang-Solo Toll Roads 427

36b Yogyakarta-Bawean Toll Roads 544 37 Bogor Ring Road Toll Roads 154 38 Medan-Binjai Toll Roads 107 39 Depok-Antasari Toll Roads 237 40 Cinere-Jagorawi Toll Roads 167 41 Cikarang-Tanjung Priok Toll Roads 372 42 Cileunyi-Sumedang-Dawuan Toll Roads 413 43 Makasar Seksi IV Toll Roads 49 44 Cilegon-Bojanegara Toll Roads 44 45 Pasir Koja-Soreang Toll Roads 56 46 Sukabumi-Ciranjang Toll Roads 165 47 Semarang-Demak Toll Roads 93 48 Jogja-Solo Toll Roads 219 49 Solo-Mantingan Toll Roads 317 50 Mantingan-Ngawi Toll Roads 122 51 Ngawi-Kertosono Toll Roads 403 52 Palembang-Indralaya Toll Roads 55 53 SS Waru-Tj. Perak II Toll Roads 83 54 Probolinggo-Banyuwangi Toll Roads 676 55 Jakarta Outer RR-2 Toll Roads 983 56 Jakarta Outer RR W2 North Toll Roads - 57 Manggarai - Soekarno Hatta Railway Ports 77 558 Bojonegoro Seaport Ports 212 59 East Ancol Seaport Ports 487 60 Kali Lamong Surabaya Seaport Ports 1,047 61 Balikpapan Seaport Ports 72 62 Kualanamu Medan Airport (new) Ports 250 63 Soekarno Hatta Airport Terminal (extension) Ports 178 64 Cargo Processing Area and Industrial Bonded Zone Ports 48 65 Hasanuddin Makassar Airport (extension) Ports 94 66 Lombok Airport (new) Ports 139 67 Uprating WTP Kali Garang Semarang *) Water Supply 5 68 Cirebon Bulk & Water Supply *) Water Supply 5 69 Jatinangor Water Supply (Kabupaten Sumedang) Water Supply 4 70 Cikarang Water Supply (Kabupaten Bekasi) Water Supply 8

Est. Investment (million US$)

71 Pondok Gede Water Supply (Kota Bekasi) Water Supply 9 72 Sepatan Water Supply (Kabupaten Tangerang) Water Supply 12 73 Ciparens Tangerang Water Supply Water Supply 50 74 Water Supply Tangerang City Water Supply 25 75 Cileduk Water Supply (Tangerang City) Water Supply 13 76 Tanjung Pinang Water Supply Water Supply 5 77 Dumai Water Supply Water Supply 4 78 Duri Water Supply (Kabupaten Bengkalis) Water Supply 15 79 Manado Bulk Treated Water Supply *) Water Supply 5 80 Samarinda Bulk Treated Water Supply Water Supply 5 81 Banjarmasin Bulk Treated Water Supply *) Water Supply 5 82 Umbulan Bulk Water Supply Water Supply 90 83 Karang Pilang IV Bulk Treated Water Supply *) Water Supply 25 84 Menganti Water Supply (Kabupaten Gresik) Water Supply 4 85 Greater Yogyakarta & Magelang Bulk Water Supply Water Supply 45 86 Surakarta-Sukoharjo Bulk Treated Water Supply Water Supply 5 87 Tegal Water Supply Water Supply 3 88 Bulk Treated WS to Regency & City of Semarang Water Supply 15 89 East Semarang New Water Supply Water Supply 15 90 Semarang Raw Water Supply Water Supply 15 91 B-1 Palapa O2 Ring (Backbone Network Development) Telecommunications 900

2,627 3,830 16,877 Priority 1 Priority 2 Rest of Batch

Gas 429 - 2,499 Power 444 - 5,453 Toll Roads 1,401 3,775 5,438 Ports 303 - 2,306 Water Supply 50 55 281 Tele- coms - - 900

Table 2-5. First-Batch and Priority Projects. (KKPPI 2005)

EU – Asia-Invest


2.3. The $ 145 bn Question : Matching Infrastructure and Financing Needs. It was earlier noted that the Government’s estimation for investment needs and its dollar fig-ure appeal for private sector involvement has remained largely unchanged in the past seven years. Also the basic reasoning appears the same, that is “to sustain economic growth of six percent” (Jakarta Post, 23 March 2000). Real infrastructure needs remain of course real needs and a seven year investment hiatus should only add demand. However, there are few consistent sources justifying the demand for US$ 145 bn investments in the next five years, although an approximate count can be made.

A recent Bappenas study provides a first but incomplete picture. It puts up an estimate of infrastructure needs amounting US$ 72 bn for the period 2005-2009. This is shown in Table 2-6.

Table 2-6. Indonesia’s primary infrastructure needs. (Bappenas ca. 2004)

Sector Quantity Cost (US$ bn) Road construction (national, provincial, local) 93,700 km 20.8 Power Generation 21,900 MW 28.4 Fixed Phone Line Capacity Extension 11,000,000 fixed lines 11.0 Mobile Phone Line Capacity Extension 18,700,000 subscribers 7.5 Drinker Water Supply 30,500,000 people 2.2 Sanitation / Sewerage 46,900,000 people 2.2 Subtotal 72.1

Other infrastructure requirements making up the total budget envelope of US$ 145 bn can then be approximated as follows :

• Sea ports and airports; in absence of data, Riau Province’s requirements of US$ 700 mio for 2005-2009 can be extrapolated to a national budget of between US$ 20 bn and US$ 30 bn;

• Housing, with a backlog of 6 million units and new year-on-year demand of 4 million units, would require funding in the range US$ 30 bn for the period 2005-2009 (assum-ing that the backlog is worked away during these years);

• Other infrastructure works, such as dams, irrigation, sea bridges,… would then haven then to be covered with a nominal budget of approximately US$ 20 bn.

Not all of these needs will obviously be financed by private investment and many of the above obligations are basic public service obligations, e.g. local roads and small ports. As such, a rough assumption can made in order to make sense of the budget envelope of Fig-ure 2-3. The key issue is to differentiate key stakeholder group each involved in infrastructure development : the Government, private households and the private sector. Simply put, the Government is to build local roads, remote power, water for the poor, small ports, housing for the poor and irrigation. Households initiate most housing development. Private-sector in-vestment are to take on toll roads, power IPP’s, most telecoms investment, water treatment, large port development and apartment development. Table 2-7 lays out the estimates on who would be taking charge of which kind of infrastructure :


Guidebook page 37

Table 2-7. Funding of Indonesia’s primary infrastructure needs. (own estimations)

US$ bn Roads Power Telecoms

Water & Sanitation Ports Housing Others Totals

Government 10 7 2 4 12 5 18 58 Households - 1 - - - 20 - 21 Private Invest. 11 20 17 1 10 5 2 66 Totals 21 28 19 5 22 30 20 145 The totals in this table are derived from Table 2-6 and the additional estimated budgets in the bullets below the table. The differentiations as to whom is willing to build what is simply approximate and relates to the specifics of each sector. For instance, most telecoms investment are private-sector investments nowadays, most water supply investment still public. Large ports and airports may attract private investors and opera-tors, but the majority of ports are small and publicly funded, even though in practice this may be done by Government-owned enterprises. Most housing is developed by households, as most housing in Indonesia is either owner-occupied or developed for the private rental market.

Next, a balance between investment needs and sources of funding can be extrapolated. The main limiting factors in this balance are (1) the Government’s funding limits (current budget plus new debt), estimated in the same Bappenas study at US$ 40 bn, (2) the likely limits on FDI and domestic capital investment, here optimistically assumed to be U$ 45 bn or two thirds of their 1995-1996 peak and (3) a limited mobilisation of funds of local banks and funds, which have assets now amounting to approximately US$ 140 bn. Table 2-8 shows how a variety of funds sources can then be matched with the funding needs of respectively the Government, households and private investors.

Table 2-8. Fund sources for Indonesia’s infrastructure needs. (own estimations)

US$ bn Realloc. Fuel

Subsidy

Other State

Budget Donor Loans

DomesticFunds

DomesticBanks

Domestic Private

Investm.

Foreign Private

Investm. Government 15 5 10 2 - 4 4 40 Households - - - 3 13 4 1 21 Private Investm. - - - 2 10 32* 44 Totals 20 10 30 45 105

The overall assumptions are again a rough estimation. Funding totals are first of all derived from the Government figures as contained in Figure 2-3. However, increasing oil prices is limiting the Government budgets, even after the March fuel price increases. Available Government funds are thus assumed to be rather US$ 20 bn compared to the US$ 25 bn as stated in Figure 2-3. Domestic funds are assumed to channel 5% of their assets into infrastructure investments. These funds can however bor-row to all market segments, especially to households if they are allowed to take up early their investment in their own provident funds. The balance of domestic funds is therefore to be delivered by banks, mostly in the form of mortgage loans to households and project funds to private investors. Mortgage lending will thereby prevail over project funding, as the lending risks are less. Finally, private investment (foreign and local) will be mainly direct project investment. Considering Indonesia’s open fi-nance markets and the intense financial links to Singapore and Hong Kong, there is no meaningful difference between local and foreign sources of funds when it concerns private investment. However, private funds can also be absorbed in government infrastructure bonds (if they materialise). Finally, households are also putting equity in home purchases, for instance as their own share on top of mortgage loans.

The above estimations indicate a number of issues to bear in mind :

• a reasonable starting point for further considerations is to assume that both the Gov-ernment and the Private Sector will only be able to fulfil about two-thirds of infrastruc-ture needs. The Government can finance US$ 40 bn but not US$ 58 bn as Table 2-7 indicates. Likewise, the private-sector is likely to mobilise US$ 44 bn and not US$ 66 bn;

EU – Asia-Invest


• apart from fixing the investment climate in general and setting adequate infrastructure institutions, the Government will be confronted by shortages of funds and will thus need to make political choices on what to do itself and in which direction to stimulate the private sector;

• the “first batch” of 91 projects valued at US$ 22.5 bn may already represent about 50% of all upcoming investment opportunities in the medium term, due to funding limitations;

• foreign and domestic capital investment are by no means to flow exclusively into physical private-sector investment projects and may well target safer (but not neces-sarily more efficient) government infrastructure spending. Government bonds for in-frastructure development could become more in favour, if issued, than direct private-sector investment; and

• domestic bank funding and non-bank funding are more likely to flow towards housing and into mortgages for households than into more risky private sector investments; sufficient liquidity by means of a secondary mortgage market is moreover more easy to achieve compared to liquid infrastructure investments, as infrastructure invest-ments are fewer.

In short, the persistent flight to safety which has characterized the Indonesian financial envi-ronment in the past few years, will not be that easily reversed into a run towards apparently lower risk, because long-term, private infrastructure investments. Such a reversal would only start to happen if the risks of these investments are lower as a result of solid expectations that they deliver steady and guaranteed returns – a condition obviously dependent on more favourable investment conditions compared to what Indonesia can offer today.

Furthermore, there is potent vicious circle hidden in this all : private capital may eschew pri-vate-sector initiatives as the effectiveness of these initiatives is often undermined as a result of insufficient concurrent public-sector investments. To put this simple : privately developed toll roads become risky if there is no certainty that the Government will build the feeder roads. The better option for private-sector funding would then be to provide restricted financ-ing for the more predictable public infrastructure programmes and only to invest directly in smaller and self-contained private projects, such as airport terminals. The end-result would then be more funds for the Government but no real progress on the policy goal of the im-provement of the productive structure of the economy.

Finally, further practical short-term to medium-term impediments are likely to be encountered in the lack of preparedness of the national banking system, which has at present few ade-quate swap and hedge facilities. The restrictive bank lending policies of Bank Indonesia is likely to limit foreign private investment to simple but risky direct investment for the first few years to come. For this simple reason alone it may be very difficult to bring private invest-ment levels close to US$ 32 bn as was suggested in Table 2-8.


Guidebook page 39

3. Micro-Economic Impact of the Government Policies. 3.1. A Sub-National Supply and Demand Analysis. The projects proposed at the Infrastructure Summit 2005 are predominantly to be built on Java. Figure 2-4 shows the respective locations, differentiated by three regions : first, Greater Jakarta (“Jabotabek++”, which includes DKI Jakarta, West Java Province and Ban-ten Province), “Other Java” (which includes in this analysis Bali) and finally all other prov-inces (“Other Indonesia”).

The dominance of the Jabotabek++ and Other Java areas has important consequences in terms of overall development policy. By pushing investment to the order of US$ 20 bn into the economy of Java, a significant economic rebound can be achieved here. This should bring clear benefits, for instance infrastructure efficiencies and savings for the manufacturing sector.

Yet , the low share for Other Indonesia implies a political risk. The benefits for Java must therefore be beyond doubt. A number of valid arguments could be contemplated in order to justify the predominance of Java : (1) perhaps Java historically dominated infrastructure spending ; (2) per capita GDP may be stronger in Java compared to other areas; (3) spend-ing power may be higher on Java; (4) Java may require infrastructure supporting the export sector; (5) Java’s transport infrastructure needs urgent investments; and (6) Java needs more power and water. These arguments will be briefly evaluated here. Argument (1) deals with supply issues, while arguments (2) until (6) basically represent a demand analysis.

Java historically dominates infrastructure spending ? Figure 2-5 summarises an analysis of construction spending in various infrastructure sectors, whether financed by the government, the private sector or households (except for self-building). The figures are derived from output statistics of the contracting sector and are ob-viously indicative and not exhaustive. Nonetheless, they give a good representation of what has been spent since 1995 on infrastructure. The graph also contains a projection. On top of output projections based on present spending, increasing at 9% per year, the value of the 91 projects has been added. All numbers are split up in function of the past and future location of the projects.

Figure 2-5 highlights a number of important issues. First, Other Indonesia had a much larger share in infrastructure spending prior to the crisis. Secondly, infrastructure spending appears to have started declining prior to the crisis – an issue that may point to declining returns on new investments. Thirdly, during the crisis, infrastructure spending collapsed more in Java compared to areas outside Java. And fourth, the 91 projects would increase infrastructure

-2,0004,0006,0008,000

10,00012,000

Jabotabek++ Other Java Other Indonesia

waterports (air/sea)roadspowergastelecoms

Locations of 91 “Summit” Projects

US$

mio

Figure 2-4.

EU – Asia-Invest


spending almost to 1995 levels. Although spending as a proportion of GDP would still be half in 2010 compared to what it had been in 1995, it is highly questionable whether such an ex-pansion of spending can be organisationally and logistically achieved. For instance, how easy will land expropriation be ? Or can the cement sector and other material manufacturers supply enough raw materials ? In short, Figure 2-5 shows that building the 91 projects, which were presented as a first batch only, will be substantial in terms of their supply-side impact, moreover so as many of these projects are to be concentrated in Java.

The collection of data in Figure 2-6 give some more indirect evidence. The various FDI and domestic investment statistics show that the almost exclusive focus of the 91 projects on Java has never been common. Certain countries may have shown specific FDI profiles (spe-cific locations, specific sectors), but overall there has never been an exclusive concentration of investment in Java.

In short, the said predominance raises questions. It could be argued that the clear lack of in-vestments on Java during the crisis years justifies a correction by means of an explicit policy. Yet, the supply bottlenecks are worrisome. Moreover, there is no indication yet which justifies that this said policy correction should be achieved through private-sector investment.

Infrastructure Realisation and Projected Values from 1995 to 2003 (inflation - adjusted (2004=100))

0

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as percentageof GDP

Figure 2-5. (BPS 2000, 2000a, 2001, 2003, 2004; figures concern public and private investment)

Road sector : 1995-1996 figures are much higher than government figures (see World Bank 2005a, p.192). This is probably due to private sector building (real estate); e.g. the 1995 statistics list almost Rp 10 trillion, while government figures quote Rp 4 trillion. For the road sector, the statistics are thus more comprehensive. Power Sector : the BPS statistics list only US$ 3 trillion list, which is not in line with the 5000 MW that came on line in the period. In this sector, the statistics may thus give an underestimation. Basis for the 2005-2010 projections : the assumed GDP y.o.y. increase 2005-2010 : 6.6%; a 9% increase p.a. is assumed for routine development spending on infrastructure. All deflator calculations are done based on the old GDP baseline of BPS. The slow-down in infrastructure spending in 1996-1997 is perhaps surprising, but could reflect a saturation in actual spending and actual investment reached prior to the crisis. There was indeed evidence that the inflow of funds could not be matched any longer with financially and technically viable projects. For instance, hurdles related to land acquisition issues had become notorious and widespread in the years 1996-1997 and required partnering with e.g. the presidential family to be overcome.


Guidebook page 41

All Foreign Investment Approvals by Location

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5.0

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Foreign Investment Approvals by Location - 14 EU Countries

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90

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Figure 2-6. (derived from BKPM data)

Foreign Investment Approvals (1990-1997)by Proxy Sector - 14 EU Countries

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Foreign Investment Approvals (1990-1997) by Location - 14 EU Countries

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All Foreign Investment Approvals andAll EU Investment Approvals by Country

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33

Domestic Investment Approvals by Proxy Sector (Rp 10 bn = approx. US$ 1 bn)

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Jakarta, WestJava, Banten

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Is Per Capita GPD in Java stronger compared to areas outside Java ? Figure 2-7 summarises regional GDP’s and GDP per capita levels. Overall GDP growth has been poorer in Other Java compared to Jabotabek++ and Other Indone-sia. Furthermore, per capita GDP is 66% higher in Jabotabek++ compared to other areas, includ-ing other Java. Greater Jakarta and the surrounding cities are in-deed the only real cluster econ-omy of any significant scale in Indonesia. Infrastructure invest-ment linking up Java with this in-tegrated cluster economy of Jabotabek may lead to the grad-ual expansion of shared micro-economic efficiencies now present only in Jabotabek++. Yet Other Java has a long way to go, both in absolute economic clout and in per capita spending prowess. This is further clarified in the next paragraphs.

Is spending power higher on Java ? Figure 2-8 (next page) gives indi-

cations on the buying power of households. Roughly speaking, the market for privately fi-nanced infrastructure may be limited to urban households with a sufficient elastic spending capacity towards additional non-food expenditures. The top graph shows the geographic spread of urban households and their spending prowess. It is evident that only Jabotabek++ has concentrated buying power, even though this buying power has limited excess capacity for spending on transportation and home services (water, sanitation, power and broadband services). The latter is evident from the lower graph in Figure 2-8. Yet only 10 mio house-holds in Jabotabek++ have incomes of more than Rp 1,200,000 (US$ 130) per month. An-other 10 mio households with similar spending capacities are spread out over Other Java and a third group of 10 mio households are spread out over Other Indonesia. In other words : infrastructure investment outside Jabotabek++ will be hard to finance commercially. The users are too thinly spread out and feasibility studies would typically have to rely on assump-tions of future concentrated spending power in Other Java and in urban centres in Other In-donesia.

Java requires infrastructure to support exports ? The on-going changes in the economic structure have been discussed briefly in Chapter 1. Figure 1-8 indicated that exports from Other Java decreased significantly in the past years. If therefore Other Java can gain in competitiveness by improving its harbours and road infra-structure, then the dominance of Java in the Government’s infrastructure programme may be

Per Capita GRDP at constant prices (without oil and gas) (1993=100)

0.0

0.5

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1999 2000 2001 2002 2003Rp

mio

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OtherIndonesia

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Figure 2-7. (BPS 2001a, 2003)


Guidebook page 43

fully justified. It should be noted, however, that the re-cent pressure on Java’s infra-structure is not caused by pressures from export, but by the volume of the existing in-ter-island trade, including trade on Java itself. To which extent these domestic trade flows can pay for an extensive infrastructure programme has not been clarified by the Gov-ernment.

Java’s transport infrastruc-ture needs urgent invest-ment. Car sales in Indonesia have shot up in recent years, creat-ing a straightforward problem of insufficient road capacity in function of the number of ve-hicles. Yet also here, regional differentiation needs to be considered. Figure 2-9 gives some primary indications that the increase of motor vehicles is most outspoken in Jabota-bek++. In Other Java, the increase of registrations is much more dominated by the segment of motorcycles. The construction of an elaborate toll road programme through-

out Java is thus not yet about accommodating huge numbers of new vehicles. This issue is only crucial in Jabotabek.

A World Bank (2005a) study confirms this outlook. Most four-lane road construction programmes in Indonesia, including the Trans-Java pro-gramme, is financially viable only starting 2015 and thus not today. Road betterment and upgrading programmes are however crucial. Figure 2-9 clarifies that this would benefit also large numbers of motorcycle users.

It is worthwhile to note that planners South Sulawesi are picking this lesson : they want

Urban Household Income per month (URBAN: approx. 100 mio people) (Rp/month)

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seho

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foodexpenditureother non-food

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Figure 2-8. (BPS 2004b and 2004b)

Number of registered vehicles (dots) and motorcycles (bars) 2000-2002

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ions

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Figure 2-9. (BPS 2003 and 2003c)

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to extent the toll road from Makassar to the airport by a two-lane toll road complemented by a toll tracks for motor cycles. Earlier, these concepts had been outlawed, as two-lane toll roads were outlawed on Java due to the many initial road accidents. These two-lane road were typically the first two lanes of a future four-lane toll road and had thus no median divider in-between the two initial lanes. As a result of their bad reputation, they were outlawed in Public Works regulations, making the four-lane toll road layout as the mandatory minimum option. Nonetheless, areas in Other Indonesia which seem now to be willing to experiment with intermediate options. Toll road development on Java, however, seems to be stuck with the options of either four lanes or none.

Java needs more water and power. There is no point in denying that water and energy are used in urban Java in environmentally and often economically unsustainable manners, while at the same time large numbers of low-income households are deprived from easy access to clean water. Yet this chapter al-ready pointed to suspicious statistics, for instance in relation to electrification. Overall, household surveys give a reasonable indication that the willingness to pay for water and power services is often much lower than the demographic needs in theory would suggest. Figure 2-10 highlights this discrepancy. The number of people having at least basic access to water (piped, pumped, or through protected wells) is highest on Java and much more problematic outside Java, where areas with difficult water resources conditions are much more common. With regard to access to power (measured here as having electrical lighting in the house), areas outside Java are even more clearly lagging behind. Again, the figures do not say that Java does not need more water and power, on the contrary. What is indicated is that the willingness to pay for water and power is not necessarily highest on Java, especially in areas where economic growth is slow.

Furthermore, there is a common assumption that Java has more non-residential demand for water and power. Yet also here, the willingness to pay is not always evident. An indication hereof is the sluggish demand for serviced industrial estate land in recent years. Industrial estates were indeed developed with the promise that high-quality services could be set off against higher than common user service charges. Yet already in the mid 1990’s and thus before the crash of 1997, it became obvious that industrial operations willing to pay for better services were finite. Many industrial estates are still left with stock of land developed in the mid 1990’s. In short, also industrial operations have shown less elastic demand for infrastruc-ture and services than what is often expected.

Access to Water - 2003

0%

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GeneratedElectricity

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Figure 2-10. (BPS 2004e)


Guidebook page 45

Above observations can be summarised as follows :

• With 90% of the Summit projects being concentrated on Java, the expectation of general micro-economic efficiencies need to be seen against specific risks.

• The locational risks of concentration are obvious. This risk is not just about physical “crowding” and the lack of spread-out options. A more important risk relates to the Government agenda to enhance regulatory efficiency : many of the proposed policies with regard to deregularisation (e.g. private investment in toll road development) and operational fast-tracking (e.g. overcoming land acquisition delays) will lead to national institutions and national regulations which are practically benefiting infrastructure in-vestment on Java only. Other regions may therefore want to delay changes, as they see no benefit in changing the status quo.

• Financial risks are not equal. Jabotabek++ is clearly the best market for infrastructure investments. Other Indonesia is the most difficult area and will often need subsidies for most infrastructure development. Yet infrastructure on Java outside Jabotabek poses a different challenge : while the rate of return should often be better compared to projects outside Java, pay-back may still require a long time. Projects in Other Java are thus more time-sensitive and should thus avoid execution delays as well as be guaranteed of policy stability during their pay-back period.

3.2. Sub-National Risk Environment for Infrastructure Investments. The above characterisation leads to three specific profiles of sub-national political risks for infrastructure investments :

• The lower risks related to infrastructure investments in Jabotabek++ could invite cherry-picking by State Owned Enterprises, as well as protectionist attitudes in favour of domestic companies.

• The time risks related to infrastructure investments in Other Java make these invest-ments very sensitive to policy changes. Good political leverage would thus be essen-tial for infrastructure investors and operators. This is a commodity which foreign investors usually have less of compared to local investors.

• The lack of commercial viability of many infrastructure projects outside Java will re-quire continued concessional financing from multilateral and bilateral sources. The interests of private-sector infrastructure investors will thus be linked to tied-aid poli-cies of donor-countries.

This risk profiling is of course only indicative. Niche clients, especially in the commodity-rich areas outside Java, could offer specific opportunities for commercial infrastructure invest-ment. But niche clients are fickle and the costs of continued business representation in order to access them is potentially high. Furthermore, the market structure will also evolve with the industry environment – which in the case of infrastructure investment is strongly defined by a limited number of producers and suppliers, whether State Owned Enterprises or multi-national groups. This supply structure is however strongly sector specific and will therefore be further highlighted in Chapter 4.

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Guidebook page 47

Chapter 3. The Legal And Regulatory Framework, and the Financial Framework for Private Participa-tion in the Provision of Infrastructure.

This chapter consists in two sections. The first one presents the overall policy, legal and insti-tutional framework that governs private investment in Indonesia, with a specific focus on in-frastructure. The second section addresses the different public-private partnership schemes and reviews the main sources of financing that are available for such schemes. It also de-scribes the main programmes designed by the European Commission to foster EU-Asia co-operation in trade and investment.

1. Legal and regulatory framework. 1.1. Overall framework. In his keynote speech at the Indonesian Infrastructure Summit, President Susilo Bambang Yudhoyono stated the following:

“To improve and increase the supply of infrastructure, we are developing a stable and clear policy framework where the private sector can engage in effective partnership with the gov-ernment, secure in the knowledge that the charges and tolls that generate income will be free of arbitrary political interference. And as we proceed to implement a number of infrastructure programs, my Government is committed to provide the private sector with a healthy environ-ment and firm project-by-project support as per tendered contracts, to implement supporting investments. Indeed, the most recent deregulations serve as clear examples of our determina-tion to attract, enable and safeguard private sector investment. The international and domestic private sectors are now encouraged to invest on almost equal terms in new companies and projects in all of the industry. For the medium-term, my Government is enacting programs to support greater private sector involvement through public-private partnership in infrastructure services and by removing all bureaucratic bottlenecks which currently inhibit private sector in-volvement.”

Since the 1990s, successive Indonesian governments have strived to promote the participa-tion of the private sector in the provision of infrastructure by creating an enabling policy, legal and regulatory framework. At the recent Infrastructure Summit, the present Government stated its policy do so again more effectively than in was done in the past years (see Text Box 3-1), notably on the following key issues for the infrastructure sector :

• Regulatory issues: to separate regulation from operations and to establish independ-ent regulatory bodies.

• Competition: to create competition between operators where there is scope for com-petition, or where there is a natural monopoly, create competition for the business.

• Tariff setting: indexation of tariffs and charges, based on cost recovery principle, should be provided for as part of the tender and contract process. Tariff adjustment to be based on contract, for legal certainty.

• Land procurement: Presidential Decree No 55/1993 on land acquisition will be re-vised to allow more efficient and timely land purchase procedures.

• Decentralisation laws: conflicting laws and regulations between the central govern-ment and sub-national governments will be revised.

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Further, the government announced an agenda of reforms in the laws and regulations of the different sectors, which are detailed under the sector profiles (Chapter 4).

As part of its reform agenda, the government listed 14 laws and regulations that would be issued in the near future. So far, the following 10 laws and regulations have been drafted:

1. Draft Government Regulation on Airport; 2. Draft Amendment to Government Regulation on Inland Water Transportation; 3. Draft Government Regulation on Air Transport; 4. Draft Government Regulation on Railways Infrastructures and Facilities; 5. Draft Law on Navigation; 6. Draft Law on Air Transport Liability; 7. Draft Law on Traffic and Road Transport; 8. Draft Law on Railways; 9. Draft Law on Aviation; 10. Draft Presidential Regulation on Land Procurement.

In addition, the following laws and regulations are being prepared:

1. Draft Law on Investment; 2. New Draft on Electricity; 3. Draft Revised Law on Oil and Gas; 4. Draft Government Regulations on the Establishment of Toll Road Regulatory Body;

Text Box 3-1. Reform measures in the post-Soeharto years. The previous government and the Parliament had already taken significant steps in several areas: a new tele-communications law had been enacted in 1999, paving the way for the introduction of competition in the sec-tor, and new laws had been passed in the oil and gas sector in 2001 and in the toll road sector in 2004.

The Government had also issued a new law on electricity, enacted by Parliament in 2002 (Law No. 20 of 2002), that allowed privatization and competition in the electricity supply industry. However this law was annulled by the Constitutional Court on the ground that electricity is deemed to be an area of production that is essential for the State as it is vital for the life of the people, and therefore it should be controlled by the State in accordance with Article 33 of the Constitution. The present Government is drafting a new law, the contents of which are not yet known. It will be important to see how it will reconcile the Constitutional Court’s ruling and the government’s objective to introduce competition in the power sector.

The first laws and regulations governing private participation in infrastructure projects were enacted in 1998. At the start of the 1998 economic crisis, a Presidential Decree (Kepres 7/1998) on Cooperation between the Government and Private Companies in the Development and or Management of Infrastructures was issued. This decree was followed by Decision of the State Minister of National Development Planning/Chairman of the National Development Planning Board (KEP-319/KET/10/1998) on Implementation of Cooperation be-tween the Government and Private Enterprises in the Construction and or Management of Infrastructures. These rules were intended to provide basic guidelines in a business area which had seen a number of projects being completed in the previous years in a legal vacuum.

The rules required that all projects proposed for private participation be subject to thorough technical, eco-nomic and financial studies. It also required that private participation solicited on a competitive basis. Deci-sion-making roles in the procurement process were accorded to a government’s Procurement Evaluation Team (TEP) for national project and to provincial governors for regional projects.

Following the crisis, a new Presidential Decree (Kepres 81/2001) revoked certain provisions under Presiden-tial Decree 7/1998 and stipulated, among others, the formation of a Committee for the Acceleration of Infra-structure Development Policy (KKPPI) that was tasked to recommend policies on the development of infrastructure projects and to amend Presidential Decree 7/1998. The possible extension of KKPPI’s role as a centralized body with decision making powers on projects in the infrastructure sector will also require change in the existing regulations. However progress has been delayed due to the proposed draft’s inconsistency with existing sector laws.


Guidebook page 49

5. Draft New Law on Maritime.

The effective implementation of this ambitious reform agenda will be a critical element of the overall action plan towards revitalising investment in infrastructure. It will entail not only the enactment of new laws but also the effective implementation of regulations.

1.2. Foreign direct investment in the infrastructure sector. The power, transportation, water and sanitation, and telecommunications sub-sectors of the infrastructure sector are open to foreign direct investment. Investment in these sub-sectors is also subject to the provisions of the Negative List and the IPU as described in the detailed information on foreign investment regulations below.

The fields of business that are open to foreign direct investment in the infrastructure sector, as set out in the IPU, are the following:

• Energy sector: Power Generation, transmission and distribution; Power support ser-vices; Oil and Gas.

• Transportation sector: Railways, special railways; harbours, airport transportation support services, toll roads.

• Telecommunications sector: Telecommunications networks; telecommunications services.

• Water and Sanitation sector: Development and operations of clear water, waste management, waste water management.

The Foreign Investment Law Foreign direct investment in Indonesia is governed by Law Number 1 of 1967 concerning Foreign Capital Investment, which was subsequently amended by Law Number 11 of 1970 as implemented by a number of regulations issued thereafter. The government institution in charge of matters that pertain to foreign equity investment is the Investment Coordinating Board (Badan Koordinasi Penanaman Modal or “BKPM”), which has been given comprehen-sive authority by virtue of a Presidential Decree.

The main features of the investment law are described hereunder. More detailed provisions are provided in Annex 1.

Sectors open to Foreign Direct Investment

The Foreign Investment Law stipulates the following:

• The Government determines the fields of business that are open to foreign direct in-vestment and sets forth special conditions on such investment.

• The Government has determined that certain business fields are closed to foreign di-rect investment.

• Those business fields that are vital to the State and essential to the livelihood of the people are completely closed to foreign investment, and cannot be undertaken by foreign investors without the participation of Indonesian businesses. These business fields are as follows: harbours; production, transmission and distribution of electric power for the public, shipping, telecommunications, aviations, drinking water, public railways, development of atomic energy; and mass media. Industries performing a vi-tal function in national defence such as the production of arms, ammunition, explo-sives, and war equipment are also absolutely closed to foreign direct investment.

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Based on the above caveats, the Indonesian Government has from time to time issued a list of the business fields which are either open or closed to foreign direct investment. The list is known as the ‘Negative List’ and is issued by way of a Presidential Decree. The most recent Negative List is that in Presidential Decree No. 96 of 2000 as amended by Presidential De-cree No. 118 of 2000.

In practical terms, and based on the recent liberalization in the investment sector, all busi-ness sectors are open to foreign direct investment, with the following exceptions and qualifi-cations:

• fields of business which are absolutely closed to foreign investment as listed in the Negative List (see Schedule 1 Annex 1);

• fields of activities that referred to as "strategic activities", which are significant for the State; the maximum foreign shareholding is 95% (these include, among others, pub-lic harbours, transmission and distribution of electric power for public use, telecom-munications, shipping, aviation, public drinking water, public railways nuclear power generation, etc.);

• fields of business open to foreign investment with the requirement of a joint venture with domestic capital (Indonesian shareholder(s)), (please see Schedule 1 Annex 2);

• fields of business open to foreign investment under certain conditions, as listed in the Negative List (please see Schedule 1 Annex 3).

Repatriation

One important feature of the Foreign Investment Law is the guarantee that the Government will not nationalize a foreign investment or revoke rights to control a foreign investment. The ex-ception to the foregoing is where it is declared by law to be in the national interest to do such nationalization and then only upon payment of mu-tually agreeable compensation de-termined in accordance with principles of international law. The Foreign Investment Law also assures that the foreign investor shall have the authority to appoint the manage-ment of the investment company and the right to repatriate capital in the form of after-tax profits, reimburse-ments for expenses of expatriate manpower, depreciation of fixed as-sets, etc.

Disputes on Foreign Investment

The Foreign Investment Law provides for arbitration of investment disputes. By virtue of Law Number 5 of 1968, Indonesia ratified the Convention on the Settlement of Investment Dis-putes between States and Nationals of other States (known as “ICSID”),

Text Box 3-2. Expected Changes in the Invest-ment Law. The Government plans to amend the existing Foreign In-vestment Law with the intention of simplifying the existing licensing procedures and providing improved legal certainty to investors. The main objectives in amending the law are: the need to eliminate discrimination in the treatment of foreign direct investment and domestic investment;

the need to simplify and expedite the establishment of a PMA Company;

the need to extend the duration or eliminate the time limit for the duration of a foreign direct investment (currently, a PMA company’s period is limited to 30 years as of its commercial production or commencement of its activities, but can be further extended subject to obtaining a license for expansion of its investment).

The new law would also reform the role and functions of BKPM from a licensing body to a registration body, in addi-tion to its promotion role as an Investment Promotion Agency.

The new (or amended) law will need to take into account existing regulations, such as the Indonesian Company Law and the Law on Mandatory Company Registration. Under the current laws and regulations, there are four general steps in process of establishment of a PMA Company: (i) the processing of the license from BKPM (ii) the processing of the approval from the Minister of Law and Human Rights of the company’s deed of establishment; (iii) the registration of the deed of establishment with the Company Registration Office (iv) the processing of other ancillary licenses from several government institutions, including another license from the BKPM – the permanent operating license.


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thus allowing for such disputes to be submitted to international arbitration under the ICSID rules.

Other matters concerning the legal and regulatory framework for investing and doing busi-ness in Indonesia are detailed in Annex 1. They include sections on labour laws, competition, anti-corruption laws, land and security issues, government procurement procedures, and regulations on establishing a company.

Government Guarantees The Government is considering the possibility of giving limited guarantees to certain projects, which may either be in the form of pre-defined risks for private financiers or commitment to provide contingent support to state-owned companies/contracting counterparties for failure to pay upon certain triggering events covering specific risks.

However, the implementation of such guarantees would be difficult as the following regula-tions currently prevent the Government from issuing guarantees for projects:

Restrictions under Presidential Decree No. 59 of 1972 – Restrictions that Apply to all Sectors

There is a general restriction under this Presidential Decree for the Indonesian Government to provide a guarantee for offshore loans obtained by State-owned or private companies in Indonesia. A government guarantee for projects can be interpreted to be in violation of this Presidential Decree. If this is the case, a new Presidential Decree (or a specific Law which is higher in hierarchy than a Presidential Decree) needs to be issued to remove said restric-tions.

Restrictions under Presidential Decree No. 37 of 1992 – Specific Restrictions for the Electricity Sector

The issuance of a government guarantee for Independent Private Power Projects is prohib-ited under Presidential Decree No. 37 of 1992. If the Government decides that it will give a guarantee (in whatever form; limited, specific circumstances, etc), a new Presidential Decree must be issued to allow the Government to do so in deviation to the restrictions under Presi-dential Decree No. 37 of 1992. Alternatively, the prohibitions under Presidential Decree No. 37 of 1992 should be revoked entirely.

World Bank Negative Pledge

The World Bank Negative pledge refers to the restrictions for the Government in the creation of security interests over public assets. As under Indonesian law, all of a person’s assets serve as objects of enforcement of that person’s obligations, and this includes the Govern-ment, it is irrelevant whether or not a governmental guarantee directly relates to the assets as meant under the World Bank Negative Pledge. If it is considered by the Government to issue guarantees for projects, although the World Bank Negative Pledge specifically refers to ‘public assets’, it may be possible for a broad interpretation of the provisions in the World Bank Negative Pledge. For this purpose, confirmation should be asked from the Government and the World Bank whether such guarantee would not violate the World Bank Negative Pledge (or whether specific waivers must be obtained from the World Bank for purposes of creating a government guarantee).

Competition Law

Indonesia has a law on competition, but its development and implementation remain unde-veloped. Law No. 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition (the “Competition Law”) was only put into effect in March 2000, and as yet, is not supported by adequate implementing regulations or cases. As an example, the

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Competition Law does not generally provide clear thresholds, or definition of practices that would fall into the category of anti-competitive practices. For example, Article 17 and Article 25 of the Competition Law actually deal with the same subject, i.e., monopoly and dominant position, but from the provisions we only know that monopoly and dominant position both acts of acquiring major control over a certain market, and it is not easy to differentiate be-tween the acts. It is not clear whether or not the Competition Law permits the application of both articles jointly.

As stated above, no specific implementing has been issued, as the fact is with the regula-tions on competition that pertain to mergers, consolidations and acquisitions, an important part of the competition policy. The Competition Law states that these will be provided in the form of a Government Regulation to be issued sometime in the future.

The Competition Law, nevertheless, recognizes agreements as an important issue of the competition policy, as reflected in the fact that it is covered extensively in the Competition Law, by defining each possible anti-competitive practice. However, due to the complex na-ture of the business activities and the vagueness of the articles in the Competition Law, it is doubtful that any single business activity will be covered by any single article. Such issues remain to be resolved as in anticipation of the continued development of the fledgling compe-tition law regime in Indonesia.

An implementing regulation, however, has been issued for the establishment of the Competi-tion Commission. This Commission is established to handle complaints and reports and is-sues decisions regarding antimonopoly and unfair business competition. Due to the absence of the implementing regulations, the judgments issued by the Commission have been based on broad fact findings and broad interpretations.

As with the issue of market control, the Competition Law stipulates that a single company controlling at least 50% of a certain market or 75% jointly with another company (or compa-nies) is deemed to have control or a dominant position in the concerned market. Article 27 of the Competition Law provides further that the above thresholds (50% and 75%) also apply to shareholdings. Under the Competition Law, a business actor (individual or company) is not allowed to have a shareholding which results in the control of more than 50% by one busi-ness actor, or 75% by two or three business actors, of a business engaging in one certain product or service. Except for Article 17 on Monopoly, these thresholds are not supported by criteria for determining the market area. The Competition Law stipulates further, in connec-tion with agreements, that an investigation of unfair oligopoly or oligopsony (Article 4 and Ar-ticle 13) issues may arise if an agreement results in the acquisition of 75% market share of a certain product or service.

As is the general case with most competition and anti-trust laws, unless it is specifically men-tioned, an excess over the above thresholds does not necessarily mean that the relevant company/party has violated the Competition Law. Further investigation, based on either the Commission’s own observations or a complaint from another party is necessary.

Laws on decentralisation and regional autonomy

In 1999, Laws on Regional Governance and on Fiscal Balance between Central and Re-gional Governments were enacted and supporting regulations were implemented. Law 22 provided for autonomous regions to be responsible for government functions in all sectors except for foreign affairs, defence and security, justice, monetary and fiscal affairs and relig-ion. The law also conferred responsibility to the regencies (Kabupatens) and municipalities (Kotas) for eleven sectors including public works (including roads) and communications (air, land and sea transport, telecommunications).

Government Regulation No 25 of 2000 concerning Government Authority and the Provincial Authority as an Autonomous Region (“GR 25/2000”) elaborated the provisions of Law 22 by


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defining the functions assigned to the centre and to the provinces, all the other functions be-ing deemed to belong to the regencies and municipalities.

Law No. 32 of 2004 Regarding the Regional Administration, promulgated on 15 October 2004 (“Regional Government Law”), further elaborated on the centre/regions relationship. It is the current basis for regional administration in Indonesia.

The territory of Indonesia is divided into provinces, which are further subdivided into regen-cies and municipalities. The regencies and municipalities within a province are autonomous and are therefore not subservient to the province.

The Regional Government Law provides that certain powers remain with the central Gov-ernment, while certain powers must or may be exercised by regions (a province, regency or municipality) autonomously. Government Regulation No. 25/2000 (“GR 25/2000”) remains the implementing regulation for the Regional Government Law.

The basic provisions of Law 22/1999 were confirmed with regard to the overall distribution of functions between the centre and the regions: the central Government governs foreign af-fairs, security and defence, judicial, fiscal, monetary, religious matters and other powers which in nature are intended to support powers granted to the regional governments. Hence regency or municipality governments have the power to govern all matters except those vested in the central Government. Where the power has not been or is not exercised by the regency government or the municipal government, or where the relevant area of activity spans across more than one regency or municipality, the provincial government has the au-thority to exercise governmental powers in respect of the relevant activity. GR 25/2000 speci-fies the range of other powers retained by the provincial government.

The Regional Government Law provides that, as an autonomous region, a province, regency or municipality may pass its own regional regulation. A regional regulation is issued by the head of the regions (a governor, head of regency (bupati) or mayor (walikota), as the case may be) with the approval of the local legislature. The legislative body may introduce a re-gional bill that may become a regulation if approved by the head of the region. A regional regulation cannot contradict or be inconsistent with another regional regulation or higher-ranking legislation or regulation.

Although this will take time to materialize, the application of the Regional Government Law will change the legal framework for investment activities in Indonesia from a centrally-administered system of regulation to a regionally-administered system. For instance regional governments are allowed to grant incentives and concessions to investors In order to attract investment. In the provisions concerning the division of governmental affairs, the Regional Government Law states that capital investment administration services including inter dis-tricts/cities is under the authority of the regional government of the province and the regency.

Land Acquisition Land acquisition/procurement has been a major bottleneck in infrastructure projects. The Government will soon issue a revision to the Presidential Decree No. 55 of 1993 (on the Land Acquisition for Development Activities for Public Interest, “Presidential Decree 55”) to improve the implementation of land acquisition procedures. The draft Presidential Regulation on Land Acquisition for Public Interest Developments stipulates the following:

• The time limit for an amicable settlement between the land owners and the committee for land acquisition;

• The development activities which are for public interest no longer refer to ‘not for profit’;

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• The infrastructure sector that is governed by the Draft Regulation has been ex-panded, to include, among others, the development of toll roads.

It is interesting to note that the Draft Regulation concerns land acquisition for public interest development carried out by the Government, and does not stipulate acquisition of land for infrastructure projects by the private sector.

2. Financial framework. Private sector participation in infrastructure projects may take a variety of forms:

• Management contract: Under a management contract, a private firm manages the operations of a state-owned business without committing investment capital or ac-cepting commercial risks.

• Lease: Under a lease, a private firm operates and maintains a state-owned business as its own commercial risk, with income being derived directly from tariffs. The private firm (lessee) is not required to commit investment capital, except for maintenance re-quirements. Other more complex forms of lease contracts are DBL (Design, Build, Lease), DBGO (Design, Build, Finance, Operate) or BLT (Build, Lease, Transfer)

• Upstream BOT/BOO/Concession: Under an upstream contract, a private firm takes commercial risk and accepts investment obligations to build or rehabilitate a facility as part of an agreement to supply to a downstream off-taker. Under a BOT (Build-Operate-Transfer) scheme, the private owner of the facility owns it for the concession period but is required to transfer the asset to the off-taker (or another government agency) at the end of the concession period. Under a BOO (Build-Operate-Own) scheme, the private owner of the project retains ownership of the asset beyond the concession period.

• Downstream BOT/BOO/Concession: Under a downstream contract, a private op-erator takes commercial risk and accepts investment obligations in buildings or reha-bilitating a facility as part of an agreement to supply a service directly to end-users.

• Privatisation: It involves the sale of government’s shares in a State-owned enterprise to private investors/operators.

Obviously, the risk profile for private investors is very different from one form of PPP scheme to another. In this study, our focus is on the PPP schemes that require private companies to commit substantial capital resources in building and operating infrastructure facilities. This is primarily the case of concessions under BOT or BOO schemes.

In the boom times of the 90s, most PPPs were financed through project finance techniques.

Project finance is a concept of financing for a particular project, usually structured as an ad hoc company being formed to undertake the project, with equity being contributed by the pro-ject promoters, usually companies/operators specialised in the particular sector of interven-tion, and loans provided by banks who look to the project cash flows as the source of funds for debt repayment and the assets of the project as the main collateral. The rationale is to limit lenders’ recourse to the capital of the project company.

At the peak time of private sector investment in infrastructure in Indonesia, before the crisis (1997), the main actors and elements of a typical project financial package were:

• The project company, that was required to put up a substantial amount of equity capi-tal of 30 to 40% of project costs, and to undertake a number of commitments in terms of completion and performance guarantees and compliance with financial covenants.

• The concession authority, usually a government body (for instance Jasa Marga in the toll road sector) legally empowered to award a concession to build (or rehabilitate) a


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piece of infrastructure and operate it for a period of time. The concession terms in-cluded provisions on the length of concession, the extent of the monopoly defined and prices (tariff) that would be charged to the customers, including revision mecha-nisms, in the case of a downstream concession. In an upstream concession, the leg-islation set the conditions under which the state-owned body (for instance PLN in the electricity sector) would purchase the output of the power plant to be set up by the project company (off-take contract),

• The government itself, usually through the Ministry of Finance, who would sign sup-port letters compelling the state-owned companies to honour their off-take contracts,

• The lenders who would provide a combination of long term export credits and com-mercial loans usually denominated in US Dollars. The lenders were primarily the large international banks, from the USA, Europe and Japan who had a strong presence in Indonesia and the Asian region.

Today, conditions have changed dramatically, due to the crisis that has affected some of the Asian countries, Indonesia in particular, and also due to a number of other events and evolu-tions in the international economic scene.

As has been amply demonstrated in numerous surveys, including our own analysis of EU companies’ perceptions and strategies in the framework of this study, the current situation is characterised by a fundamental reluctance by most of the key potential actors to consider new investments/loans to large infrastructure-type of projects in emerging countries.

Most of the big companies that have the financial capacity and technical expertise to invest in large PP projects have been hurt by the crises of the 90s. They are under strong pressure from their shareholders to retrench from risky countries and projects and concentrate on more developed markets. In addition the new IAS accounting norms that will be enforced in 2006 (?) are likely to have a negative impact on their risk assessment by financial markets. As a result, they are increasingly hesitant to engage substantial levels of equity funds in high risk projects in the foreseeable future.

Similarly many of the international banks, be it in the USA, Japan or Europe have gone through an intense period of restructuring and concentration over the last ten years. The new banks are generally stronger and well equipped to undertake large and sophisticated project financing. Yet they are facing less pressure from competitors whilst they are under increased scrutiny from their shareholders and financial markets. Furthermore banks are mulling the consequences of new prudential rules on their own capital base and risk policies with the planned enforcement of the “Basle II” guidelines, in the near future.

International Financial Institutions (IFIs) themselves have not been unharmed by the crises, inasmuch as they have also participated in the financing euphoria of the 90s. They are now re-assessing their missions and strategies, by endeavouring to better correlate their role of advisors and facilitators with the role of provider of funds. With regard to the private sector, they emphasize their role as helping the creation of an enabling environment through a range of technical assistance programmes aimed at enhancing the capacity of governments and public bodies.

In the present Indonesian context, what are possible sources of funds for potential private promoters of infrastructure projects?

2.1. Equity. With regard to equity capital, private promoters of projects who would be searching for risk capital to complement their own equity contribution would have a number of options.

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In Indonesia itself, the financial markets are still at an early stage of development. There are large amounts of funds placed in pension funds and life insurance institutions, estimated to exceed 100 trillion Rupiah (about USD 11 billion) at end 2003. However, the existing legal framework limits the possibility of investing these funds in long term securities such as infra-structure projects’ equities. Furthermore, the public sentiment is till cautious about the whole financial system following the recent crisis, and management capacity needs to be built within the pension funds and insurance companies, and at the regulatory and supervisory level.

The indexes of the Jakarta and Surabaya stock exchanges have recorded impressive growth recently, which is a positive indication of renewed interest and confidence by investors, in-cluding foreign portfolio managers. Yet, this inflow of money could easily be reversed. What is required is a steady mobilisation of funds into long term investments, including in infra-structure projects.

A first important step in mobilising domestic savings into infrastructure investments could be achieved if a proposal to set up an Infrastructure Development Fund (IDF), currently under consideration by the Indonesian government, becomes a reality. One of the main objectives of the IDF would be to contribute to the re-capitalisation of state-owned enterprises such as PLN. It is conceivable that it could also invest in PPP projects.

Outside Indonesia, there are possible sources of equity capital.

As a general observation, European banks, which are now for most of them in the private sector, do not invest in the share capital of risky projects in emerging countries.

This specialised field of intervention is more the domain of the IFIs such as the World Bank/IFC Group and the Asian Development Bank (ADB) who are potential investors in pri-vate projects, including PPP infrastructure projects.

Several European public institutions are also potential investors in the share capital of private projects, usually as minority partners alongside the project promoters/operators: DEG from Germany, FMO from the Netherlands, PROPARCO from France, CDC from the UK. Each institution has its specific mode of intervention. As a whole these institutions no longer tie their support to the project sponsors’ nationality.

Some of these institutions are reported to consider setting up a specialised fund that would invest in small to medium size power generation projects.

Private investment funds: a firm called Emerging Markets Partnership (EMP) manages pri-vate funds that provide equity and equity-related capital to companies in infrastructure pro-jects in emerging economies, including Asia. The shareholders of these funds are international financial institutions, government institutions, insurance companies, banks and private investors. EMP has announced its intention of setting-up a specific fund dedicated to infrastructure projects in Indonesia.

There may be other initiatives of this kind in the future.

Lastly, an important source of investment may prove to be regional private investors such as Malaysian, Singaporean, Thai or Chinese companies that will seek partnerships with other foreign companies for the purpose of jointly setting up infrastructure projects in Indonesia. The potential of such joint-ventures between European providers of technical expertise and Asian providers of capital and local business experience should be explored.

2.2. Debt. The Indonesian banking system is still recovering from the crisis started in 1997. With mas-sive government support, it has improved significantly over the recent past, and it is now in a position to again play a meaningful role in supporting the Indonesian economy. Bank Indone-


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sia has recently issued regulations aimed at enabling banks to commit larger amounts to in-frastructure and other investment projects.

However it will take some time before Indonesian banks can provide meaningful funding to infrastructure projects that are by nature quite risky. At present, only 2% of bank loans have maturities in excess of two years.

In addition to bank loans, well-established Indonesian companies, both state-owned and pri-vate, have access to the domestic bond market. Institutional investors have shown a strong demand for bonds over recent months. For instance a private toll road operator recently is-sued bonds for an amount of Rp 800 billion to finance the construction of a project in Sura-baya.

Foreign banks are present and active in Indonesia, albeit in a smaller number than in the 90s. European banks are well established, with major institutions such as HSBC, BNP Paribas, Deutsche Bank, Calyon, ABN AMRO and Standard Chartered operating branches or representative offices in Jakarta.

When they are conducting onshore banking business, either as branches or subsidiaries, banks are mostly involved in short term rupiah lending to corporate clients and to servicing the needs of private clients.

With regard to the financing of infrastructure projects, European banks present in Indonesia would be able to offer a full range of foreign currency lending services such as project financ-ing, either from units based in Jakarta and/or from units based in regional financial centres such as Singapore or Hong-Kong. However, the overall attitude of foreign banks on long term lending to the Indonesian corporate sector or to individual projects remains cautious (except in cases where projects are securely structured with reputed companies involved, both in constructing and operating a facility, and in committing long term purchase contracts for the facility’s output).

European banks are also active in providing export credits to Indonesian buyers of equip-ment, both from the public and private sector. They coordinate the setting up of elaborate financial packages for public promoters of large projects (such as the main State-owned En-terprises), which usually involve a combination of soft loans in the framework of bilateral aid and export credits with insurance coverage by institutions like COFACE, ECGD, HERMES or SACE. Since 1976, the terms of intervention of these Export Credit Agencies (ECAs) have been coordinated and harmonised on an international basis in the framework of the “OECD Consensus” and within the guidelines set forth in the EU by the EC through the directive on harmonisation of provisions related to medium-term export credit insurance that was adopted in 1998. The current position of European ECAs with regard to Indonesia is one of renewed openness. There have been recent cases of export credits being set up with durations of more than 10 years, in favour of public borrowers, i.e. on the basis of an Indonesian sover-eign risk. The ECAs’ attitude on corporate borrowers, or PPP projects, remains cautious.

Other possible sources of term loans are the IFIs, including the World Bank Group and the ADB.

Further to extending straight loans, the ADB has recently announced a new initiative that ap-pears to provide an effective answer to the crucial risks of un-hedged exchange exposure and tenor mismatch.

The initiative involves ADB undertaking a local currency swap with a developing member country, and using the local currency proceeds to provide long-term lending to private sector financial intermediaries for on-lending to local borrowers. ADB has concluded a first transac-tion for the Philippines, by undertaking a $200 million swap for 15 years, and it anticipates doing similar transactions in other Asian countries.

The European financial institutions mentioned earlier (DEG, AFD/PROPARCO, FMO,..) con-stitute alternative sources of foreign currency term loans. DEG, for instance, has had a per-

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manent presence in Indonesia for more than 30 years, and has financed a large number of projects, mostly in industry and services. It would be keen to finance well-structured infra-structure projects. Another major European institution, the European Investment Bank (EIB) would also be a possible provider of term loans (for projects of a total cost higher than 50 mil-lion euros). EIB’s mandate is to support projects that have a European feature, either in their shareholding or in their management structure (or even as a long-term off-taker of the con-cerned project’s output). The EIB however would require a bank or a corporate guarantee for its loan.

Export credits are again being offered by European banks to Indonesian companies/projects with the insurance coverage of the above-mentioned institutions, for durations that may be up to seven years or more. However there has been no test case, in particular because of the guarantee issue. It must be noted that new competitors have entered the export finance market in a forceful way. This is particularly true of China, who is aggressively supporting its equipment exporters with attractive export credits.

2.3. EC Programmes The European Commission offers a range of programmes through which it is financially sup-porting initiatives from European and Asian organisations towards fostering trade, investment and technology linkages.

The Asia-Invest II Programme aims to promote and support business co-operation between the EU and Asia. The Programme provides financial assistance to business intermediary or-ganisations to facilitate partnerships between European and Asian companies, in particular small and medium-sized enterprises, and to strengthen the business environment to increase trade and investment flows between the two regions.

The EU-Indonesia Small Projects Facility in Economic Co-operation (SPF) aims to promote economic co-operation between Indonesia and the EU and to support the on-going reform process of the Indonesian economy and systems of governance. It provides financial assis-tance to projects by Indonesian and EU organisations that are based in Indonesia in areas like business dialogue, economic policy, reform, public administration and governance.

The EU-ASEAN Energy Facility (EAEF) is a co-operation programme between the EU and ASEAN that aims to facilitate partnerships between organisations in the two regions for the joint development of projects in the energy sector.

The Asia Pro Eco II Programme supports projects that address issues of protection and remediation of the urban environment in Asia. It results from the merger of two previous pro-grammes, the Asia Pro Eco I Programme and the Asia Urbs Programme. In response to the destructions caused by the Tsunami, the EC has launched a specific Asia Pro Eco II B – Post Tsunami Programme to support projects towards the reconstruction of the affected ar-eas.


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Chapter 4. Sector Profiles. Chapter 4 provides an exhaustive sector-based review, i.e. on energy (power production and gas supply), telecommunications, transportations (including terminals such airports and sea-ports) and water and sanitation. The sections each look at existing and required amenities. They then comment at the question whether the Infrastructure Summit addressed the appar-ent service gaps. Next, they give recommendations relevant to investment decisions. Finally, a selection of regulatory conditions and limitations are highlighted.

1. Energy Sector. 1.1. Size of the Sector, Growth Potential and Outlook.

a. Present Condition of the Network. Indonesia’s energy network is only partially integrated. As Table 4.1-1 indicates, Java domi-nates power production and is indeed provided with an integrated production, transmission and distribution net. Bali (and in the near future also Madura) is part of this integrated net-work. The Java-Bali network is organised around two PLN-owned companies, Indonesia Power and Jawa-Bali Genco, which both generate power. PLN also buys from IPP’s, that is independent producers. In the past few years, networks respectively in Northern and South-ern Sumatra have been slowly integrated as well. One of the projects proposed at the Infra-structure Summit provides a Java-Sumatra connection. In a few years, PLN would thus have an integrated network covering Sumatra, Java, Madura and Bali and could add to demand through new mine-mouth coal-fired power generation and possibly gas-fired generation near one the many gas fields, for instance in South Sumatra. Finally, there is a considerable amount of captive power generation in Indonesia, especially from self-generation by indus-tries. A part of this generation capacity was built in the past due the absence of (cheaper) PLN power, but in the commodity industries, some large captive power installations are part and parcel of highly efficient integrated production processes. Table 4.1-1. Electricity Production. (BPS 2003, PEUI 2004, website PLN)

Network Capacity & Sector Size Remarks Production Java-Bali Other

PLN Installed Capacity 19.5 GW 5.7 GW • peak load is max. 85% of installed capacity (rating); but more often only 75%

• 2005 data show installed capacity in Java-Bali of only 18.4 GW and available capacity of 14.6 GW (http://ubos.pln-jawa-bali.co.id/)

Main Installed Capacity 1.5 GW 3 GW • data in kVA; assuming power fac-tor of 0.8

Captive (self-generation) Reserved Installed Capacity 3.3 GW 1.5 GW • back-up power Total Installed Capacity 21.0 GW 8.7 GW • excluding back-up power

Note : statistics on captive power vary. The Ministry of Energy estimated an installed capacity of 12.4 GW in 1998, to increase to 15 GW in 2003, “generating about 44000 GWh” (World Bank 2005a); this assumes a capacity factor of 33%. PEUI (2004), however, notes a year-on-year decline of captive power capacity from 2000 to 2002. This could be related to the reduction of fuel subsidies, making diesel-generated captive power no longer economic. The in-stalled main capacity of captive power would therefore deliver some 26,000 GWh, of which 17,000 GWh outside Java – for instance for oil drilling, mining, paper and pulp, fertiliser production and other commodity-related indus-tries. (A capacity factor of 66% on main installed capacity is assumed, as many production processes are continu-ous.) This means that areas outside Java still depend to a large extent on captive power and not on net distribution. Cases of captive power selling to the net and of dual-purpose production are rare.

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PLN and its subsidiary companies had 4,766 power plants in 2002, the majority being small diesels for local production. Table 4.1-2 shows the installed production, by type of fuel and separately for IPP’s as a whole. The main share of the 3250 MW produced by IPP’s in Java is derived from the coal-fired Paiton I and Tanjung Jati B, with respective capacities of 1220 MW and 1320 MW. All other plants are small, that is varying between 60 to 200 MW, and rely on oil, gas or geothermal steam.

Table 4.1-2. Power Production by Energy Type. (website PLN)

Power Plant Java-Bali Other Total % Combined Cycle – Gas Fired 3,268 876 4,144 Combined Cycle – Oil Fired 2,717 - 2,717

27%

Steam – Gas Fired 1,000 - 1,000 Steam – Oil Fired 800 310 1,110 Steam – Coal 4,200 590 4,790

27%

Gas Turbine 1416 646 2,062 8% Diesel 109 2441 2,550 10% Geothermal 360 20 380 2% Hydro 2,391 624 3,015 12% IPP’s 3,255 195 3,450 14% Total 19,516 5,702 25,218 100%

The growth of demand for power has been brisk in the past years, notwithstanding the economic crisis. How-ever, the planning of pro-duction expansion has been somewhat of a roller-coaster in the past 15 years. In the early 1990’s, projections for strong demand increases from the industrial sector were excessively extrapo-lated and translated into IPP contracts, leading to a fear of excess production capac-ity a few years later. This resulted in the abrupt can-cellation of many of the pro-jects in 1998. By 2000-2001, a sudden demand expansion from the residen-tial sector became evident, raising the spectre of sys-tematic black-outs in Java. The fear was aggravated as there were no new plants in the immediate pipeline. Nonetheless and notwith-standing the fact that resi-

Text Box 4.1-1. The IPP saga continued. In the early 1990’s, the Government had started contracting new IPP’s with a total production capacity of almost 11,000 MW. As the table shows, only a few plants with a cumulative capacity of 3,255 MW were built, while other contracts were postponed or cancelled in 1998. PLN lists all 27 IPP schemes still on its website as well as a status report on the progress of negotiations : http://www.pln.co.id/english/company_profile_iip.asp http://www.pln.co.id/english/company_profile_prog_ipp.asp

The latter report is rather opaque, as it looks like that all schemes are still open, with the exception of Kahara Bodas, a geothermal project that became the subject of a bitter court battle for compensation fought in Indonesia and in the US. PLN labels 14 postponed projects as al-ready renegotiated and under cover of a “long-term agreement”. This basically implies that PLN still has relationships with or still recognises license claims on these IPP’s from the past stakeholders – mostly Indo-nesian business groups. PLN lists 5 IPP’s, all of them geothermal, as “acquired”, meaning that PLN may want to execute them itself.

Finally, another 7 IPP’s are identified as “renegotiated, closed-out”: Tangung Jati A, Tanjung Jati C, Cilacap, Serang, Pasuruan, Cilegon and Kamojang. With the exception of Kamojang, which is a geothermal site already under operation by PLN and Pertamina, all other project are big and are the real upcoming IPP projects. All except Kamojang and Cilacap are in the list of 91 projects. However, only Cilegon is in Prior-ity List 1 and none in List 2. The readiness of PLN to offload these old projects again in the market for private is thus not that clear. Some projects are already wraps with joint venture projects, such as Kepco in Serang.


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dential black-outs are common outside Java, they have not materialised in Java on a grand scale – although peak demand is very close to peak capacity on dry hot days. The integrated net has thus shown its virtues in managing peak demand. Table 4.1-3 sheds insight into the sectoral demand levels and the growth of demand in the respective sectors. Hereby a differentiation is made between total energy demand (including oil, gas and derived fuels) and electricity demand. When considering the overall size of en-ergy consumption, then industrial demand outstrips all other sectors today, including demand for fuels from the transportation sector. However, when looking at growth figures, a different picture emerges. Growth in energy demand in general has been strongest in the industrial sector and recovered in a particular brisk way after the economic crisis, i.e. by 9% p.a. However, growth in electricity demand has been persistently stronger in the residential sec-tor. The econometric energy model of the University of Indonesia predicts however that these increases in demand will slide back to amounts lower than historical ones, except in case of sustained future very strong economic growth. Moreover, in line with experiences in economically more advanced countries, demand for electric power would systematically grow faster than demand for other forms of energy. This is related, among others, to the expan-sion of the service sector and to non-industrial urbanisation in general. Furthermore, growth for electrical power is then again modulated by energy saving programmes, alternative en-ergy production, etc. Table 4.1-3. Energy/Electricity Consumption in 2003, and Growth (PEUI 2004, BPS 2003)

Sector Consumption Sub-Sectors Key Segment

Industrial Commer-

cial Residen-

tial Transport Social/ Public

All Energy 218 29 83 177 Industry Size (2003) (Barrels of Oil Equivalent, mio)

Electricity 55 8 21 3 Industry

All Energy 7.7% 6.2% 3.8% 5.9% Industry Medium- Term Growth (199..-2003)

Electricity 4.7% 4.7% 11.3% 5.5% Residential

All Energy 9.3% 7.2% 1.1% 5.5% Industry Growth Recovery (1999-2003)

Electricity 5.5% 8.1% 8.2% 5.3% Residential

All Energy 5.5% 4.8% 4.5% 3.9% Industry Long-Term Growth (1992-2020)

Electricity 6.0% 5.6% 7.0% - Residential

Size in BOE, with 1 MWh = 0.613 BOE; Medium-Term Growth : of energy consumption from 1992, of electricity consumption from 1996. Long-term growth assumes a GDP growth of 4.5% to 5% in the main scenario of the model, whereby the growth of energy consumption declines from 6% p.a. to 3.4%. (Based on the InoSyd dynamic modelling system of PEUI (University of Indonesia)). “All Energy” does not include biomass energy. It includes petroleum fuels, gas, coal, LPG and electricity. Biomass energy provides another 275 MBOE to the energy balance, but only a fraction is for electricity production (hydro, geothermal and limited applications of organic materials as fuel, e.g. bark for pulp and paper plants).

Although the longer-term growth numbers for power are lower than the historical ones, the need for more power generation capacity is still impressive in all forecasts. PEUI is here only slightly more aggressive in its predictions compared to the World Bank, as is clear in Table 4.1-4 (next page) :

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Table 4.1-4. Investment Requirements for Power Generation, Transmission and Distri-bution. Including Requirements for Gas Supply to Power Stations (PEUI 2004 : InoSyd Model with GDP growth of 4.5 to 5% per year)

Period PEUI (2004) model World Bank (2005c)

Capacity

(GW) Generation(US$ bn)

Transmission& Distribution

(US$ bn) Generation(US$ bn)

Transmission& Distribution

(US$ bn) Rural Power

(US$ bn)

Domestic Gas Supply

(US$ bn)

2001-2003 + 12 + 5 + 1 2004-2008 + 15 + 10 + 2 2009-2012 + 17 + 9 + 3

+ 10-12 + 4-7 + 5-7 + 3-4

2013-2020 + 18 + 11 + 3 PEUI’s model includes captive power, which is assumed at about 14 MW in 2003.

PEUI predicts an investment requirement of US$ 24 bn for the period 2004-2012, a forecast not taking into account that the capacity extension for 2001-2004 did not reach 12 MW but only about 4 MW. The World Bank’s prediction is slightly lower : around US$ 23 bn, exclud-ing gas supply investments but including rural power expansion (micropower). These invest-ments would provide 350 GWh of power, compared to 150 GWh now (including captive power), with industry and the residential sector taking up each 40% of the supply in 2020 and the balance used by the commercial sector and by public services.

These numbers are clearly impressive. However, before looking to the question whether the Infrastructure Summit addressed these needs, it is necessary to see to which extent there is clarity in terms of a national energy strategy.

b. Indonesia’s Energy Strategy. In retrospect, it now looks foolish that private contracts leading to 7 GW of new generation capacity were cancelled in 1998. The projects were adding a substantial amount of new ca-pacity compared to the 15 GW which PLN had ready by 1996, but they are small compared to future needs. Getting cold feet when dealing with long-term power production seems to be counterproductive.

The immediate reason for the cancellation was related to temporarily untenable blanket guarantees issued by the Government at contract signing. Yet the problems of the IPP pol-icy was not only about sovereign guarantees and payment capacity. Indeed, there were other strategic problems with the PLN-IPP set-up. The IPP projects were technologically and environmentally advanced but expensive and relied mostly on two sources of energy only : coal and geothermal steam. The 1990’s outlook for electricity production was indeed one in which coal would dominate future supply, while geothermal steam would be the main source of renewable energy, even if it would only give a small contribution to the overall supply. Over time it became clearer that a strategy of relying primarily on coal would never have been sufficiently reliable in the longer run, due to the risks of over-reliance to one source of energy and also because of the risk of relying on a limited set of potential suppliers and tech-nologies. Pricing power could have shifted to new IPP’s. Table 4.1-5 (next page) shows the imbalance of coal use versus the use of gas in the national energy supply : although abun-dant in potential supply, demand for coal for local electricity production would have been a dominating factor in the market.


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Table 4.1-5. Ratio of coal consumption versus gas consumption. (PEUI 2004, figures for 2003)

Coal Gas Total Production 114 MT 2900 TCF Domestic Consumption 29 MT (25%) 1131 (39%) Domestic Consumption for Electricity Generation 21.2 MT (19%) 114 MT (4%) Reserves to Production Ratio in 2020 85 years 26 years

Coal in million Ton; gas in Terra Cubic Feet

This imbalance has been now been recognized by the Ministry of Energy. The present strat-egy is characterized by a higher degree of flexibility, or at least by an intent in that direction :

• Primary energy sources will be more diverse and power production shall no longer rely on coal and oil only. The major issue is here the development of a domestic gas supply system, consisting of pipelines and LNG terminals for re-gasification. The lat-ter are more expensive, but more flexible and the first tender for a plant in Cilegon, which will supply a joint PLN-Kepco (Korea) power plant which is under construction, is now underway. Extensive gas pipeline networks will anyway take time to build. The State Gas Company PGN has a monopoly and has made little progress so far, even though its sales of gas have increased by 14% p.a. since 1999. Where possible, in-dustries have already substituted oil for gas.

• The use of renewable energy sources will further be encouraged by the Government, e.g. by means of allowing negotiated bids (without tender) and through the promotion of the benefits under the Clean Development Mechanism (CDM). The Indonesian Government has signed the Kyoto Protocol and will try to take advantage of carbon trading in order to promote clean energy projects. The potential of geothermal energy is estimated to be from 10 GW to 20 GW, although the locations are often remote.

• For rural electrification, the Government continues to look into microhydro energy, so-lar energy and biomass energy. Progress on these issues is however very lacklustre.

• There is no policy yet with regard to micro-generation in general. The existing captive power installations are often aged, making their integration into the net unviable. It is predictable, however, that at locations where gas will be available, micro-generation by businesses can become integrated into the PLN net, through highly improved technologies for micro-generation sharing. This could become a reliable strategy for certain businesses, off-setting the losses now made due to the use of less-subsidised diesel used in their captive gen-sets.

A key building block in the strategy for more reliable electricity production had been of course the issuance of the 2002 Electricity Law which allowed competition in supply, i.e. power trad-ing. Due to its cancellation by the Supreme Court in late 2004, PLN has again become the sole buyer of net power. However, the Electricity Blue Print of the Government, published by the Ministry of Energy and Mineral Resources in 2003, is said still to be valid, notwithstand-ing the fact that at the core of the strategy are power trading, the establishment of an Elec-tricity Market Supervisory Board and the resumption of the responsibility for the Public Service Obligation by the Government and no longer PLN.

However, it should be underlined again that precise forecasting remains very hard. It is clear that power trading by multiple suppliers would deliver strong advantages if the overall power demand would more than double in the next 7 years, as said from 150 GWh to 350 GWh. The additional 40 GW of production capacity would create a real market of power. Nonethe-less, such projections remain hypothetical. Table 4.1-6 (next page) clarifies the sensitivity of the projections to growth assumptions and base-lining :

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Table 4.1-6. Re-based Forecast for Power Generation (GW).

Year Real Capacity till 2005 Escalation from 1999 + 5% p.a. + 7% p.a. + 9% p.a. + 9 % p.a.

1999 20 20 20 1999 20 2001 21 21 21 2001e 24 2003 21 21 21 2003e 28 2005 26 26 26 2005e 34

2007e 29 30 30 2007e 40 2009e 32 34 35 2009e 47 2011e 35 39 41 2011e 56 2012e 37 42 45 2012e 61

2005-2009 + 6 + 8 + 9 + 14 2005-2012 + 11 + 16 + 19 + 28

Power demand on the Java-Bali grid rose by 7.1% between mid-January 2004 and mid-January 2003 and by only 2% from mid-January 2003 to mid-January 2004. The 7% p.a. benchmark forecasted by PEUI (2004) is therefore reasonable. The need for new power generation until 2009 may thus well be no more than 8 GW.

Table 4.1-6 shows that a capacity of 40 GW is only required in case of 9% p.a. growth start-ing in the year 2000. Due the absence of capacity expansions in the past years, that baseline has now become irrelevant. Even if demand had been potential and thus merely postponed, it did not materialise or it did not lead to massive black-outs. Lacking economic growth, ris-ing electricity prices and a stop on the expansion of the rural network may explain why growth remained depressed. Yet this does not need to be the case in the future. Neverthe-less, a very reasonable projection, from a producer’s point of view, would be a need of an additional 8 GW until 2009 and another 8 GW until 2012. The question then becomes whether adding 16 GW brings along the advantages of power trading both to producers and consumers. For producers, this may be unlikely, as supply will match demand that closely so that lesser productive power generating companies will not be punished.

c. Infrastructure Investment Priorities Addressed at the Infrastructure Summit.

At the occasion of the Infrastructure Summit, the Government put centre-stage again the pre-viously cancelled IPP projects. However, also the first new projects which relate to the strat-egy above in terms of adding gas as a key source of energy and to promote inter-connectivity were added. Table 4.1-7 (next page) lists what has been put on the table. The most salient fact of this overview is the fact that the Government only puts out 7 GW as investment opportunities. This is remarkably close to the earlier projection of Table 4.1-6, which set out a need for 8 GW as a reasonable level, from a producer’s point of view. PLN, as sole buyer, is here clearly not interested in opening up too many new sources of supply. It is conceivable that it is aware that too many new sources of supply would compete unfa-vourably with its own plants.


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Table 4.1-7. Sub-sector Key Development Aim Key Bottle-necks. P*

Gas supply through pipe-lines

• Several pipelines proposed, but relationship with PGN unclear

(Y)

Gas supply through re-gasification at terminals

• Not proposed in 91 projects, but meanwhile put out for tender by PLN-Kepco (“existing project”)

(Y)

Primary Energy

Mine-mouth generation • One small project proposed in Kalimantan; not yet related to concept to use mine-mouth generated power in Sumatra for delivery on to an integrated net

0

Power Genera-tion

IPP’s • 8 projects proposed (earlier cancelled); 6 in Java (7 GW; 6.7 GW in Java and 0.3 GW out-side Java)

• On-going PLN partnerships for new plants upcoming hardly mentioned (e.g. with Kepco)

Y

Net integration Java-Sumatra inter-connection

• Proposed Y

Transmission & Distribution

• done with World Bank and G-to-G financing N

Micro-Power • partially addressed through G-to-G financing (including grants) for rural development

N

P = Programmed; that is part of the package of 91 projects proposed at the Infrastructure Summit : Y=yes; (Y)=yes, but questions on readiness for private investment; 0=only selective projects but no comprehensive in-vestment priorities; N=no.

d. Main issues relevant to investment decisions. The following issues are relevant to investment decisions :

• Demand growth is brisk for the coming 5 years, but not dramatic;

• With new supply coming from the previously shelved and at the Summit reintroduced IPP’s, which are to deliver about 7 GW, and from a number of new projects on PLN’s own account, large region-wide black-outs may be avoided, just;

• Pressure towards a more comprehensive energy reliability may remain (unjustifiably) weak in the coming years : the cancellation of the Electricity Law prohibits competi-tion; demand can be (just) met with the scheduled production expansion; PLN may feel secure if it can continue to avoid black-outs in large cities and the political havoc related to such black-outs; and the expectation of insufficient access to power may reduce economic growth in general;

• The planning of enough capacity expansion on Java to accommodate new industrial investments in the future, is absent;

• Capacity expansion outside Java is very urgent, as black-outs are common; however, there is only limited pressure on PLN to divert attention away from its core market of Java-Bali;

• The provision of integrated gas supply infrastructure is crucial for energy reliability and supply stability, but it may take 5 years or more before any real progress be-comes visible;

• Over-reliance on coal and possible supply hick-ups of coal (due to real or manipu-lated shortages) could still substantiate;

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• As stated earlier in Chapter 2, the pay-back of most power infrastructure investments is more uncertain for areas outside Java; however, for Sumatra, this issue will be-come slowly less relevant when it becomes interconnected with the Java-Bali grid;

• As long as the existing legal and regulatory framework is in place, PLN will remain the sole buyer of power, and it will likely insist on being a partner in all new IPPs.

• The current uncertainties in the institutional and regulatory environment are likely to discourage many potential investors, particularly the European and US companies who do not operate with the “consortium” approach that is the mark of their Japanese competitors. However there may be interesting opportunities for the consideration of investors/operators who would accept a higher degree of risk, provided that they would ensure well-structured contractual arrangements with PLN, with the possible support of undertakings from the Ministry of Finance or under other financing schemes that could be suited to medium size projects.

1.2. Legal and regulatory framework

Electricity. Relevant Authorities in the Electricity Sector. Based on Presidential Regulation 9/2005, the general responsibility for coordinating infrastructure projects falls under the Coordinating Ministry for Economic Affairs. The coordinating minister acts through his deputy for en-ergy, mineral resources and forestry who has the responsibility to prepare planning and policy making as well as synchronizing policy implementation in the energy and mineral resources and forestry.

Under the coordinating minister of economic affairs, the key central government actor in the development of elec-tricity is the Ministry of Energy and Mineral Resources, through its Directorate General of Electricity and Energy Utilization (Direktorat Jenderal Listrik dan Pemanfaatan Energi, DGLPE). DGLPE has primary responsibility in the formulation and the implementation policies and in the electricity and energy utilization. Licensing for the electric-ity industry is granted by the Minister of Energy and Mineral Resources.

The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to regional governments and its role in supporting the implementation of regional autonomy.

I. General The current basis for electricity in Indonesia is Law No. 15 of 1985 (“Law No. 15”) which was declared as the ap-plicable law due to the reason that Law No. 20 of 2002 on Electricity (“Law No. 20”), which had previously re-placed Law No. 15, was annulled by the Constitutional Court on 15 December 2004. The Constitutional Court ruled that Law No. 20 was in contradiction with the Constitution of the Republic of Indonesia as it allowed privati-sation and competition in electricity supply. Particularly, the Court stated that electricity is considered as an area of production that is essential for the State as it is vital for the life of the people, and therefore, it should be con-trolled by the State in accordance with Article 33 of the Constitution.

II. Law No. 15 as the Applicable Law in the Electricity Sector Under Law No. 15, the following general matters are regulated: (i) electricity development basis and goal, (ii) en-ergy sources for electricity, (iii) electricity general planning, (iv) electricity business, (v) relationship between the Holder of the Electricity Business Authority and the Holder of Electricity Business License for the Public Interest, (vi) electricity supply and utilization, (vii) development and control, (viii) investigation, etc. The important features under Law No. 15 presented here are mainly related to the electricity supply business. The electricity business activities are divided into two main activities, namely:

(a) The electric power supply business activities, which include: (i) electric power generation, (ii) electric power transmission and (iii) electric power distribution.

(b) The electric power support business activities, which include: (i) consultation services relating to elec-tricity matters, (ii) construction and installation of electrical equipment, (iii) maintenance of electrical equipment, and (iv) development of equipment technology to support the electricity supply.

The electric power supply business activities are conducted by the Indonesian Government and are operated by the state-owned company PT. Perusahaan Listrik Negara (Persero) PLN as the Holder of the Electricity Business


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Authority (Pemegang Kuasa Usaha Ketenagalistrikan or “PKUK”). However, for the purpose of meeting public demand for electricity, the Government may grant licenses to cooperatives (Koperasi) and other business entities.

As implementation of the above, the Government has issued Presidential Decree number 37 of 1992 (as amended by Presidential Decree number 38 of 1998) regarding Electricity Power Supply Business Activities by the Private Sector (“PD 37/1992”).

Based on PD 37/1992 (1) PLN as PKUK has established PT. Pembangkitan Jawa-Bali I (which was later re-named to become PT. Indonesia Power) and PT. Pembangkitan Jawa-Bali II (collectively, the “PJBs”) (2) Private companies have established Independent Power Producers (IPPs). The PJBs and IPPs are acting as power generating companies which sell the electricity to PLN as the PKUK. PLN as PKUK then distributes the electricity to end users.

With respect to transmission and distribution, although the law and regulations allow the involvement of the pri-vate sector, in practice, no licenses have been given to the private sector.

Law No. 15 also provides that the price of electricity shall be determined by the Government.

III. Implementation of Law No. 15 Law No. 15 is implemented by Government Regulation No. 10 of 1989 with respect to the Supply and Utilization of Electricity (“GR No. 10”), which has been partly amended by Government Regulation No. 3 of 2005 (“GR No. 3”).

The main features of GR No. 10 as amended by GR No. 3 are as follows:

General features 1. The Minister of Energy and Mineral Resources ("Minister") determines the National General Planning of Elec-

tricity.

2. The central Government and/or regional Governments provide development funds for electricity infrastructure in the undeveloped areas, remote areas, state borders and villages, and for the poor society.

Licensing The supply of electricity by the State is done through PLN as the PKUK. The Minister has the authority to deter-mine the business operating areas and/or lines of business of PLN as the PKUK. Under the prevailing govern-ment regulations, PLN has been appointed as the PKUK for the entire Indonesian territory.

The government may grant Electricity Business Licenses (“Electricity Business License”) to cooperatives and other business entities to conduct the supply of electric power, in so far it is not detrimental to the interests of the State. Electricity Business Licenses may be issued by the Head of Regency/Head of Municipality, Governor and the Minister, depending on the location of the plant and facilities or their connection to the national grid. The Min-ister has the authority to issue the Electricity Business Licenses for power supply connected to the national grid.

In general terms, an Electricity Business License can be given for power generation, transmission and distribu-tion. However, in practice, Electricity Business Licenses have so far been given only for power generation.

Business plan The holder of an Electricity Business License which has a business operating area is required to make and im-plement a Plan for Electricity Supply to be approved by the Minister, Governor, Head of Regency/Head of Munici-pality, as applicable.

Tender requirement The purchase of electricity by PLN from the holder of the Electricity Business License must be done through a tender, except when:

(a) the purchase of electricity by PLN is done from a power plant which uses renewable energy, marginal gas, coal from the coal mine mouth, and other local energy;

(b) the purchase is from excess electricity;

(c) the local electricity system is in a critical supply of electricity condition (as determined by the Minis-ter/Governor/Head of Regency, in which case it can be done through direct appointment.

Electricity price The price of electricity supplied by PLN to consumers is determined by the President upon a proposal from the Minister. The electricity price under a PPA (power purchase agreement) should be stated in Rupiah. However, it will be based on the cost element as agreed in the relevant PPA.

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The electricity support business activities are regulated under Government Regulation No. 25 of 1995 (“GR No. 25”). Under this regulation, potential investors must obtain a business license from the Minister1. This business license can be given for more than one supporting business classification. In order to obtain the business license, an application needs to be submitted to the Minister together with all required supporting documents. Once the business license has been obtained, the holder of electricity supporting business license must report its activities to the Minister regularly. The Minister may revoke the business license upon the occurrence of, among others, non-compliance with the requirements under the prevailing electricity laws and regulations.

IV. Conditions for Foreign Participation In principle, the electric power supply industry is open to foreign investment in Indonesia. Under the current Nega-tive List and the IPU, it requires a joint venture with Indonesian partner(s). The maximum share percentage of the foreign shareholder(s) is 95%, the remaining 5% must be owned by Indonesian shareholder(s). However, in the electric power support services industry, foreign shareholders may have fully-owned companies, subject to fulfil-ment of certain requirements.

V. New developments As mentioned above, Law No. 15 is currently the applicable law with respect to electricity matters. However the Government is planning to:

1. Draft a new Presidential Decree to accommodate the cooperation between state-owned company as the Holder of the Electricity Business Authority and private companies as replacement of Presidential Decree No. 37/1992 and Presidential Decree No. 7 of 1998 on Cooperation between Private and Government on Infra-structure Projects;

2. Draft a new law on electricity.

Oil and Gas. I. Relevant Authorities in the Oil and Gas Sector The general responsibility for coordinating infrastructure projects in Oil and Gas falls under the coordinating minis-try for the economic affairs. The coordinating minister acts through his deputy of energy, mineral resources and forestry which has the general responsibility to prepare planning and policy making as well as synchronizing pol-icy implementation in the energy, mineral resources as well as forestry.

At the ministerial level, the energy and oil and gas activities fall under the Department of Energy and Mineral Re-sources (DEMR).

Upstream business activities fall under the supervision of DEMR, through its Directorate General of Mineral Re-sources. BP Migas is the Implementing Body for the upstream oil and gas business activities.

Downstream business activities are also under the DEMR who has the authority to manage, foster and supervise the implementation of the sector and to determine the master plan of the transmission network. BPH Migas is the Implementing Body for the downstream oil and gas busioness activities.

II. General The current basis for oil and gas mining in Indonesia is Law No. 22 of 2001 promulgated on 23 November 2001, which was amended by the Decision of the Constitutional Court in late 2004 (“New Oil and Gas Law”), replacing the old Oil and Gas Mining Law under Law No.44 (“Old Law”) and all its implementing regulations.

Under the Old Law, Pertamina, as the sole state oil enterprise, had the mining authority within the Indonesian territory and was responsible for the supply of all petroleum needs of the country. This resulted in the monopolistic position of Pertamina with respect to awarding Production Sharing Contracts (PSCs) for oil and gas exploration and exploitation (upstream) activities and with respect to the supply and sale of oil and gas to meet the domestic needs of Indonesia. This situation gave Pertamina the function of a regulator as well as that of a business entity with a monopolistic position in the oil and gas mining industry.

The New Oil and Gas Law has taken away the regulatory functions of Pertamina, as well as its monopolistic posi-tion. The mining authority for upstream (exploration and exploitation) activities is now held by the Government and downstream activities are carried out based on obtaining specific business licenses from the Government. As the holder of the mining authority, the Government has established:

(a) the Implementing Body for the Upstream Oil and Gas Business Activities or “BP Migas” as the supervisory body for upstream activities, and

1 For PMA Companies, this will be issued by BKPM on behalf of the Minister.


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(b) the Regulating Body for the Supply and Distribution of Oil Fuel and Transportation of Gas through Pipelines Business Activities or “BPH Migas” as the supervisory body for downstream activities.

The status of Pertamina was also changed from a State oil enterprise established under the Pertamina Law to a State-owned limited liability company (Persero) under the Indonesian Company Law.

The current regulatory package in the oil and gas sector is seen as an improvement to the old regulatory pack-age. In upstream business activities, the new regulatory package has taken out the monopolistic position and regulatory functions of Pertamina. Certain roles of Pertamina are now assigned to BP Migas, which is a non-profit governmental body, and Pertamina is now a normal business entity.

In the downstream business sector, the new regulatory package provides a broader business environment and more competitive market, including for foreign investment. The retail trading business which was closed for pri-vate entities is now open, including for foreign investment.

III. Upstream Activities

BP Migas BP Migas was established by Government Regulation No. 42 of 2002, as a State-owned legal entity. The Head of BP Migas reports to the President who has the right to appoint and dismiss him, after consultation with the Par-liament.

BP Migas supervises the implementation of Cooperation Contracts for upstream activities to ensure that the ex-traction of natural oil and gas owned by the State provide the maximum benefit and revenue to the State.

The main tasks of BP Migas are: (a) to give considerations to the Minister of Energy and Mineral Resources in preparing and offering work areas

and Cooperation Contracts; (b) to sign the Cooperation Contracts; (c) to review and submit development plans for the first field to be put on production in a work area, to the Minis-

ter of Energy and Mineral Resources for approval; (d) to approve field development plans other than the above mentioned; (e) to approve work programs and budgets; (f) to appoint sellers of the Government’s share of natural oil and gas.

Cooperation Contracts The upstream natural oil and gas activities have been further implemented by the Government Regulation No. 35 of 2004 (“GR 35/2004”).

Upstream activities consist of exploration and exploitation. Foreign investors can (i) invest directly in the up-stream activities or (ii) establish a PMA joint venture company. Such upstream activities are now conducted and controlled through Cooperation Contracts, which can be in the form of Production Sharing Contracts or other forms of cooperation contracts. The Cooperation Contracts must contain conditions concerning:

(a) ownership of the natural resources which must remain in the hands of the Government until the point of de-livery;

(b) management of the operations, in terms of the granting of approval over the work plan and budget plan, the field development plan and the monitoring of the implementation of said plans, must be with BP Migas;

(c) the capital and risk shall entirely be borne by the oil company which is a party to the Cooperation Contract.

Foreign legal entities may only conduct upstream activities and such activities may not be combined at the same time with downstream activities, which consist of processing, transporting, storing and trading, except if such ac-tivities are done in the furtherance of the operations under the Cooperation Contract.

Work areas are determined by the Minister of Energy and Mineral Resources, after consultation with the pertinent local Government and then offered to oil companies. The Minister of Energy and Mineral Resources also deter-mines the oil company to be granted the right to conduct the upstream activities in the Work Area under a Coop-eration Agreement. Each oil company may only hold one Work Area.

The term of a Cooperation Contract is at the most 30 years, with the possibility for extension for a maximum pe-riod of 20 years. GR 35/2004 has regulated guidelines, procedures, and provisions of the Cooperation Agree-ment, the determination and offering of work areas, amendment and extension of Cooperation Contracts and area relinquishments. These provisions in general follow those used in the existing PSCs, but adjusted according to the current situation, certain improvements being made to make the Cooperation Contract more attractive.

Cooperation Contracts signed by BP Migas must be notified in writing to the House of Representatives of the Re-public of Indonesia.

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IV. Down Stream Activities

BPH Migas BPH Migas, which was established by Government Regulation No. 67 of 2002 (“GR 67/2002”), exercises supervi-sion over the implementation of the supply and distribution of oil fuel and of the transportation of natural gas through pipelines.

The tasks of BPH Migas are to regulate, determine and supervise, among others: (a) the availability and distribution of oil fuel, (b) national reserve of oil fuel, (c) tariff of transportation of natural gas through pipelines, (d) price of natural gas for household and small scale business use, (e) natural gas transmission and distribution business undertaking.

BPH Migas consists of a Committee and fields. The Committee has a Head who is also a member, and eight members who are professionals and are all appointed and dismissed by the President after obtaining the approval of the Parliament. BPH Migas is responsible to the President.

GR 67/2002 stipulates the organizational structure, status, functions, tasks, personnel, authority, responsibility and work mechanisms of BPH Migas which constitutes an independent government institution.

Business License The oil and gas downstream activities, as provided under the New Oil and Gas Law, are ruled under the Govern-ment Regulation No. 36 of 2004.

Down stream activities consist of processing; transporting, storing and trading.

Such activities can only be conducted by legal entities established under the laws of Indonesia and domiciled in Indonesia, after obtaining a Business License from the government. Foreign legal entities can establish a joint venture (PMA Company) to conduct downstream activities and obtain the required Business License. The Busi-ness License is issued separately for each activity, and one legal entity can be given more than one Business License.

The Minister of Energy and Mineral Resources determines the master plan of the transmission network and distri-bution of national natural gas. A Business License for transporting natural gas through a pipeline network can only be granted for a certain transportation fragment. The Business License for trading of natural gas through a pipe-line network can also only be granted for a certain trade area.

The price of oil fuels and of natural gas is left to normal competition.


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2. Telecommunications. 2.1. Size of the Sector, Growth Potential and Outlook.

a. Present Condition of the Network. In 2002, one had excellent phone connections from Pekanbaru, Riau (Sumatra) to Singa-pore, but lines to Jakarta were often dead and working lines often lacked the quality required for simple faxes. Large companies in Riau have been anyway using satellite links for all their communication needs. In 2004, the State Telecommunications Company Telkom started to sell ASDL (a-synchronous broadband), but buyers in suburban Jakarta could not always get a simple new telephone line, as local exchanges had, again, run out of capacity (or so people were told). In 2005, companies selling broadband services, such as wireless WAN, have to deal with a duopoly over the wireless broadband spectre held by two politically well-connected companies set up in the 1990’s, PSN and CSM. A good two-way broadband con-nection for business use is still prohibitive in price for small companies, with costs of around US$ 10 per kB/s per month for the leaseline and the service provider. Only recently, internet service providers have started to make inroads against this duopoly and prices have slowly started to drop. Telkom even slashed its prices for ASDL by approximately 50% a few months after the introduction of the facility. No wonder that in this environment, mobile GSM networks offering simple prepaid packages have seen their subscriber numbers go up by massive double-digit numbers, although their revenues per customer are going down. New and cheap CDMA services, which were first offered by fixed-line operator Telkom in order to get back into the mobile market segment, are further sending prices downwards.

Table 4.2-1 gives a number of indicators with regard to the development of the network ca-pacity. Indonesia had only about 1 million telephone lines by the end of the 1980’s. By 1997, that number had gone up to about 5.5 million. Presently, there are around 10 million lines, but also 30 million subscriber numbers to mobile services.

Table 4.2-1. Network Size and Growth (BPS 2001a, BPS 2003c) Network Category Lines (‘1000) Remarks Java-Bali Other

1997 3547 1309 subscribers 2002 5237 (+8%p.a.) 2102 (+10%p.a.)

lines in service 2002 5597 (84%) 2200 (88%)

Fixed-Line

free capacity 2002 1028 (16%) 276 (12%)

1997 217 2002 + 15,000

Mobile

subscribers

2005e + 35,000

Notes in Text Box 4.2-1 on: - fixed networks - JV’s for fixed networks - fixed wireless networks - international services - GSM, CDMA services (fixed wireless) - ISPs - broadband: ASDL, leaselines, WAN wireless, cable-TV networks, satellite down/uplink services for telecom and TV - VOIP

Table 4.2-1 suggests strong growth both in the 1990’s and of course again in recent years. The fixed line services are supported by fully digital local and trunk exchanges. Transmission networks are also 98% digital (World Bank 2005a). Indonesia’s fixed line telephone network has thus given reasonable service quality levels for the last ten years, especially on Java. Mobile networks are good in almost all large urban centres and along major national roads in Java. Yet tariffs for fixed services were insufficiently adjusted after the crisis. While tariffs for mobile services have been free, recently a price war has set in, which had become unavoid-

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able as mobile operators have been enjoying operating margins of typically 50% upwards in recent years. Investment budgets from operating cash are thus reasonable but not over the board. It is to be noted that Telkom and Indosat have good local credit ratings, but are still below investment grade internationally.

Figure 4.2-1 (next page) shows a more comprehensive sector growth picture, including a growth forecast until 2020. This forecast simply assumes that Indonesia will have the same lines per 100 inhabitants as Malaysia has today. Figure 4.2-1 makes clear that stellar mobile subscription rates have lifted the teledensity growth rates, but also that a return to more nor-mal long-term averages is to be expected. Indeed, a respectable teledensity rate of 56 lines per 100 inhabitants could be reached in 15 years with these lower rates. As a comparison : Malaysia had 51 lines and Singapore 120 lines per 100 inhabitants in 2001.

The assumed growth rates are moreover realistic due to the ongoing urbanisation of Indone-sia and the concentration of services on Java. The reverse picture is that rural areas and ar-eas outside Java will continue to lag in access to telecommunication services, especially for broadband and data services, albeit evolving WAN wireless technologies may come here to rescue earlier than expected. Presently, however, the introduction of WAN wireless and other

Text 4.2-1. The Service Provision Landscape for Telecoms. • Fixed Line connections are offered mainly by Telkom, although deregulation has opened the market in

principle. Indosat has now a license for local phone services on Telkom’s last-mile network, in a duopoly service arrangement competing with Telkom, but it has made little inroads into this market as of now. When Indosat was privatised in 2002, it was obliged to provide no more than 759,000 fixed lines by 2010. In prin-ciple, Indosat should also be able to offer national long-distance services, but implementation has been de-layed.

• The expansion of Telkom in the 1990’s was steered towards regional joint-ventures with private partners, some local and other foreign (including France Telecom and Cable and Wireless). Of the 5 ventures origi-nally set up, only one so-called KSO remains, with Bukaka and Singtel in Eastern Indonesia. The partners of the other KSO’s (West Java, Central Java, Sumatra, Kalimantan) were bought out by Telkom after the on-set of the economic crisis.

• Originally, Indosat offered the satellite services and the international services. • GSM services are offered by a range of companies. Telkomsel, set up initially as a subsidiary of Telkom, is

the market leader. Other important service providers are Satelindo (owned by Indosat) and Excelcomindo. • In the past, public phone services and phone kiosks were vital in delivering access to low-income groups.

25% of telephone traffic of Telkom was delivered through these services up to a few years ago. Mobile ser-vices have decreased the relevance of these franchised public amenities in urban areas, but they remain vital for service delivery in rural areas.

• CDMA services are offered by Telkom (“Flexi”), Esia (Bakrie Group) and others. These services had been preceded by a few limited networks of “fixed wireless”, such as Ratelindo (Bakrie Group), which delivered fixed line infrastructure to difficult to reach urban and suburban locations, mostly however at mediocre quality.

• Internet services are offered by close to 200 providers offering a wide range of services, but service quality and penetration is hampered due to poor backbones. Telkom has the deepest penetration, but often at the cost of poor access. There are presently about 3 mio users and 600,000 subscribers. Internet kiosks have taken over the function of telephone kiosks in urban areas for increasing access to internet services.

• Broadband is available through ASDL (Telkom), leaselines (CSM, PSN, wireless WAN), satellite down- and uplinks and cable-TV.

• Cable TV is offered mainly by two companies having each a limited fibre-optic network (Cablevision (Lippo Group) and Telkom) and by Indovision which offers satellite downlinks accessible through desktop sets. Government statistics mention 2 mio subscribers for these multimedia services.

• VOIP services are controlled by Telkom, Indosat and Satelindo.


Guidebook page 73

wireless technologies other than GSM are hampered due to a very poor spectrum management by the government.

Overall, it should be clear that although growth in the tele-communication ser-vices is to remain strong, Indonesia as a country may continue to lag behind coun-tries in the vicinity. Such weakness would put a damper on the market for those applications which require, for in-stance, fast, cheap and reliable broad-band services. Part of service reliability is moreover dependent on backbone and

gateway infrastructure, linking Indonesia’s vast areas together and linking them all up to in-ternational networks.

Indeed, two bottlenecks which are to impact on market development, and vice-versa, stand out : backbone reliability and pricing. These issues are moreover interrelated.

In the past three decades, Indonesia built up a backbone via self-owned satellites and sea cables. Indonesia’s sole gateway was Singapore and Indosat managed all international traf-fic. This infrastructure served its purposes well in the initial decades but had become highly overstretched and too monopolistic in recent years. Luckily, that is all changing currently. The following recent developments, and continuing bottlenecks, should be noted :

• As a result of on-going deregulation, Indosat’s sole gateway has been added with a new gateway to Malacca and one to Brunei. Another gateway to Australia is planned. These gateways are built or built-operated by a number of international companies in Joint Ventures with Telkom or other national operators.

• The major telecom operators are also building stretches of backbones on Java and in Sumatra. This is resulting in a technically more reliable hybrid backbone grid. A prob-lem may be inter-connectivity, as this hybrid grid is controlled by competing operators. There are presently no final regulations yet concerning interconnections of privately owned networks.

• Network sharing is further hampered as a result of the non-existence of backbone in-frastructure on power grid infrastructure. At present, no telecommunication lines are built on high-tension towers. The technical option of using the electrical grid itself as a data carrier is even more remote operationally.

The evolving regulatory set-up for telecom services will be clarified further on in this Section. While it is clear that deregularisation and privatisation has moved on quickly in the sector during the past years, Indonesia still seems to be slow to take advantage of technological

Telephone Subscription 1990-2004 and Trend (2020 = lines per 100 people equal to Malaysia now)

0%

30%

60%

90%

120%

150%

1990

1993

1996

1999

2002

2005

e

2008

e

2011

e

2014

e

2017

e

2020

e

-

30

60

90

120

150

fixed lines

mobilesubscribers

total lines(mio)

lines per 100people

Figure 4.2-1. Telecoms Penetration.

Note : Government statistics, with a forecast up to 2015 (Infrastructure Develop-ment 2005a) are in line with the above predicted teledensity growth. For 2015, there is also a forecast for 32 mio internet subscribers, up from 3 mio now, and 27 mio multimedia subscribers (cable-TV, TV over internet,,..), up from 2 mio today.

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advancements early on – advancements which could add considerable benefits both to high-end data and multimedia traffic and to low-end rural access. The lack of intention of coopera-tion between the State Companies Telkom and PLN is hereof indicative.

The second issue is about pricing. As said earlier, local fixed line tariffs have been low, but national long-distance tariffs have actually been high. This is hurting again regions outside Java, which rely more on long-distance services. Deregulation and competition, added with a more hybrid and competitive backbone infrastructure crisscrossing Java, Kalimantan, Suma-tra and in the future also Eastern Indonesia (on to Australia) should allow more competition for national long-distance services. VOIP services and optical data transmission are of course adding options for cost reductions beneficial to consumers. Again, adding competi-tion should bring very substantial consumer benefits (World Bank 2005a), but price wars and resistance from state owned companies may hamper the speed of reforms and progress.

b. Infrastructure Investment Priorities Addressed at the Infrastructure Summit. At the occasion of the Infrastructure Summit 2005, surprisingly only one (mammoth) project was proposed : the B-1 Palapa O2 Ring Backbone Network Development. This US$ 900 mio multi-year programme would provide a fiber-optic sea cable hopping around all major islands of the country. It obviously mentions the defence department as one of the stakeholders.

This project is curious, as a range of companies are already setting up a hybrid backbone network in Western Indonesia and as there is no reason why Eastern Indonesia would not be serviced soon as well, as the gateway connection to Australia will be of strategic importance to the commercial interests of the large telecom companies.

Indonesia may need one day the Palapa O2 project, but the timing and the scope of this massive backbone are presently difficult to justify. Table 4.2-2 moreover shows that there are many more policy issues that needs to be addressed. Table 4.2-2. Sub-sector Key Development Aim Key Bottle-necks. P* Gateways Providing alternative and

thus reliable links to interna-tional communication net-works

• None. Recent deregulation has brought more gateways.

N

Backbones Providing alternative and thus reliable links within the national communication network

• No regulation yet on inter-connectivity. • No co-operation with PLN for the sharing of

high-tension towers, or of cables

(Y)

Privatisation of state-owned ser-vices

Adding competition. • None in principle. Deregulation has already provided a range of maturing and competing service providers

• Telkom remains the main provider in many services

• Regulatory Body has not yet been set up

N

Public Service Obligation (Rural)

Guaranteeing access to ser-vices in remote areas

• Dependent on Government budget; more policy than progress

N

Public Service Obligation (So-cial)

Promoting cheap access of data services to educational and other social institutions

• Not addressed in public policy N



Guidebook page 75

The fact that the Government only presented the Palapa Backbone is for sure related to the on-going deregulation. Telecommunications investment is no longer decided by the Govern-ment but by a limited number of established companies. The question is who is now deciding over telecommunication policy.

c. Main issues relevant to investment decisions. The following issues are relevant to investment decisions :

• Demand growth is to remain very strong for a long time to come, but the growth fig-ures will become increasingly manageable for the established companies;

• Deregulation and privatisation has already been achieved to a large extent, making new entrants more likely to happen as a result of buy-outs, strategic alliances and the introduction of patented substitute technologies;

• Deregulation is also achieving the construction of a more hybrid and reliable back-bone and gateway infrastructure; this is likely to result over time in better pricing for national long-distance traffic;

• The regulatory infrastructure accompanying deregulation is still far from complete, leaving most industry initiative in the hands of established and dominant players (Telkom, Indosat,…); this implies that dominant local market players will have a very strong voice in setting new technological standards, of their choice;

• Investments in new data technologies is on-going on Java’s urban centres; better ac-cess to telecommunication services in remote / rural areas may be expected over time due to technological advances in wireless technologies and as a result of com-peting backbones traversing the larger main outer islands; rural access is unlikely to benefit from substantial government investments;

• The Infrastructure Summit did not address telecommunications and the Government showed its lack of clout in telecommunications policy and management by proposing the Palapa O2 Ring Backbone; the present Government may already try to address this weakness, for instance by setting up a new Communications Ministry, which has an explicit agenda of accelerating data infrastructure development.

• Investment risk in telecommunications investments is mainly related to country risk; this is reflected into the good local investment rating of the main service providers, notwithstanding the fact their international credit rating is still below investment grade.

2.2. Legal and regulatory framework.

1. Relevant authorities in the telecommunications sector The general responsibility of the telecommunications industry, as in the case of other economic sectors, falls un-der the coordinating ministry for economic affairs. The coordinating minister acts through his deputy of infrastruc-ture and regional development who has the general responsibility to prepare planning and policy making as well as synchronizing policy implementation in the infrastructure as well as regional development.

The Department of Communications and Informatics is now the ministry in charge of telecommunications. It car-ries out the main functions of formulating the national policy, implementation policies and technical policies in the fields of telecommunication and informatics.

Under the Department of Communication and Informatics, there are three Directorate Generals which carry on the policy functions, namely: a. Directorate General of Post and Telecommunication, which has the primary tasks of formulating

and implementing the technical policy and standardizing in the field of telecommunications;

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b. Directorate General of Telematics Application (Aplikasi Telematika), which has the primary tasks of formulat-ing and implementing the technical policy and standardizing in the field of telematics application;

c. Directorate General of Telecommunications Facility and Information Dissemination, which has the primary tasks of formulating and implementing the technical policy and standardization of telecommunications facility and information dissemination.

The regulatory and supervisory functions are vested in BRTI.

2. General The telecommunications business is regulated by Law No. 36 of 1999 on Telecommunications (“Telecommunica-tions Law”). The main objectives of the Telecommunications Law were to accommodate technological develop-ments and to facilitate competition.

The following government regulations and ministerial decrees were issued as implementing regulations of the Telecommunications Law: - Government Regulation No. 52 of 2000 on the Telecommunications Organization, - Decree of the Minister of Communication No. 20 of 2001 on Telecommunications Networks Operations, as

amended by Decree of Minister of Telecommunications No. 29 of 2004 (“Network Decree”), - Decree of the Minister of Communications No. 21 of 2001 on Telecommunications Services Operations

(“Service Decree”), - Decree of the Minister of Communications No. 4 of 2001, as amended by Decree of Minister of Telecommu-

nications No. 28 of 2004, concerning Determination of National Fundamental Technical Plan, - Decree of the Minister of Communications No. 31 of 2003 on the Determination of Indonesian Regulatory

Body on Telecommunications (Badan Regulasi Telekominukasi Indonesia or “BRTI”).

Before the Telecommunications Law was enacted, the private sector’s involvement was severely limited. The pre-vious law divided telecommunications operations into: (i) telecommunications service operations, divided into ba-sic and non-basic services,

(ii) telecommunications operations for special purposes and (iii) telecommunications operations for state defense purposes. Any telecommunication operator providing basic services (local and long distance telephone, mobile cellular, fixed wireless, etc) had to enter into a co-operation scheme with the so-called “Organizing Bodies”, Telkom and Indosat. Such co-operation could be in the form of joint venture, joint operating scheme (Kerja Sama Operasi/KSO) or management contract.

3. BRTI BRTI (Badan Regulasi Telekominukasi Indonesia), the Regulatory Body on Telecommunications was established by Decree No. 31 of 2003 to supervise and regulate the telecommunications network operations and telecommu-nications service operations.

The BRTI consists of the Directorate General of Post and Telecommunications and (“DGPT”) and the Committee of Telecommunications Regulations (“Committee”). The Committee consists of five individuals, telecoms and IT professionals who are chosen by the Minister.

BRTI has the following tasks:

Regulatory functions: o The issuance of licenses for telecommunications network operations and telecommunications service opera-

tions o Setting standards of operational performance and quality of services o Setting interconnection fees o Setting standards of telecommunications equipment and devices

Supervision of telecommunications network operations and telecommunications service operations: o The performance of operations; o The business competition; o The use of telecommunications equipment and devices.

Control of telecommunications network operations and telecommunications service operations: o Settlement of dispute between the telecommunications network operators and telecommunications service

operators; o The use of telecommunications equipment and devices. o The determination of quality services standard.

4. Telecommunications Operators The Telecommunications Law classifies telecommunications operations into the following categories:


Guidebook page 77

(a) Telecommunications Network Operation, defined as any provision and or telecommunications network ser-vice to enable telecommunications, divided into regular network operations and mobile network operations, subsequently divided into more specific sub-categories.

(b) Telecommunications Service Operations that utilize the telecommunications networks. The Service Decree divides the telecommunications services into (i) basic telephone services, (ii) value-added telephone services and (iii) multimedia services. Each of these three main categories is divided into sub categories.

(c) Special Telecommunications Operations, i.e. telecommunications operations for the purposes of: (i) private use, either for:

• individual use, namely for amateur radio or inter-residents radio communication (either for information on any danger, natural disaster, search and rescue),

• government institutions (only if the need could not be fulfilled by the operator of telecommunications network and the operator of telecommunications service, the location of activities are not reachable by operator of telecommunications network and the operator of telecommunications service, and/or the activities require separate telecommunications network),

• special agencies, and • legal entities (only if the need could not be fulfilled by the operator of telecommunications network and

the operator of telecommunications service, the location of activities are not reachable by operator of telecommunications network and the operator of telecommunications service, and/or the activities re-quire separate telecommunications network);

(ii) State defense (to be performed only by the Ministry of State Defense, Indonesian Armed Forces, and the Indonesian Police Forces)

(iii) Broadcasting, in which the nature, form, and use of the telecommunications operation are specifically for the broadcasting purposes. In this regard, the operators must construct their own networks as broadcast-ing device (sarana pemancaran) and transmission devices (sarana transmisi) for the purpose of broad-casting.

5. Licensing The Telecommunications Law stipulates that the licensing of telecommunications operators must be granted through a simple, transparent, fair and non-discriminatory process, and a short period of completion.

Applicant telecommunications operators must undergo a two-step licensing procedure. The applicant will first be granted a principal license in order to conduct the necessary preparation to be telecommunications operator. This license is valid for a period of three years and can be extended only for one year. The license is issued within a period of sixty days upon complete submission. In the event that after the lapse of this period, there is no re-sponse from the Minister, the license is deemed to have been granted. The license will only be granted to Indone-sian legal entities engaged in the telecommunications field with adequate funds and human resources in this field. This principal license is not assignable.

Within the validity period of the principal license, the applicant must obtain an operational license which is granted once it has established the necessary infrastructure and devices and passed an operational feasibility test (Uji Layak Operasi/ULO/”Test”). The license is valid without time limit. However it will be thoroughly evaluated every five years.

6. Anti Monopoly Provision The Telecommunications law provides the prohibition of any action which could give rise to a monopolistic prac-tice and unfair business competition among the telecommunications operators.

7. Foreign Investment With the enactment of the Telecommunications law, all telecommunications areas are open to foreign invest-ments, however, subject to joint venture with a local company as set forth in the Negative List, in which the foreign investor can hold up to 95%.

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3. Transportation Sector. 3.1. Size of the Sector, Growth Potential and Outlook.

a. Present Conditions of the Network. Being an archipelago, Indonesia’s transport infrastructure strongly relies on an integration of transport over land and transport over water. As pointed out earlier in Chapter 2, the ameni-ties underscoring this structure came under duress during the extended economic crisis, due to under-investment, but the structure itself is intact and vibrant. The global tendency towards budget air services has added to the intensity of long-distance (inter-island) traffic. The only looser, so far, has been the rail transport system on Java, which has had difficulties to com-pete with cheap inter-city air transport and which has moreover failed up to date to develop a stronger role in suburban transport. In effect, suburban transport in general, including freight transport from industrial estates, dispersed in the hinterland of the major coastal cities, to the harbours which are more centrally located, has suffered from the lack of transport capacity growth. Finally, inter-city freight transport over land, which has to use national roads in ab-sence of an extended inter-city network of freeways, has become more difficult due to bad road maintenance and an array of local legal and illegal levies charged to passing trucks.

Tables 4.3-1 and Table 4.3-2 summarises the present condition of the transportation net-work: Table 4.3-1 . Transportation Networks Sector Sub-sector Sector Size Key Problems Java Other

Toll Roads 558 km 49 km • Integrated network only in Greater Ja-karta, including new link to Bandung

• Limited private sector experience : Approx. 80% built and managed by S.O.E. PT Jasa Marga; other operators belong to, or were set up by a few do-mestic and politically well-connected business groups, most notably CMNP

• Tariff revisions have been insufficient National Roads 4,373 km 21,897 km • Poor condition of the network wors-

ened by over-loading of trucks Sub-national Main Roads

83,030 km 226,996 km • Due to the decentralisation process, increasing responsibility disputes over budgeting and O&M.

Roads (World Bank 2005a)

General Issues : • 1990-2004: Vehicle sales growth at over 10%-15% per year, especially in Java; approximately

5%-10% p.a. outside Java • Upgrading and maintenance not sufficient compared to increasing loads (and axel overload-

ing)

Java Other Railroads (website PT KAI)

Operational Rail Network

3,672 km 1,370 km • Decrease of passenger and freight traffic in Java

• Accident prone due to poor mainte-nance and management by PT KAI

From Commercial Ports

2 mio pass./year

10 mio pass./year

• Limited attempts to integrate over-land and over-water transport logistics

Ferry Ser-vices

From Non-Commercial Ports

0 8 mio pass./year

• Only provided of very basic amenities

General Issues : • Areas outside Java have seen a strong growth in mobility by means of ferry services, includ-

ing via river transportation.


Guidebook page 79

Table 4.3-1 indicates that Indonesia heavily relies on a sub-standard road and ferry network which has to absorb traffic growth figures of 10%-15% p.a. in Java and 5%-10% p.a. outside Java. Unfortunately, a more integrated and more efficient transportation network, in which rail lines and freeways offer high-speed backbones, is non-existent. Similarly, more efficient in-ner-city and suburban transport infrastructure, with underground lines and suburban light railways, have been largely absent as well, most often as rate of returns are insufficient, es-pecially if the projects have Rupiah revenues only. Moreover, investments have often to start from basic upgrading work of public services. For instance, major parts of the inter-city rail network and inner-city rail tracks are still single-tracked.

Table 4.3-2 . Transportation Amenities.

Sector Sub-sector Sector Size Key Problems Java Other

25 strategic ports(in/out=(un)loading in Ton)

4 ports out:22,000Tin:80,000T

21 ports out:169,000T

in:58,000T

• 63% of all traffic by ton • Local authorities trying to break the

monopoly of the State Port Operators, often adding to risks (fragmentation of amenities)

• Average forecast for all large container terminals to run out of capacity by 2007-2009

non-strategic main ports

>10 ports >61 ports • 37% of all traffic by ton • Only provided of very basic amenities

Seaports (Transport. and Communication Statistics 2002)

General Issues and Remarks : • Main general ports are Medan / Belawan, Jakarta / Tanjung Priok, Surabaya / Tanjung Perak

and Makassar • Majority of ports managed by 4 regional State Port Operators (Pelindo I to IV) each managing

one large port and all other ports in the region, thereby creating a vital role in managing the flow of goods between groups of islands

• Reasonably successful partnerships with private operators in Jakarta and Surabaya; focus on container terminals for import-export with dollar-earnings

• 1991-2002: Inter-island traffic up by 5.5% p.a.; imports up by 4% p.a.; exports up by 3.4 % p.a. (in Ton)

• Some large port facilities outside Java are commodity specific (e.g. oil); declining oil produc-tion puts up potential of conversion

Java Other Major airports

2 airports 19 mio pass.


• Terminals of several major airports are close to full capacity

Other main air-ports



• Minimum-standard air traffic control, runway conditions and terminals, with frequent safety lapses

• Least prepared to deal with the in-creased number of budget flights

Other airports / public air strips

> 167 airports

Airports (Infrastructure Outlook 2005; JICA, estimates for 2004)

• Main airports and main hub remains Jakarta / Soekarno-Hatta, with 40% of all traffic • Airports managed by State Airport Operators, Angkasa Pura I and II; selected services

(ground services,…) outsourced • 1991-2004 : year-on-year growth of both domestic and international travel (passengers and

freight ) of about 11%; very strong growth in recent 3 years in domestic passengers (35% p.a.), but this is a combination of the effects of the economic recovery and a price war among budget airlines

Table 4.3-2 shows pressures affecting the port facilities which are in effect identical to prob-lems identified earlier in Table 4.3-1. The key seaports and airports have reasonable termi-

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nals, sometimes with Joint Ventures for management and development. But with long run traffic growth figures between 5% and 10% per annum, capacity is quickly running out due to the investment stops brought about by the economic crisis. In various segments, there is scope for increased efficiencies in O&M, allowing the worst-case scenarios of reaching full capacity already in 2006-2008 not to come through. Nevertheless, investments in solid new amenities, including major expansions, are unavoidable.

The peculiar and politically sensitive position of Jakarta and to some extent Surabaya should again be underlined with regard to investment needs. The hub position of these two cities makes investments an absolute necessity : they cannot handle much larger traffic volumes. Moreover, traffic flows through other ports (seaports, airports) would be suppressed – and smaller investments there would suffer – if investment in these two hub cities are held up for whatever reason. Outer areas are thus again depending on mega-growth on Java, or would have to go through difficult and time-consuming adjustments of their logistics channels in or-der to avoid these hubs.

b. Infrastructure Investment Priorities Addressed at the Infrastructure Summit.

The Infrastructure Summit addressed only partially the problems laid out above. It is there-fore important to summarise the priorities and the potential bottle-necks of the Government priority programme. Bottle-necks are only selectively identified, especially when such a bot-tle-neck could impede the basic financial viability of potential investments. This is shown in Table 4.3-3. Table 4.3-3. Sub-sector Key Development

Aim Key Bottle-necks. P*

Regional Toll Roads

Trans-Java high-speed link

• Fragmentation of tender batches, making missing links possible

• Several inter-city segments economically viable by 2015-2020 (World Bank 2005a), increasing the risks due to the absence of private-sector interest for a few links meanwhile

Y

Regional Rail links

High-speed passenger and freight links in Java; New point-to-point commodity freight lines outside Java

• Lack of economies of scale due to island fragmen-tation

N

Urban Toll Roads Easing car and freight traffic, mainly to and from airports and sea-ports

• Lack of planning coordination with regard to multi-modal transportation solutions, with e.g. dedicated passenger rail lines to airports and freight lines to container terminals. Possible competing proposals can uphold decisions

0

Urban Rail Solu-tions

High-speed inner-city transportation, including to and from air and sea terminals

• Difficult on-going attempts in Jakarta to build an elevated light-rail system do not bode well for fu-ture investments requiring intense public-private partnerships

• Summit project for rail link to Soekarno-Hatta is a simple upgrading project of a commuter line.

N

Seaports Adjusting capacity to strong traffic growth

• Monopoly of State Port Authorities 0

Airports Adjusting capacity to very strong traffic growth

• Monopoly of State Airport Management Authori-ties

0



Guidebook page 81


• Demand growth for transport infrastructure is strong and over time solid. The crisis has hardly dented increasing transportation needs. Only sea transportation may show lower than 10% p.a. long-run growth figures, but this is dependent on many variables, such as world prices of commodities, new manufacturing investments on Java, etc.

• Overall, the Government reasonably projects a transportation growth of 17.2% p.a. if the economy achieves to grow at 6.6%;

• Capacity extensions of terminal infrastructure is urgent, although efficiency improve-ments may buy adequate time for better planning; this seems to particularly the case for terminals outside Java;

• The planning of integrated and complementary transportation networks, which in-cludes the development of high-speed inter-city and suburban amenities, is done only at a rudimentary level

• At the Infrastructure Summit, the Government presented investment proposals which were mostly shelved at the start of the crisis; the selective approach shows more pragmatism than concerted planning, although the rates of return on these projects have not drastically changed; this is due to the fact that demand growth has been constant and high; however, projects which were not feasible prior to the economic crisis remain most often not (yet) viable at present;

• The pay-back of most infrastructure investments on Java simply depends on steady (and not exponential) demand growth and unlikely on multipliers due to an increased

Text Box 4.3-1. Projects re-emerging, but not yet a strategy surfacing. The Toll Road programme inherited many pre-crisis stakeholders who had for instance paid for licenses prior to the crisis. Not surprisingly, the strategy emerging from the Publics Works departments reflects rather this past legacy than the weight and the cost of the future programme as a whole. The Government envisions close to 1,700 km of toll roads to be built, costing US$ 14.9 bn. G-to-G soft loans make it possible for the Government to complete building 17 km. Jasa Marga is still earmarked to keep a share of 291 km, all in Java. What is reserved for private-sector investments may not be too appealing : difficult suburban toll roads in the fringes of Jakarta, facing long land acquisition proceedings and complicated dealings with multiple local au-thorities (141 km); a range of projects in Java set aside for “later-stage” bidding (668 km) and three small projects outside Java (56 km). There is also no clarity on how the licenses of the aborted projects of 1997 will be re-allocated. These licenses comprise 523 km and Jasa Marga was always a partner in the Joint Ventures, so it is still a shareholder now. Licensees were companies such as Bukaka Teknik Utama and Bakrie Invest-indo. Some licenses became state property as a result of debt restructuring processes, but many linger in one form or the other. Some licensed Joint Venture companies set up prior to the crisis had also equity capital from Jasa Marga on their books, but there are cases in which the cash evaporated over time.

Finally, a number of projects did not (yet) re-appear in new Government long-lists, although they were on the drawing boards in the 1990’s. The following list is but a selection : a high speed train for the route Jakarta to Surabaya, the Jakarta MRT/Underground, the Surabaya MRT/light rail system, new rail lines in the wider periphery of Jakarta, the Java-Bali bridge and Java-Sumatra Bridge. Projects pursued in the past years by stronger local authorities, such as the toll road from Pekanbaru to Dumai in Riau Province, are also no longer on official lists. Many of these projects (but not all) are by no means commercially viable. Furtermore, a number of past projects are presently being pursued by State Operators and/or local authorities and for that reason do not appear on the list open to private investors, for instance : the Palembang airport terminal, the Greater Jakarta commuter train system, the Jakarta/Manggarai integrated rail-bus terminal, the Bandung light railway system, the double-tracking of the rail line from Jakarta to Surabaya and the Surabaya-Madura bridge.

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inter-connectivity of transportation networks; the longest pay-back is to be expected from inter-city amenities; rates-of-return depending heavily on a late pay-back (e.g. within the last five years of the concession period) are highly uncertain;

• State enterprises control most investment decisions and decisions are dependent on a legacy of past licenses and stakeholders with legacy interests;

• All revenues, except for international traffic, are in local currency; local-currency long-term investment vehicles, such as a Transportation Fund, are non-existent as for now.

C.3. Legal and regulatory framework

1. Relevant Authorities in the Transportations Sector The general responsibility for coordinating infrastructure projects in transportation in general falls under the coor-dinating ministry for economic affairs. The coordinating minister acts through his deputy for infrastructure and re-gional development who has the responsibility to prepare planning and policy making as well as synchronizing policy implementation in the infrastructure and regional development.

Under the coordinating minister of economic affairs, there are two key central government actors in the road transport sector: 1. Minister of Public Works (MPU), through its Directorate General of Spatial Management (Direktorat Jenderal

Penataan Ruang, DGSM) and Directorate General of Road Development (Direktorat Jenderal Bina Marga, DGRD). DGSM has primary responsibility for the formulation and implementing policies, and technical stan-dards of spatial management; DGRD has the primary responsibility for the formulation and implementing policies and technical standards on road developments.

2. Minister of Communications (Perhubungan or MOC), through its Directorate General of Land Transport (DGLT) has primary responsibility for the formulation and implementing policies, and technical standards of land transportation.

The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to Regional Governments and its role in supporting the implementation of regional autonomy.

Regional Governments - regency (kabupaten), municipal (kota) and provincial – each have agencies (Dinas) whose responsibilities broadly align with the central Government Departments in the form of regional offices (Kan-tor wilayah) of the Department: a. Offices of Public Works (Dinas Pekerjaan Umum) are responsible, among others, for the road infrastructure

functions and programs of their respective regions. b. Offices of Communications (Dinas Perhubungan) are responsible for road traffic and transport functions and

programs, including route licensing and tariff regulation for public passenger transport services.

The regional autonomy law defines the power of provincial as well as the regency in each the transportation sec-tors, as follows: 1. licensing of inter-regency/municipality toll roads; 2. determination of policy management and licensing of provincial ports; 3. management of provincial seaports and airports constructed by the provincial government or seaports and

airports whose management is granted by the central government to the provincial government; 4. planning, construction and maintenance of provincial roads; 5. planning, construction and maintenance of inter-regency/municipality railways.

In the air transport sector, licensing of airport operations will be granted by the MOC and the Head of the Regional Government where the airport is located.

In the sea transport sector, MOC guides harbors affairs which include aspects of regulatory, control and supervi-sion on construction, empowerment, and development for implementing the National Harbor System. The regula-tory aspect includes the MOC’s authority for policy making on harbor sector.

2. Toll Roads

General Construction and operation of roads including toll roads in Indonesia are regulated under the Law No. 38/2004 regarding Roads (“Law 38/2004”) which replaced the old Law No. 13/1980.


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Government regulation No. 15/2005 (“GR 15/2005”) as an implementing regulation of Law 38/2004 has been enacted and contains the main following provisions with respect to the operation of toll roads:

Policy on development of toll roads Policy on the planning of toll road is established by the government every five years. The toll road development programme is established with due regard to regional and economic development, national transportation sys-tems and national policies on other sectors.

The Regulatory Body for Toll Roads GR 15/2005 establishes BPJT (Badan Pengatur Jalan Tol), the Toll Road Regulatory Body,

as an institution responsible to the minister in charge of the road construction and development (the “Minister”). BPJT replaces PT Jasa Marga, the State-owned Corporation which served as toll authority under the previous law. BPJT will be directed by a steering committee that will oversee a professional management and staff. The steering committee will comprise government representatives, representatives from interested parties and the community/public.

BPJT is tasked with the regulation and supervision of business entities that operate toll roads, including: i. Recommending the initial toll tariff and tariff adjustment to the Minister; ii. Taking over the right to operate a toll road the concession of which has expired and recommending on the

further operation of such toll road to the Minister; iii. Taking over temporarily the operation of a toll road which failed in the implementation of its concession and

further re-auctioning of its operations; iv. Preparing toll road projects covering technical and financial feasibility studies as well as environmental im-

pact analysis; v. Procuring the toll road investment through an open and transparent auction mechanism; vi. Assisting the implementation of land procurement in case there is certainty on availability of funds and pre-

paring mechanism for the use of land procurement fund; vii. Monitoring the implementation of toll road projects by the business entities; viii. Supervising and controlling the implementation of all toll roads operations and reporting periodically to the

Minister.

Operation of Toll Roads Under Law 38/2004 and GR 15/2005 operation of toll roads encompasses the financing, technical planning, con-struction, operation and/or maintenance of toll roads.

The operation of toll roads may be conducted by state-owned companies, regional government-owned companies as well as by private companies.

In certain circumstances, due to the lack of private interest in building certain segments of the toll roads, the gov-ernment may engage in the construction of toll roads either wholly or partly.

The concession for the operation of a toll road is granted for a certain period of time to meet an appropriate return on investment of the business.

The right to operate a toll road granted by the government to a business entity is to be carried out in a transparent and public tender. The business entity winning the tender will enter into a toll road operation agreement with BPJT acting on behalf of the government.

GR 15/2005 provides that the preparation of toll road projects is conducted in the framework of a priority list of toll roads that are intended to be tendered. The preparation will include pre-feasibility studies, feasibility studies, and analysis of environmental impact, to be conducted by BPJT. The technical preparation of toll roads is to be pre-pared by the toll operators (business entities). On the construction phase, GR 15/2005 provides that construction can only be implemented after the procurement of land has been finalized at least for the segment of toll that is feasible for the operation.

Funding for land acquisition will either be from the government or the business entities. The government will set the amount of funds for the procurement of the land. In the event the amount of funds for the procurement ex-ceeds what the government has already set forth, the government will grant an extension of the concession pe-riod. The same principle applies if the amount of funds is less than what has been provided, in which case the excess will be deposited as non tax revenue.

Tender Mechanism for Toll Roads GR 15/2005 provides that tenders will be conducted in an open and transparent manner by a tender committee established by BPJT. Tenders are divided into prequalification and limited tender phases for the party which have passed prequalification. The prequalification is conducted to evaluate the financial ability of the tender partici-pants. Both Indonesian and foreign companies may participate in the tender.

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Aside from toll roads projects that are initiated by the government, GR 15/2005 provides a scheme under which a business entity can propose to operate a toll road. Under this scheme, a business entity must propose a plan to operate a segment of toll road with a demonstrated feasibility. The feasibility study will be used as a basis for a regular tender involving other business entities.

Following the tender, the concession agreement to operate a toll road is to be signed between the business entity and the Minister, acting on behalf of the government. GR 15/2005 specifies the terms and conditions of the con-cession agreement to operate the toll road. Special emphasis is put on provisions regarding the delivery of the toll road in the event the concession to operate ends.

Toll Tariff Article 48 of Law 38/2004 specifies that the toll tariff will be calculated based on the following components: (i) the affordability of the toll road user, (ii) the extent of the profit generated from the vehicle operational cost, and (iii) feasibility of investment. The application of the toll tariff, the range of which is provided in the toll road operation agreement, is stipulated in a simultaneous manner with the stipulation concerning the operation of the road as the toll road by the Minister. Evaluation and adjustment of the toll tariff is carried out once in every two years based on the impact of inflation on the tariff. The formula for the tariff adjustment is as follows: New Tariff = Old Tariff (1+inflation rate).

Further provisions on the toll tariff are contained in GR 15/2005. The element of the profit generated from the ve-hicle operational cost is calculated based on the difference of vehicle operational cost and value of time on toll roads and alternative crossing on the existing public road. On the element of feasibility of investment, GR 15/2005 specifies that it will be calculated based on an accurate and transparent appraisal of all costs during the term of the concession agreement, which will enable the toll road operator to get a reasonable profit on its investment. The application of toll tariff will be decided by the Minister concurrently with the operation of the toll road. BPJT will recommend any adjustments of the toll tariff to the Minister.

Foreign Participation in Toll Road Projects Construction and operation of toll roads is open for foreign participation. Foreign partners may own up to 95% of the equity in the business.

3. Railways

General Construction and operations of railroads in Indonesia are regulated under the Law No. 13/1992 regarding Rail-ways (“Law 13/1992”) which replaced several laws and regulations that were promulgated during the Dutch colo-nial period. In addition to Law 13/1992, the government has issued Government Regulation No. 69/1992 regarding Railway Infrastructure and Facilities (“GR 69/1992”). A draft on amendment of GR 69/1992 is being prepared to regulate the cooperation between the Government Railways Company and the private sector (“Draft GR”). Furthermore, a new law on railways has been drafted and is ready for submission to the parliament (“Draft Law”). The Draft Law is more extensive in its coverage of the railway sector and is intended to attract more opera-tors into the industry.

Law 13/1992 divides the railway industry into two categories, railway infrastructure and railway facilities. The rail-way infrastructure comprises railway lines, railway stations and railway operational facilities. Railway facilities comprise driving facilities, facilities for the transportation of passengers or cargos and facilities for specific pur-poses.

Operation of Railways Under the Draft Law, public railways management is divided under the following categories: 1. National railways 2. Provincial railways 3. Municipal railways

Entities other than the state railway company PT. Kereta Api Indonesia (“PT KAI”) may participate in railways ac-tivities under cooperation schemes with PT KAI.

The operation of railways is divided into types of operators: 1. Operator of infrastructure 2. Operator of facilities 3. Operator of both infrastructure and facilities

The facilities itself is defined as anything that runs on the railway whereas the infrastructure includes railways and railways stations and other supporting infrastructure for the operation of railways.

The Role of PT KAI


Guidebook page 85

PT KAI is a State-owned enterprise and is currently the sole railway and public train operator in Indonesia. Basi-cally the government provides and maintains the train infrastructure. The provision and maintenance of the infra-structure may be delegated by the government to PT KAI. The operation of the infrastructures itself will be carried out by PT KAI.

The government also develops the railway’s construction design and engineering. The government will also stipu-late regulations concerning the railroad comprising of the road way area, right of way area, and road control area including areas below it and the free space above it.

Under Draft Law, operation of railway infrastructure can be conducted by government, regional government, state owned enterprise (BUMN like PT KAI), regional government owned enterprise (BUMD) or private entities and may also be conducted in a joint venture between those institutions.

Tariff Draft Law contains provisions with respect to tariff. Passenger tariff is set by the operator based on the quality of services that operator provides whereas tariff on goods is set based on contract between the operator and the user. Government may be involved in the setting of tariff in the event (i) the train service is deemed an essential public need and (ii) the service is provided as part of regional development.

Train Transportation Service Network Law 13, 1992 governs a train transportation service network, which is operated in an integrated manner and forms an inseparable part of the entire transportation system. Train Transportation Service Network consists of inter-city transportation service network and the city transportation service network.

Under Law 13/1992, the operation of train transportation service is carried out after the fulfilment of the general requirements as as stipulated by PT KAI as the operator/regulator in this field..

The structure and classification of tariff for the train transportation is stipulated by the government.

GR 69/92 provides that the Minister in charge of railways will stipulate a railway lane network in the form of gen-eral plan on railway lane network taking the following into account: a. the general plan on spatial layout, consisting of existing lanes and future lanes; b. integration of intra and inter transportation modes; c. integration into other development sectors; d. safety and smooth-running of railway operations; e. the economic growth; f. environment conservation.

Participation in the Railway Business Draft GR contains provisions with respect to the participation of private parties in the railway sector. Cooperation is intended to increase the use of infrastructures, the capacity and quality of services and to foster the participa-tion of the private sector. The cooperation between the government or PT KAI and the Indonesian entities2 may involve the following: (a) procurement; (b) operation; and (c) maintenance.

The cooperation has to meet the following requirements: i. the ability to procure the required capital; ii. environmental friendly; iii. having qualified human resources; iv. safety and smooth-running of the railway operation; v. meet the technical requirements set by the government; vi. in accordance with the general plan on railway lane network and the general plan on spatial layout;

In meeting the above cooperation, the Indonesian entity applies to the minister attaching the following documents: i. cooperation agreement between PT KAI and the Indonesian entities in the form of a notarial deed; ii. audit report from a public accountant regarding the Indonesian entities; iii. performance of the Indonesia entities covering its capital, human resources, and equipments; iv. detail design of the railway infrastructure to be built; v. evidence of ownership of maintenance facilities for the infrastructure; vi. plan on steps to construct the infrastructures and operational plan on the construction.

The Minister has to verify the application with one month after the application having been received completely and correctly.

2 Under the draft GR, this is stated as “Indonesian entity”. We assume that this refers to the private sector.

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Foreign Participation in the Railway Sector Foreign investors have to cooperate with PT KAI to establish a joint venture company in railways. A foreign inves-tor may own up to 49% for foreign Investment in railway that will engage in public transportation. Foreign investor may own up to 95% of equity in the joint venture company if the cooperation is to build a new network.

4. Airports

General Airport activities are governed under Law No. 15 of Year 1992 concerning Aviation (“Law 15/1992”) which is due to be amended. Under Law 15/1992, the provisions related to airport are set out with Government Regulation as the implementing regulations.

The current Government Regulation on airport activities is Government Regulation No.70 Year 2001 (“GR 70/2001”). The government also plans to amend this regulation in the near future.

In this section, the ‘Government’ is meant as the central government.

National Airport Guidelines Airports in Indonesia are built based on a National Airport Guideline (“NAG”) which is established by the Minister (which in this matter is Minister of Communications as the minister who holds the responsibility for the flight au-thority). The NAG sets out the following: a. functions, utilization, classification, status, operational and airport activity; b. synchronization of intra and inter transportation mode; c. synchronization with other development sectors.

Airport Classification - Based on its utilization, Airport is classified into airports open for serving air transport to/from abroad and

which airports closed for serving air transport to/from abroad. - Based on its classification, airport is categorized into classes based on facility, operational activity and type of

surrounding air control. - Based on its status, airports are categorized into public airports which serve public flights and private airports

which serve personal interest for supporting specific activities. - Based on its operations, airports are categorized into (i) public airports operated by the Government, includ-

ing the regional government or by an airport business entity (“Airport Business Entity”)3 (ii) private airport op-erated by the government, including the regional government and Indonesian legal entities.

- Based on its activities, airports are classified into airports which serve aircrafts and airports which serve heli-copters.

- Based on hierarchical functions, airports are divided into two types, hubs and non-hubs. - Based on control of the surrounding airport airspace, airports are divided into controlled air space and uncon-

trolled airspace.

Stipulation of Location, Land Utilization and Possession, Water and Air Space in Public Airport The land and/or water location, and air space for airport operation is stipulated by Minister on Communications with due observance of the Regional Spatial Plan, economic development, economic worthiness, technical con-struction and operation, environment, flight safety and state defence.

The airport operator must possess the land and/or water and air space in the airport location for purposes such as airport services, flight safety services and airport supporting facilities.

Public Airports With regard to public airport operations, the Minister stipulates (i) the construction standard procedure/master plan requirement of airports (ii) design standards and/or airport facility and tools engineering (iii) facility and tools reliability standard and (iv) airport operation standard.

The operations of public airports provide airport services related to air traffic of aircrafts, passengers, cargo and postal. This group of activities/operations is undertaken by the Government (for its functions as mentioned below), the Airport operator, and legal entities that conduct related activities in the airport.

Government function is carried out by government agencies which authority is related to: a. flight safety; b. fees and excise;

3 This is a State/Regional Government-owned enterprise specifically established for engaging airport activities.


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c. immigration; d. airport safety; e. quarantine.

The operation of public airports may only be carried out by the Government or the Regional Government and an Airport Business Entity. In the framework of public airport operations, an Airport Business Entity may establish cooperation with the Government (including the regional government) and Indonesian legal entities.

Airport Supporting Activities Based on GR 70/2001, public airport support activities consist of (i) flight supporting service such as hangars, aircraft workshops, warehouses, aircraft catering, aircraft ground handling, cargo services and (ii) airport activities support services such as accommodations, stores, restaurants, parking, nursery.

Airport Service Fees Airport service fees are fees charged by an airport operator, such as landing fees, ground handling fees and air-craft parking fees. Service fees of a Government-operated airport shall be stipulated by a government regulation or regional government regulation. For airports operated by an Airport Business Entity, the service fees shall be stipulated by the Airport Business Entity after consultation with the Minister.

Special Airports The operation of a special airport may be carried out by the Government, including the regional government, or Indonesian legal entities for a personal/private interest for supporting specific purposes. A special airport is pro-hibited for public use, except after having prior approval from the Minister.

International Flight Airports The Minister can stipulate public airports or special airports as airports that are allowed to serve international flights which serves passengers, cargos or postal services.

Regional Government Role As of the implementation of Law No.22 of 1999 regarding Regional Autonomy, most of the authority and respon-sibilities of the central government is assigned to the regional government, including airports.

Based on GR 70/2001, the operations of an airport conducted by the central government can be assigned to the provincial government (as implementation of de-concentration task) and to the Municipality/City Government (as implementation of decentralization task).

In the event a Municipality/City Government is not able to conduct airport operations, the respected authority can establish cooperation with an existing Airport Business Entity or return its operations to the Central Government.

Airports that have been operated by Airport Business Entities shall remain to be operated by Airport Business Entities.

Conditions for Foreign Participation According to the Negative List and the IPU established by BKPM, foreigners may hold a maximum of 49% of shares of a company engaged in public airport operations or direct airport supporting services. For indirect airport supporting services, the foreign shareholding can be a maximum of 95% of the company’s share capital.

Division of Responsibilities

With respect to licensing, the Minister shall have the authority to grant permits or licenses on hub and non-hub airport operations, while Head of Regional Government shall stipulate work areas in non-hub airports and airports with uncontrolled air space.

Draft Laws and Regulations on Airports The major changes in current draft law concerning aviation especially with regard to airport activities, are among others, the following: - the deletion of the provisions related to the restriction of international cargo airlines initiating domestic cargo

flights, - determination of scheduled and non-scheduled flights, - airports that are setup to serve pioneer flights in remote areas.

Additional provisions are made on the requirement to obtain certificates for the establishment and operations of airports (airport operations certificate, competency certificates) and the requirement to fulfil sound ambiance stan-dards and air pollution standards.

There are no material amendments in the current draft government regulation concerning Airports, except that it simplifies the classification of airports. In the current draft, the major classification of airports is determined by the

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capability of an airport in handling aircrafts with 30-seat configuration or pay load more than 5,700 kilograms (the “Required Capacity”).

If the respected airport is able to handle higher than the Required Capacity, the airport-related licenses will be granted by Minister, and if the respected airport is only able to handle less than the Required Capacity, the li-censes will be issued by Head of Local Government, namely, either by the Governor, the Regent or the Mayor.

5. Harbours

General The harbour sector in Indonesia is governed by Law No. 21 of 1992 concerning shipping (“Law No.21”) and its implementation regulations namely, Government Regulation No. 69 of 2001 concerning harbour affairs (“Gov-ernment Regulation No. 69”), Decree of Minister of Communications number KM 53 of 2002 concerning national harbour system, Decree of Minister of Communications number KM 54 of 2002 concerning harbour operation, and Decree of Minister of Communications number KM 55 of 2002 concerning special harbour operation.

Law No. 21 and Government Regulation No. 69 provide that there are two types of harbour in Indonesia, i.e. gen-eral and special harbour. The general harbour is a harbour which is operated for public utilities whereas the spe-cial harbour is a harbour which is operated only for specific needs to support certain activities.

What follows are the description of the current government policy with regard to the construction and business activities of general and special harbour.

General Harbours a. Construction The construction of a general harbour must satisfy the following requirements: (i) administration; (ii) evidence of acquisition of land and waters; (iii) obtaining the decree for harbour location; (iv) obtaining harbour master plan; and (v) technical design which includes soil condition, construction, hydro-oceanography condition, topography, con-

struction and installment of navigation facilities, shipping lane, harbour pool; site plan and equipments capac-ity at the harbour.

The construction must be subject to the technical directives of harbour construction as determined by the Minister of Communications (“Minister”). The central government, province governments and/or regency governments may only develop a new harbour subject to the national harbour system (Tatanan Kepelabuhanan Nasional) and must comply with the provisions set out in the Government Regulation No. 69.

The harbour operation can only be undertaken provided that a number of requirements have been fulfilled, among others: (i) the construction has been completed as in accordance to the construction conditions as set out in article 25

of Government Regulation No. 69 (see previous paragraph); (ii) safety and security navigation have been in place; (iii) facilities for securing the smooth flow of passengers and goods have been provided; (iv) environmental management has been in place; (v) system and procedure for service has been in place; and (vi) the operator has certified and qualified human resources for technical operation who support the harbour

operation.

As a consequence of the authority distribution between the central and local governments, the Government Regu-lation No. 69 provides that the decision for harbour operation is issued by the difference officials subject to the types of general harbour. (i) The minister grants the decision for international and national harbour; (ii) The governor grants the decision for regional harbour; and (iii) The head of regency/mayor grants decision for local harbour. b. Activities Pursuant to the Government Regulation No. 69, there are three key players of the activities in general harbours: (i) government agencies; (ii) harbour operators; and (iii) Indonesian legal entities which provide services relating to smooth flow of the traffic of ships, passengers and

goods in the harbours.

Below is the description of the authorized activities for each player in the general harbour pursuant to the Gov-ernment Regulation No. 69.


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(i) Government Agencies. The government agencies have functions for navigation safety, custom and excise, immigration, quarantine; and peace and order at the general harbour.

(ii) Harbour Operators (Penyelenggara Pelabuhan). The harbour operators in the Government Regulation No. 69 are as follows: a. Technical Operating Unit (Unit Pelaksana Teknis)/Harbour Task Force (Satuan Kerja Pelabuhan) for the

general harbour which is operated by the government, province government, and regency/town govern-ment;

b. Technical Operating (Unit Pelaksana) of Harbour Business Entity for a general harbour which is oper-ated by the harbour business entity.

Under Indonesian law, the state-owned enterprise which is authorized to operate harbours, being the Har-bour Business Entity, is PT. Pelabuhan Indonesia (Persero) (hereinafter referred to as “Pelindo”).

These players are authorized to conduct the following business activities: a. providing harbour pool and waters for ship traffic and anchoring; b. providing services related to pilotage; c. providing services for jetty, loading and unloading of goods and animal; and facilities for passengers and

vehicles boarding; d. providing warehousing and containers yard services, transportation in harbour waters, loading and

unloading equipments, and harbour equipments; e. providing land for any building and yards related to the smooth flow of sea transportation and industry; f. providing roads and bridges network, vehicles parking area, water disposal channel, drinking water and

electricity installations, fuel depot, and fire engine; g. providing services of container terminal, liquid bulk and dry cargoes; h. providing other services which support the harbour services.

Harbour services undertaken by the Technical Operator Unit/Harbour Task Force is assignable to the Har-bour Business Entity provided that the entity has met the financial, operational and facility criteria. The provi-sions as regards the assignment on the harbour services will be further regulated in the Minister Decree.

(iii) Indonesian Legal Entities or Citizens. Indonesian legal entities or citizens may only undertake the following support harbour business activities: a. activities which are not included into an essential harbour business, namely:

1. providing office for harbour services users; 2. providing industrial estate; 3. providing trading area estate;

b. activities which support the smooth flow of harbour operation, which in a certain time if they are not in place will have an effect on the smooth flow of harbour operation, which may include: 1. providing waste storage area facility (reception facility); 2. providing cargo terminal service; 3. providing warehousing service;

c. activities which support the smooth flow of harbour operation, and not disturbing the smooth flow harbour operation if they are not in place, which may include: 1. public transportation services from and to the harbour; 2. hotel, restaurant, tourism, post and hotel; 3. other public facilities.

These support activities according to the Government Regulation may also be undertaken by the Technical Op-erator Unit/Harbour Task Force of the government, province government, regency/town government or Harbour Business Entity. Indonesian citizens or legal entities may also undertake these services after they have been firstly considered by the Technical Operator Unit of the Government Harbour, province government, regency/town government or Harbour Business Entity.

The current regulations and policies with regard to the foreign capital participation in the general harbour opera-tions are discussed under “Conditions for Foreign Participation” section below.

Special Harbours As mentioned earlier, a special harbour is a harbour which is developed and operated only for specific needs to support certain activities. The location of a special harbour is a part and inseparable to the national harbour sys-tem and is determined by the Minister after obtaining a prior recommendation from the governor and head of re-gency/mayor.

The Government Regulation No. 69 divides the special harbours into 3 (three) types, i.e. national/international, regional and local special harbour. The criteria for each type are as follows: (i) National/international harbours have the following criteria:

1. The minimum ships tonnage is 3,000 DWT. 2. The minimum length of jetty is 70 meter. 3. The minimum water depth in front of jetty is -5 M LWS.

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4. These harbours handle services for dangerous and poisonous goods 5. These harbours handle activities for inter-provinces and international lanes.

(ii) Regional harbours have the following criteria: 1. The minimum ships tonnage is 1,000 DWT and the maximum is 3,000 DWT. 2. The minimum length of jetty is 70 meter, and the construction is made of steel. 3. The minimum water depth in front of jetty is -5 M LWS. 4. These harbours do not handle services for dangerous and poisonous goods. 5. These harbours handle activities for inter-regencies/cities within one province.

(iii) Local harbours have the following criteria: 1. The ships tonnage is less than 1,000 DWT. 2. The length of jetty is less 50 meter, and the construction is made of wood. 3. The minimum water depth in front of jetty is -4 M LWS. 4. These harbours do not handle services for dangerous and poisonous goods. 5. These harbours handle activities within one province/city.

The special harbours may be operated either by the government, province government, regency government or an Indonesian entity for its own interest to support its certain activities. A. Construction The permit for special harbour construction is issued by the Minister for national/international special harbours, the governor for regional special harbours and the head/mayor for local special harbours.

There are a number of requirements that must be satisfied for the special harbours construction: (i) administration requirements:

1. deed of incorporation; 2. taxpayer registration number; 3. principal business license from relevant agency; 4. land certificate as evidence of acquiring land; 5. proposal for activities plan; 6. obtaining the decree on the special harbour location; 7. recommendation from the official in charge for navigation safety;

(ii) technical requirements: 1. harbour master plan; 2. jetty design; 3. main building construction plan; 4. hydrographic and topography plans, and an extract of survey on raising tide and stream; 5. survey report on soil condition; 6. study report on navigation safety including lane and harbour pool; 7. borders of inland and waters area along with geographical coordinates; and 8. environmental study.

The decision on whether the construction of special harbour is acceptable by the relevant authority will be issued no more than 14 days as from the complete application is received.

B. Operation The operation of special harbours must be in accordance to a permit issued by (i) the Minister for na-tional/international special harbours, (ii) governor for regional harbours and (iii) head of regency/mayor for local harbours. The operation permit is valid as long as the operator still conducts its main business.

The operation may be commenced after the following requirements are satisfied: (i) the construction has been completed and has complied with the standard requirement and conditions as set

out previously (see paragraph A. Construction); (ii) navigation safety and security; (iii) environmental management; (iv) having a system and procedure of services; and (v) the operator has certified and qualified human resources for technical harbour operation field as stipulated by

the Minister Decree.

The special harbour permit is assignable to other parties along with the principal/main business and this assign-ment must be reported to the Minister, governor or head of regency/mayor as in accordance to their own authority set out in the Government Regulation No. 69.

Conditions for Foreign Participation Based on the current Negative List, the construction and operation of harbours is open for foreign investors with a requirement that they enter into a joint venture with an Indonesian partner to set-up a foreign investment company in which the capital participation of the Indonesian partner must be at least five per cent.


Guidebook page 91

Under the IPU issued by BKPM, the policy as regards foreign capital participation in the harbour sector is as fol-lows: - Basically, general harbours must be operated by Pelindo. - Foreign investors may only undertake the following harbour businesses with some specific requirements:

Reception Facilities Ship to Ship Transfer: The foreign investors must set-up a joint venture company with the local Pelindo and the maximum foreign capital participation in the company is 49 percent.

Cargo Terminal: The foreign investors must set-up a joint venture company with the local Pelindo and the maximum foreign capital participation in the company is 95 percent.

New Draft Law on Shipping The government has recently issued a new draft law on shipping (“Draft”) which is going to be discussed by the House of Representatives prior to its enactment. In general, the provisions in this Draft re-affirm the provisions stipulated in the Government Regulation No. 69 as mentioned above.

The Draft divides harbours into general and special harbours. The general harbours consist of sea harbours, river and lake harbours; and channel harbours.

The central government, province and/or regency/city governments may construct and develop new general har-bours subject to the National Harbour System. The operation of general harbours may be performed either by the Harbour Business Entity, central, province, regency or town government. Business related to the general har-bours may be undertaken by an Indonesian legal entity or citizen.

With regard to the special harbours, the Draft provides that they can be developed and constructed for a specific purpose and needs. These harbours are a part and inseparable with the national harbour system. The permits for special harbours are issued by the different authorities subject to the types of harbours: (i) permits for national/international special harbour are issued by the minister of communications; (ii) permits for regional special harbours are issued by the governor; and (iii) permits for local special harbours are issued by the mayor.

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4. Water and Sanitation Sector. 4.1. Size of the Sector, Growth Potential and Outlook.

a. Present Conditions of the Network. Water supply and sanitation are vastly under-serviced in Indonesia. 307 often bankrupt local water authorities (“PDAM”) deliver water to 5.25 million connections, supplying about 30 mil-lion people. Sixty million people living in metropolitan, urban and small-city areas have no access to piped water. Tariffs are well below cost and 40% of water is unaccounted for. Ja-karta’s unaccounted water reaches 53% (World Bank 2005a). Collection networks and treat-ment for grey water or sewerage are practically non-existent in Indonesia. Only 10 cities have small networks, benefiting only some 1 million people. By contrast : Greater Jakarta has 20 million inhabitants. Table 4.4-1 gives some estimates of how people get water.

Table 4.4-1. Estimated Water Distribution in Urban and Rural Areas. (World Bank 2005a)

Source Supplied Area of Supply Urban Rural Mode of Distribution Urban Rural

PDAM (connections, tankers,…) 35% 5% PDAM 50% 8% non-PDAM distribution of PDAM water (re-selling, tanker-supply,…)

15% 3%

Non-PDAM 8% 3% Private networks, private sellers of bulk drinking water (gallons),…

8% 3%

Community supply 2% 33% Self-Supply 42% 89% Household supply (wells,…) 40% 56%

Note : Data collected in 2001. Overall, PDAMs supply 17% of the total population, non-PDAM supply provisions sell to 13% of the population and 70% is provided through self-help. In 2001, approximately 85 million people were living in urban areas and 125 mio in rural areas. It is estimated that between 55% and 60% of the population will be urban by 2020, that is about 145 million people. Chapter 2 already indicated that the supply alternatives are considerable, resulting in less willingness to pay than the need for water may suggest. Java’s density should make supply networks more efficient compared to net-works elsewhere in Indonesia, but this benefit is to been against Java’s easier access to water and thus its lesser willingness to pay. It will take time to overcome this hurdle before tariffs can raised drastically.

The Government’s strategy for water and sanitation development is still about basics first (Rantetoding 2005) :

• Promoting institutional reform, by strengthening the role of consumers in decision making and by improving governance;

• Expanding the service, by introducing competition and private-sector participation, as well as by promoting cooperatives and community-based developments;

• Conserving water resources, by efficiently managing river basins (one river-one man-agement) and by promoting integrated water conservation and treatment;

• Improving the equality of services, by setting minimum standards of service; and

• Mobilising alternative funding.

Real institutional change is, however, coming slowly. The Water Resources Law of 2003 is most relevant, as its name suggests, in relation to managing regional water resources. It has little clout with regard to water supply and municipal water and sanitation systems. As a re-sult, a concept has been set down in which a river basin is to be managed in a wholesome manner but PDAM’s remain on a municipal footing. How PDAM’s should overcome their debt burden, increase tariffs, attract and counter-guarantee private investments and solve con-flicts between private investors and vaguely defined multi-stakeholder “Consultative Coun-


Guidebook page 93

cils” is hardly set down in the Law. Answers on these issues are only very slowly emerging in national regulations. One should also keep in mind that municipalities (either Kabupaten (districts), Cities or Provinces) cannot yet borrow independently, for instance by issuing mu-nicipal bonds. The Central Government is presently not willing to go further than allowing so-called Two-Step Loans, which are bilateral or multilateral concessional funding taken up by the Central Government and channelled through as piecemeal loans to local authorities.

What has worked well in the past ? And what not ? These questions may shed some prag-matic insights on what can be expected for the future.

• Existing municipal systems were most often established in the Dutch-colonial era or in the 1950’s; these networks have been further extended by PDAM operations;

• Most newer raw water supply installations were built in the 1970’s and 1980’s, often as a result of the construction of new dammed reservoirs which were also to provide hydro-power; in the 1990’s, additional large hydro-power reservoirs never proceeded beyond the drawing board, often due to protests because of unfair evictions; existing reservoirs have been silting up earlier than expected, because of upstream deforesta-tion; reservoirs are therefore no longer a priority option and no longer a driver for in-creased water supply;

• Throughout the 1990’s, so-called Integrated Urban Infrastructure Development Pro-grammes added supply capacity, for instance through the construction of new main supply pipes; these programmes provided also in the first grey water treatment instal-lations since the 1950’s;

• These programmes evolved into preparations for a number of municipal water devel-opments with possible private-sector involvement (Gresik, Bandung,…), but the crisis has put these developments on hold before implementation was started;

• Packaged (small-scale) water supply and integrated waste water treatment were suc-cessfully developed for a limited number of residential and industrial estates in and around the largest cities (Jakarta, Surabaya, Batam); around US$ 30 mio was in-vested in such schemes by private developers; locations like Serpong (BSD devel-opment), Karawaci (Lippo Karawaci development) and various industrial estates in Bekasi and Karawang as well as on Batam are provided with good quality but com-mercially priced and thus expensive water.

• Only a few municipal privatisation schemes were set up, most notably in Jakarta (with Thames Water and Lyonnaise des Eaux / Ondeo) and more modestly in Medan (On-deo); the Jakarta privatisation process practically collapsed due to the unwillingness of Local Authorities to match the need for new investments with tariff increases;

• A number of private water schemes were drawn up in the second half of the 1990’s, but these schemes were often speculative (Jambi, Samarinda) and have never left the drawing board.

All in all, the Government lists twenty on-going PPP ventures in water supply, but few have been financially rewarding and even fewer have had any significant impact in terms of scale. Text Box 4.4-1 sheds some light on what is deemed possible presently.

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b. Infrastructure Investment Priorities Addressed at the Infrastructure Summit. The above hurdles of private-sector investment should lead to the obvious conclusion that the Infrastructure Summit 2005 evaded water projects. That the opposite is the case is there-fore at least surprising. Twenty-four water supply projects were proposed, albeit with a mod-est total value of US$ 385 mio. The list of 36 priority projects has five water projects, four of which are in Tangerang (west of Jakarta). The latter combined programme costs US$ 100 mio and is by no means unreasonable as Tangerang has the least water provisions of all metropolitan fringe areas of Jakarta, notwithstanding the fact that mid-income and high-income residential developments have been brisk in the past 10 years. Table 4.4-2 shows the scope of the 24 proposed projects, and highlights the main bottlenecks.

Table 4.4-2. Sub-sector Key Development Aim Key Bottle-necks. P* Water Resources Solutions

To ascertain long-term water availability, e.g. by upgrad-ing irrigation systems, build-ing new dams, reducing water run-off time, adding upstream waste water treatment in order to avoid river basin pollution, etc.

N

Text Box 4.4-1. Private sector investment in water : contemporary views on what may and may not work. Kevin Stovell, of Mott MacDonald Engineers (UK) summarised the problems for foreign private-sector par-ticipation well during the Infrastructure Summit : (1) the private sector is ready to deliver expertise or man-agement but unlikely equity investment; (2) most municipal water programmes are small and managed in a fragmented way by localised PDAM’s; (3) there is no clarity how the private sector would not get caught in-between the political-social-environmental interests of water resource management and political-social inter-ests of local, municipal water supply. Even if the private sector would agree to BOT’s for, say, limited treat-ment installations for clean water, then there is the risk that intake or take-off or both are uncertain, making apparently simple “take-or-pay” agreements difficult to uphold and conflicts nearly impossible to arbitrage. Local and politically well connected investors may be less wary of these obstacles, but they lack the expertise to make private water management pay off.

An on-going Dutch initiative sheds some light on what it takes to overcome the obstacles. In 2002, the Dren-the Provincial Water Authority WMD (Waterleidingmaatschappij Drenthe) approached the Manado PDAM for co-operation. WMD is a public company and is allowed to invest funds in development projects, on a not-for-profit basis. However, WMD first asked considerable and improbable guarantees from the PDAM, includ-ing management control, in order to ascertain that the funds would be well invested. By early 2005, the intent of cooperation has evolved : a Dutch water fund for developing countries added 7.5 mio Euro to the 2.5 mio Euro which WMD would contribute; the co-operation has been expanded and should now include another ten PDAM’s in Eastern Indonesia; WMD would work which each of the PDAM’s individually but would also set up a joint training centre; and excess cash earned in the future would be put into a revolving fund for water development in Eastern Indonesia. The issue of management and control has, however, not been resolved. WMD is asking for 51% of the shares in each of the PDAM’s to guarantee financial control. Legally, it is not clear whether this is line with the 2003 Water Law. It is moreover telling that majority control is not defined on the basis of equity input and the prospect of a fair share in profits, but simply for reasons of operational control. If the hurdles are that basic for a not-for-profit ventures, it is clear that bottlenecks for genuine private investments will only be worse.


Guidebook page 95

Sub-sector Key Development Aim Key Bottle-necks. P* Raw water intake and treatment, primary distribu-tion

To focus on private sector expertise in treatment

• Kali Garang/Semarang, Kali Jajar/Semarang, Surakarta(Solo), Karang Pilang/Surabaya: OK, if PDAM healthy

• Banjarmasin, Samarinda, Menado : small scale

Y

Clean water dis-tribution and re-ticulation

To focus on private sector expertise in network man-agement (which should in-clude invoicing systems)

• Semarang, Yogyakarta, Umbulan (from spring resource) : potentially OK, pending health of PDAM

• No mentioning of invoicing management

Y

Combined pack-age of intake, treatment, distri-bution and reticu-lation

To provide in turn-key inte-grated solutions, reducing the “take-or-pay” risks of treatment only and insuffi-cient water supply in case of distribution/ reticulation only

• Commercially unviable schemes : e.g. Duri, Dumai, Tanjung Pinang (Riau) (“pending IBRD loan”); these schemes also deal with competing intake interests, respectively from the oil industry (Pertamina) and from water sales deals with Singapore

• Cileduk, Cengkareng, Ciparens/Bintaro-Serpong, Sepatan/Pasar Kemi, Pondok Gede, Cikarang : tariff issue; issue of financial health of PDAMs; co-agreements required with private estate developers having their own water facilities; enforcement required against industrial facilities relying on cheap but good ground water

• Jatinangor/Sumedang : small scale • Cirebon : likely OK as Cirebon has a good

network (both of supply and sanitation) • East Semarang : potentially OK, as local

ground water is brackish and unfit for con-sumption

• Tegal, Menganti/Gresik : same as Semarang, but small scale

• No mentioning of invoicing management

Y

Gray water / sewage treat-ment

Ideally to be integrated into PDAM treatment systems, in order to ascertain stable raw surface water qualities

N


Table 4.4-2 clarifies that notwithstanding the reasonable development aims, there is no inte-grated approach in making sure that water is managed well from its source until re-treatment and disposal. The most likely form under which a number of public-private partnership deals may substantiate is by converting contractor-arranged construction funding into equity or quasi-equity as part of B.O.T. programmes. This will however invite partners to mark up construction budgets (in order to recoup profits early on) and subsequently to downscale management and expertise, especially if the outstanding financial balances are carried by uninformed third-party lenders. The most likely scenario is that the Central Government will increase simple Two-Step lending (which does not require public-private partnership in fi-nancing and management) and will eventually settle for the risks of municipal lending.

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• Demand growth is substantial, but demand elasticity is not always large, due to the availability of (less sustainable) supply alternatives;

• The Water Resources Law stresses a comprehensive approach to water manage-ment, but it is not clear, from the Law, from regulations or from developments in prac-tice, how this will impact municipal water management which is presently fragmented;

• Most PDAMs are financially nor organisationally ready or open even in principle for genuine public-private partnerships;

• Private-sector water provision is fraught with past failures, except for small packaged deals for industrial and up-market residential developments;

• The pay-back of most water infrastructure investments is very uncertain due to the fi-nancial condition of most PDAMs, but also in relation to the absence of independent arbitration mechanisms in relation to tariff setting and for attributing responsibility in case of service failure;

• The present emphasis on private-sector participation is more about the raising of con-struction finance and the securitarisation of the repayment of this financing, rather than about the injection of management expertise; due to the near-zero credit worthi-ness of PDAMs but also of local administrations (which cannot give viable multi-year commitments), the guarantees on repayments are likely to be more political than strictly financial;

• All revenue is in local currency.

D.3. Legal and regulatory framework

1. The Relevant Authorities in the Water & Sanitation Sector The general responsibility for coordinating infrastructure projects (including the development of SPAM in general) falls under the coordinating ministry for the economic affairs. The coordinating minister will act through his deputy of infrastructure and regional development who has the responsibility to prepare planning and policy making as well as synchronizing policy implementation in the infrastructure and regional development.

Under the coordinating minister of economic affairs, the key central government actor in the development of SPAM is the Department of Public Works (PU), through its Directorate General of Water Resources (Direktorat Jenderal Sumber Daya Air, DGSDA). DGSDA has primary responsibility in the formulation and the implementa-tion policies and in the technical standardization of the water resources field.

The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to regional governments and its role in supporting the implementation of regional autonomy. Regional governments – provincial, regency (kabu-paten), municipal (kota)– each have agencies (Dinas) whose responsibilities broadly align with the central Gov-ernment Department in the form of regional offices (Kantor wilayah) of the department.

The Office of Public Works (Dinas Pekerjaan Umum) is responsible, among others, for the water resources infra-structure functions and programs of their respective regions.

The regional autonomy law defines the power of province as well as the regency in each the water resources sec-tors as follows: - determination of criteria for regional arrangement of the ecosystem water catchments area in the river basin - determination of the planning and development guideline on the housing and settlement construction - determination of the standard for regional infrastructure and facilities development consisting of irrigation,

large dam, bridge and road and toll-road - determination of the guidelines in controlling the natural resources and preserving environmental function - determination of the guideline on the natural resources conservation - determination of standard for managing surface water resource inter-regency/municipality - providing support/assistance for managing surface water resources.


Guidebook page 97

2. General The construction of infrastructure and facilities related to water in Indonesia, including for drinking water and sani-tation, is regulated under Law No. 7/2004 regarding Water Resources (“Law 7/2004”) which replaced the Law No. 11/1974 (“Law 11/1974”) concerning Irrigation. In addition to Law 7/2004, the government has to issue a number of government regulations covering more than thirty issues.

Law 7/2004 further describes the authority and the responsibility of the central government, which among others, is required to establish a National Water Resource Council (Dewan Sumber Daya Air Nasional or “DSDAN”) which constitutes a coordinating forum between the stakeholders of water resources at the national level. DSDAN gives recommendation to the President on the basis of input from the regional government.

The only issue mentioned in Law 7/2004 that has been previously regulated is concerning Water Quality Man-agement and Water Pollution Control as set out under Government Regulation No. 82/2001 (“GR 82/2001”). GR 82/2001 was issued before the enactment of the Law 7/2004 and therefore still refers to Law 11/1974. GR 82/2001 is further implemented by the Decision of the State Minister of Environmental Affair No. 111/2003 con-cerning Guidelines on Requirements and Procedure for Licensing and Study on Disposal Waste Water to the Wa-ter or Water Resources.

On March 21, 2005, the Government further regulated another issue mentioned in Law 7/2004 by enacting Gov-ernment Regulation No. 16/2005 concerning the Development of Drinking Water Supply System (“GR 16/2005”).

The Drinking Water Supply System (Sistem Penyediaan Air Minum or “SPAM”)4 Under Law 7/2004, the water resource utilization is conducted by way of, among others, developing the water resources by referring to the water resource management plan which is determined in each river areas. Such de-velopment is directed to enhance the benefit of the water resource functions to meet the need of raw water for households5, agriculture, industry, tourism, defence, mining, power, communications and any other needs. Law 7/2004 rules that the need of raw water for household drinking water shall be fulfilled by developing a drinking water supply system6.

The SPAM may be conducted by way of pipe network and/or non-pipe network system. The SPAM with the pipe network system shall cover the raw water unit, production unit, distribution unit, service unit, and processing unit and be managed in good and sustainable manner. The SPAM without pipe network system may cover shallow well, well hand pump, rainwater reservoir, water terminal, water tank vehicle, packed water installation or water spring protection building. The technical provisions concerning the SPAM without pipe network system shall be further regulated by a minister regulation.

The Development of SPAM Law 7/2004 requires the development of SPAM to be the responsibility of the government and the regional gov-ernment. GR 16/2005 further explained that such responsibility is given to guarantee the right of the people to obtain drinking water for daily basic needs in order to fulfil healthy, clean and productive life.

The development of the SPAM shall be carried out by the State-owned company (“BUMN”) and/or the regional administration-owned company (“BUMD”) which is established specifically for such purpose. According to the elucidation of Law No. 7/2004, in the absence of the drinking water provider conducted by State-owned compa-nies and/or regional government-owned companies in a particular area, cooperatives, private entities and the community (the private sector) can become the provider of drinking water within such particular area.

Both Law 7/2004 and GR 16/2005 stipulate that the purpose of regulating the development of SPAM is to: (i) establish a qualified drinking water management and service with reasonable price; (ii) achieve equitable interests between the consumers and the service providers; and (iii) improve the efficiency and coverage of drinking water service.

Protection of Raw Water (Air Baku) The protection of raw water shall be conducted by harmoniously regulating the development of SPAM and sanitation infrastruc-tures and facilities, which cover infrastructure and facilities for waste water and solid waste. The waste water infrastructure and

4 GR 16/2005 defines SPAM as an integral unit of physical (technical) and non-physical system of the drinking water infrastruc-ture and facilities 5 GR 16/2005 defines the raw water for household drinking water as water originated from surface water spring, groundwater notches and/or rainwater that fulfil certain water quality as raw water for drinking water. The elucidation of Law 7/2004 defines household drinking water as water with drinkable standard without having to be boiled first and is declared healthy in accor-dance with the micro biology examination result (e-coli test). 6 GR 16/2005 defines the development of drinking water supply system as activities having purpose of building, expanding and/or improving the physical (technical) and non-physical (institution, management, finance, community participation and law) systems in an integral unit as a whole to provide drinking water for the community leading to a better condition. The elucidation of Law 7/2004 defines further explained that the developments of installations, networks and drinking water supply system for household include hydrant model and distribution model by water tank vehicles.

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facilities shall be conducted by local and/or centralized waste water disposal system. The solid waste infrastructure and facili-ties, on the other hand, covers the collection, transfer, transportation, processing and final disposal, which must be conducted harmoniously.

The processing of waste water and solid waste shall be conducted in accordance with the technical guideline stipulated in a minister regulation.

The Implementation of the Development of SPAM As required by Law 7/2004, GR 16/2005 stipulates that the development of SPAM shall be regulated harmoni-ously with the development of infrastructure and facilities for sanitation, in order to guarantee the sustainability of the drinking water supply and the prevention of raw water being contaminated by waste water and solid waste. .

The regional government may conduct inter-regional cooperation in order to carry out the development of SPAM and/or infrastructure and facilities for sanitation.

The Planning of the Development of SPAM

The planning of the development of SPAM shall cover the drafting of master plan, feasibility study and/or detailed technical planning. The SPAM provider itself or an appointed certified construction planning service provider may perform the drafting process. Such drafting shall be done based on the norm, standard, guideline and manual regulated by the minister regulation.

The Construction of SPAM. GR 16/2005 regulates that the construction of SPAM shall comprise the physical construction activities and trial. GR 16/2005 further rules that the construction of SPAM may be carried out by the SPAM provider itself or con-ducted by a construction service provider through a tender/auction process. However, the elucidation of GR 16/2005 requires the SPAM construction activities to be conducted by construction service provider through a tender/auction process in accordance with the prevailing laws and regulation in the case where the BUMN/BUMD is the SPAM provider.

The Management of SPAM The activities of managing the SPAM, which cover (i) operations and utilization; and (ii) administrations and insti-tutions, shall be conducted by giving priority to the principle of justice and environmental preservation in order to guarantee the sustainability of the drinking water service function and the improvement of the community’s health and prosperity degree. The technical guideline and procedure in managing SPAM shall be decided by the minister regulation.

Maintenance & Rehabilitation of SPAM The SPAM Provider shall conduct routine and periodical maintenance to and rehabilitate part and/or the whole SPAM. The technical guideline and procedure for maintenance and rehabilitation shall be decided by the minister regulation.

Monitoring & Evaluation of SPAM The central and regional government conduct the monitoring and evaluation of the implementation of the SPAM provider in order to obtain performance data of the drinking water service. The SPAM provider shall submit its activities report and required data to the central and regional government for the monitoring and evaluation pur-poses. The technical guideline and procedure for monitoring and evaluation shall be decided by the minister regu-lation.

Funding of the Development of SPAM GR 16/2005 provides that the funding for the development of SPAM shall cover the funding for building, expand-ing and improving the physical (technical) and non-physical systems. The funding resources may be originated from: (i) the central and/or regional government; (ii) BUMN or BUMD; (iii) cooperatives; (iv) private legal entities; (v) community fund; (vi) any other sources of funds in accordance with the prevailing laws and regulations.

The Participation of Private Sector in the Development of SPAM As mentioned in Law 7/2004 and GR 16/2005, the development of Drinking Water Supply System is to be carried out by BUMN and/or BUMD specifically established for such purpose.


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Nevertheless, GR 16/2005 provides that if the BUMN or BUMD is unable to improve the service quantity and quality of SPAM in their regional services, such BUMN or BUMD upon the approval of their supervisory board/commissioner may involve cooperatives, private entities, and/or the community within their services areas.

In case that the drinking water service which is required by the community cannot be provided by BUMN or BUMD, the government or the regional government can build part or all the SPAM infrastructure and facilities, which will then be operated by BUMN or BUMD.

GR 16/2005 further grants the cooperatives, private legal entities and/or the community (“Private Sector”) oppor-tunities to participate in carrying out the development of SPAM in the areas or regions that have not been reached by the service of BUMN/BUMD.

The aforesaid cooperative and private legal entity are to be established specifically for conducting business activi-ties in providing SPAM. The involvement of the Private Sector in the development of SPAM shall be conducted based on fair competition principle through auction procedure in accordance with the prevailing laws and regula-tions, which may cover all or part of the development phases of SPAM . The Private Sector obtaining the right to develop SPAM based on the aforesaid auction shall execute an agreement in developing SPAM with the govern-ment or regional government in accordance with their authorities. Such agreement shall contain the following pro-visions: (i) the coverage of the service providing; (ii) the technical standard (water quality, quantity and pressure); (iii) the initial tariff and tariff calculation formula; (iv) the duration of the service providing; (v) the right and obligation of the parties.

After the period of such agreement lapses, all assets shall be transferred to the government or regional govern-ment in good condition and operation. The auction procedure and methods of drafting the agreement on develop-ing SPAM and the assets transfer shall be further regulated by a minister regulation.

The Development of SPAM Supporting Agency (Badan Pendukung Pengembangan SPAM or “BPP SPAM”) Law 7/2004 stipulates that the government may establish an agency which is subordinate to and responsible to the minister in charge of the water resources in order to reach the purpose of regulating the development of SPAM and infrastructure and facilities for sanitation, which will be implemented by a government regulation. Such agency is formulated in the form of the Development of SPAM Supporting Agency or BPP SPAM.

According to GR 16/2005, BPP SPAM is established to achieve the purpose of regulating the development of SPAM as mentioned above. BPP SPAM, which is domiciled in Jakarta, is a non-structural agency established by, under and responsible to the Minister carrying out the governmental affairs in the field of water resources.

The task of BPP SPAM is to give support and assistance in the framework of reaching the purpose of the devel-opment of SPAM in order to distribute the most benefit to the state and the greatest benefit of the people’s pros-perity.

In order to implement its task, BPP SPAM has the following functions: (i) to give input to the central government in the policy and strategy drafting; (ii) to assist the central and regional government in the application of the norm, standard, guideline, and manual

by the SPAM Provider and community; (iii) to conduct evaluation on the SPAM Provider’s service quality and performance standard; (iv) to give recommendation on the action against the deviation of the SPAM Provider’s service quality and per-

formance standard; (v) to support and give recommendation to the central government in the SPAM providing by cooperative and

private legal entity; (vi) to give recommendation to the central government in preserving balanced interests between the SPAM Pro-

vider and the community.

Further provisions on the implementation of the BPP SPAM’s task and functions shall be decided by the Minister carrying out the governmental affairs in the field of water resources.

3. Foreign Participation According to the Negative List and the IPU, the fields of public works that are open to foreign direct investment with specific conditions include the activities of (i) clean water construction and business; (ii) waste management and (iii) waste water management.

The activity of clean water construction and provision of clean water business requires the cooperation with the Drinking Water Regional Company (Perusahaan Daerah Air Minum or “PDAM”) or with a national company in the absence of PDAM in such area. The activity of waste management requires the cooperation with the regional

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government and the Sanitary Regional Government Company (Perusahaan Daerah Kebersihan or “PDK”). For waste water management, this activity requires the cooperation with the regional government and the PDK.


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Chapter 5. Positioning of EU companies in the Infrastructure Sector.

This chapter describes the presence of EU companies in Indonesia and points to the compe-tition they are facing from traditional actors like Japanese companies, but also increasingly from emerging players from other Asian countries.

1. A Review of EU Companies operating in Infrastructure Sectors. In all there are about fifty EU companies operating in Indonesia’s major infrastructure sec-tors: energy including power, oil & gas; telecommunications; water supply; and transportation including roads, railways, airports and seaports.

These companies include operator companies, technology/equipment and solution providers, EPC contractors, as well as consulting/technical service providers. They are present as joint ventures, fully-owned subsidiaries or representative offices.

Several of them are large transnational companies with a large footprint over several conti-nents, and also a significant presence in Asia. Among such large companies present in Indo-nesia are the following:

• Power: ABB, Alstom, Babcock, International Power, Rolls Royce, Siemens, Thyssen Kruppe, Wartsila

• Oil &Gas: Total, Shell, British Petroleum, British Gas

• Telecommunications: Alcatel, Ericsson, Nokia, Philips, Pirelli, Siemens

• Water Supply: Ondeo Services, RWE Group (Thames Water), WMD

• Transportation: SNCF, Colas

• Consulting/engineering: BCEOM, Halcrow, Mott MacDonald, Binnie Black and Ve-atch, WSP, Witteween and Bos, Fichtner, Sofrecom,

Among the major European banks and insurance companies present in Indonesia are ABN AMRO, Allianz, AXA, BNP Paribas, Calyon, Deutsche bank, HSBC, ING, Rothschild, Stan-dard Chartered.

Table 1. Comparison of EU Investment Presence in select Asian countries Company Indonesia China India ABB Present 20 JVs,

5500 employees Subsidiary, 1500 employees

Siemens Subsidiary and JVs,

40 JVs, 21000 employees

Subsidiary, 3000 employees

Alcatel Subsidiary 17JVs, 5000 employees

Subsidiary and 2 JVs,

France Telecom Present through Sofre-com, exited JV with Telkom

Provides services in partnership with China Telecom, Unicom, JV in Guangzhou

Exited mobile services joint venture

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Company Indonesia China India Ericsson Subsidiary Manufacturing JV,

2000 employees Subsidiary, 1000 em-ployees, JV in telecom cables

Nokia 5000 employees Subsidiary, 700 em-ployees

Telecom Italia Not present directly, though Pirelli

Rep office Exited JV in cellular services

Vivendi Not present Rep office Rep office Thales Rep office Rep office 150 staff Rep office Total JV Ondeo JV JV, 100 staff JV, 100 staff Rolls-Royce Subsidiary Subsidiaries Deutsche Tele-com

Rep Office

RWE Solutions JV BCEOM Rep Office Rep Office Rep Office EdF Not present JV Exited GdF Not present JV JV (gas distribution) Tractabel Exited Exited British Telecom Rep Office JV telecom solutions

Source: EU business directories in China, Indonesia and India

2. The positioning of European Companies. Overall, EU companies represent a major force in the Indonesian infrastructure sector. Their presence in the country has been longstanding, and most of them have continued to do business through the recent economic crisis, with a few notable exceptions in the telecom-munications sector.

The respective position of EU companies differs significantly across sectors.

In the oil and gas sector, EU companies like BP, Shell and Total are among the largest for-eign investors in Indonesia.

EU companies have been the dominant foreign investors in the water supply sector, with Ondeo Services (formerly Lyonnaise des Eaux) and Thames Water operating water distribu-tion companies in Jakarta.

In the telecommunications sector, EU operators (France Telecom, KPN, Deutsche Telecom) have had a significant presence until 2002, but they have exited or reduced their presence following the crisis. However EU companies (Alcatel, Ericsson, Nokia, Pirelli and Siemens) still dominate the telecommunications equipment market, with an aggregate market share of more than 60%.

In the power sector, EU companies (ABB, Alstom and Siemens) altogether hold an estimated 40% share of the equipment and supplies market.

Generally, he EU is highly regarded as a source of technology, best practices, capital goods and investments in all infrastructure sectors. EU companies in Indonesia are present across the spectrum of activities: investors/operators, equipment suppliers, technology solution pro-viders, and consulting/engineering.


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Within the EU, France, Germany and the UK outweigh others in presence, both in terms of number of enterprises and volume of investments.

Overall, the international presence in Indonesia’s infrastructure is dominated by Japan, who has had a looming presence in the energy sectors and has also been involved in transporta-tion, telecom and water supply.

Recently, China, South Korea and some of the ASEAN countries have been emerging as serious players in the country, crowding out other origins, especially the EU and US, which have shown tendencies to withdraw from Indonesia or hold back further investments.

Unlike the EU, Japan and, increasingly, China and ASEAN countries have long-term strate-gic interests in Indonesia. Japan has had an investment presence for over 100 years, and is the largest donor of development assistance to Indonesia.

These countries’ strategic interests in Indonesia are based on the following:

• Indonesia has the most important energy and mineral reserves in the region, specifi-cally coal, geothermal and oil/natural gas, which is of competitive interest to Japan as well as ASEAN and China.

• There are over 400 Japanese companies in Indonesia in various industrial sectors, which require infrastructure conditions to match their business growth potential.

• Indonesia is the largest economy and the biggest market in ASEAN, and will conse-quently be the biggest consumer of goods and services in South-East Asia. It will also be a major buyer of capital goods in the next twenty years.

As a result, there is intense competition in infrastructure projects from Japan and other re-gional players, often with an un-stated strategic mandate with the support of government and development institutions. For instance, in the energy sector, Japanese consortia offer not only a large export market, but also compete in supplies of capital goods, provide financial assistance and invest in projects. The largest projects in electricity, oil and gas processing, etc, have Japanese investors, backed by Japanese equipment suppliers, financial institutions and large trading conglomerates.

Such a consortium approach is not followed by US and EU players. EU institutions have been extremely cautious with exposures to Indonesia.

Regional players are also more conversant and comfortable with the Indonesian business culture and are willing to take greater risks than their competitors, notably EU firms. This is illustrated by the fact that ASEAN companies have successfully ensconced themselves in the telecom space, by taking over the EU investments in leading telecom service companies.

Thus the EU positioning in Indonesia remains that of a niche player, as a supplier of techno-logical solutions in projects on a BOT or concession basis, but not at the scale of Japanese investments in the same sectors. However, there are some large EU companies with a strong presence in the Asia region, which enables them to offer competitive products from their own subsidiaries in Indonesia, China and other parts of Asia. This has helped compa-nies like Alcatel, Alstom, Pirelli, Siemens, and Ericsson compete successfully against other competitors. However, these companies are not always able to secure the levels of subsi-dised financial assistance from EU financial institutions/governments to match offers from Japanese or other regional competitors.

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Chapter 6. Key Issues in Enhancing Investment in Infrastructure. This chapter presents an overview of the main issues that affect the investment climate in Indonesia, with special emphasis on investment in the infrastructure sector, as experienced by EU companies. It then submits a list of key factors that should be addressed by the Indo-nesian authorities in order to improve investment conditions in the country.

1. Assessment of the Business Environment. The survey of EU companies present in Indonesia mirrors the overall investment climate in Indonesia as captured by recent detailed investor surveys:

Table 6-1. Experiences of business community in Indonesia. Issues faced by business community

% of respondents with negative experience

Law enforcement 91% Corruption 88% Tax 84% Bureaucracy and policy inconsistencies 82% Manpower 64% Crimes and security 58% Infrastructure 51% Regional autonomy 51%

Source: business experience survey by International Chamber August 2004

These inputs, along with recommendations by the Consultative Group on Indonesia (CGI) have been used by KADIN (Indonesia Chamber of Commerce) in preparing a road map (Oc-tober 2004) to revitalize industry and investment and to restore investor confidence in the economy.

For companies, market access and production cost advantages are the most relevant issues in deciding to invest abroad, but the key factors that determine the selection of a particular country are its business regulatory environment and its legal/judicial recourse mechanisms. In both these respects, the track record in Indonesia has been discouraging.

EU investors currently face rather challenging circumstances in Indonesia in terms of the regulatory environment, legal recourse, and, consequently, access to competitive interna-tional long-term funding.

Regulations EU companies cite major risks in implementing infrastructure projects, arising from uncertain-ties related to land acquisition, overlap and conflict among various implementing regulations and laws issued by the central and regional government, non-market tariff setting by regula-tors, the duality of the government’s role as an operator and as regulator.

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Decentralisation Indonesia embarked on a major decentralisation programme in 1999. However, important aspects of decentralisation (like jurisdiction on a large number of local subjects, decentralisa-tion of local tax revenues and expenditures, etc.) were not clearly defined, which resulted in confusion for investors, who had to deal with central as well as sub national levels of gov-ernment.

Decentralisation has increased uncertainties and costs for companies, due to the following reasons:

• The number of rent-seeking points increased in projects, as decentralisation in-creased opportunities for illegal levies;

• Sub national governments imposed new taxes and charges in addition to central taxes, which were economically harmful as they added to costs without providing new public services;

• Sub national bodies did not have clearly defined roles nor the institutional and human resource capacities to carry out their new missions, and central ministries themselves were reluctant participants to the decentralisation programme;

• Sub national governments often made regulations that conflicted with central laws or regulations in the same sectors;

• While sub national bodies were allowed to provide infrastructure services, they were not provided adequate funds for infrastructure development. They were also not al-lowed to not raise their own funds through bonds or international debt, which also lim-ited their ability to generate their own resources and provide for public goods and services under a public-private partnership model (this has changed recently). As a result, regional governments could not initiate and financially promote infrastructure projects, even though these would be under their jurisdiction.

Corruption According to a World Bank study, 41.5% of firms interviewed in recent surveys cite corruption as a serious business constraint. EU companies report frequent demands for bribes, organ-ised protection money and harassment by tax authorities.

The new government has affirmed its serious intentions to mitigate corruption and has taken measures to address this major constraint affecting the investment climate.

Some companies observed that corruption levels were actually coming down to more man-ageable levels.

Dispute settlement and legal recourse Perhaps the most important concern of foreign investors including EU companies in Indone-sia is the lack of confidence in the judicial system to resolve disputes legally, under the provi-sions of contracts. This lack of confidence stems from a wide-spread attitude of disregard towards contractual sanctity, and the low credibility of Indonesian courts in enforcing contrac-tual rights.

In some cases, contracts that had international arbitration clauses and had been decided through international award have seen non-enforcement of these awards by the local courts.


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Financing bottlenecks The domestic financial markets in Indonesia suffer from maturity mismatches between the sources of funds and the demand for funds, as well as risk-return mismatches, given the high perceived uncertainties (risks) in infrastructure projects:

The uncertainty of recoveries restrains long-term exposures in projects. Less than 2% of bank loans have maturity exceeding two years. Insurance and pension funds account for less than 5% of the funding that goes into infrastructure.

The rates of interest on these loans, exceeding 12%, are unviable for infrastructure projects, which are capital intensive and sometimes operate on subsidised revenues.

Indonesian state owned institutions have low equity capital (many of them have not accessed public equity), which restricts their debt raising capacities, and affects the capital gearing in investments.

International funding for Indonesia continues to be restricted, influenced by its low credit rat-ing. EU companies experience difficulties in obtaining foreign currency funding, both in form of soft loans, and commercial long-term loans, purely on project-level risks. The absence of government guarantees for payments, and the record of contract cancellations and/or viola-tions without adequate legal recourse, remain the principal bottlenecks in financial closure of infrastructure projects.

Furthermore, EU companies engaged in infrastructure activities stress the following key is-sues that are seen as major factors affecting investors’ adherence to the government’s re-cent initiatives, as exposed at the recent Infrastructure Summit :

• Lack of an overall government policy on the private provision of infrastructure,

• Lack of a comprehensive “Master Plan” for each key sector of infrastructure with a clear indication of the private sector’s role,

• Lack of a firm institutional framework for the implementation of infrastructure policies and projects.

2. EU investors’ Expectations. Consequently, EU companies state the following requirements as key issues in assessing the investment outlook in Indonesia:

Improvements in governance:

• Development of a clear policy and strategy for infrastructure development, including well-defined roles for central and sub-national levels of government and for the pri-vate sector,

• Development of a comprehensive master plan for each main sector of infrastructure,

• Development of a comprehensive institutional framework for the implementation of policies and projects, including the creation of a multi-disciplinary coordinating body that would provide an independent evaluation of tenders and a special unit with au-thority on subsidies and other project enhancement schemes,

Setting up of mechanisms for addressing investor grievances, establishment of a permanent dialogue with the business community,

Development of institutional capacities, especially at sub-national levels of government.

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Improvements in the regulatory environment :

• Establishing a framework for private participation in infrastructure by revising existing outdated laws and regulations (in particular Keppres 7/1998),

• Institution of a tendering process that is comparable to international standards in terms of content, clarity and selection procedures,

• Presence and clarity of enabling laws and implementing rules and regulations for each sector and type of investment,

• Clarity over roles and responsibilities of central and provincial governments,

• Creation and empowerment of autonomous sector regulatory bodies, with powers to set tariffs and competitive rules, without political interference.

Legal recourse for investors:

• Development of a business culture based on contractual sanctity,

• Special dispensation of litigations involving foreign investors/parties under interna-tional laws (UNCITRAL) rather than Indonesian domestic laws,

• Enforcement of arbitration awards, especially those awarded under international arbi-tration.


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Chapter 7. Recommendations for Prospective European Investors.

This final chapter gives recommendations for European companies looking for opportunities in the Indonesian infrastructure business. The discussion in this Manual amply clarified that Indonesia is not an easy business environment, either for companies already operating in Indonesia or for those looking for market expansion or investment opportunities.

This chapter therefore proposes a tentative decision tree which can guide companies in their evaluation process. The decision tree shows that the key capabilities which would enable companies to approach infrastructure investment in Indonesia are the following :

1. Capabilities in project finance

2. Experience in operating in Asia / Indonesia

3. Capabilities in value stream segments with relevance to infrastructure investment (which are to be broadly defined : project development, supply, construction, opera-tions and management)

4. Sector-specific know-how, either in sectors with active competition (power, telecoms) or in sectors where serious competition is notably absent (transportation investment, water and sanitation).

A final variable in the decision tree is whether investment decisions in Indonesia are purely commercial or whether there is a non-commercial mission. This may be the case for some of the European public companies or public authorities who subscribe to development objec-tives and international co-operation.

The decision tree is obviously indicative, as there are many more combinations possible based on the profiles of individual companies or due to the variety inherent to infrastructure sectors. The discussion of the variables in the following paragraphs is therefore mainly a guide for strategy-making.

1. Capabilities in Project Finance. The capability to commit project finance and investment funds in general in Indonesia’s high-risk business environment is primordial as a competitive advantage. The 2005 Infrastructure Summit was over-optimistic by portraying the Indonesian business environment as ready for receiving substantial new FDI flows based on the good intentions of the new Cabinet and pent-up needs. Nonetheless, the capability to bring in project finance and also the ability to be influential in influencing policies that are easing such investment is a key advantage. To put this in perspective: in March 2005, the Indonesian tobacco group Sampoerna sold its companies to Phillip Morris / Altria for US$ 2 billion in cash. The reasons given for the auda-cious sale of a very successful Chinese-Indonesian family business was the fear of declining returns in the consumer business and especially in the tobacco business but also the stated intention to use cash for upcoming infrastructure investments.

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The decision tree indicates two strategic areas for European companies with project finance strengths.

For companies with little prior experience in developing or operating infrastructure facilities either in Asia or in Indonesia, the suggestion is to explore future financial portfolio invest-ments in infrastructure, preferably through derivative financial vehicles and instruments spe-cialised in infrastructure. These could simply be future infrastructure funds targeting Southeast Asia, Indonesia or even specific infrastructure sectors in Indonesia. There are few opportunities as of today, but it is a reasonable prediction that in a few years, such funds will take off. Chapters 1 and 2 gave ample indications that policies of Bank Indonesia focusing on bond issues by national banks will likely make the country more fertile for derivative finan-cial instruments. Also the Government’s intention to strengthen governance mechanisms in relation to risk management should help to some extent. It should be noted, however, that project risk in Indonesia is likely to remain high, even more so for minority investors. None-theless, the volume of upcoming investments opens up reasonable perspectives of en-hanced liquidity of derivate investments resulting thus in a reduced portfolio risk.

The suggestions in the decision tree are especially valid for companies with limited prior ex-posure to investments in fixed assets in Asia. Companies without such exposure are advised to scout for opportunities in general, preferably through specialised investment bankers. Companies with Asia experience may be better placed to contribute to building such invest-ment vehicles, preferably in co-operation with other potential investors in more advanced markets in the ASEAN region, e.g. in Singapore and Malaysia.

Companies which already have experience in dealing with fixed assets in Indonesia need to evaluate whether or not equity investment may be placed in infrastructure investments. The following basic options emerge:

• European companies with strengths in competitive sectors (mainly power and tele-coms) should actively build or strengthen alliances both with Asian investment com-panies and with European financial institutions.

• European companies with strengths in sectors which are dependent on donor finance and/or heavily controlled by Indonesian State-owned Enterprises (i.e. transportation, including O&M of terminals; water and sanitation) will unlikely identify a significant number of viable investment opportunities. The decision tree therefore indicates the necessity for long-term aid-based engagements in accessing immature market envi-ronments at municipal and sub-national levels in general. In the short term, this may mean no more than small projects and/or feasibility study work.

• Finally, if no equity finance is to be committed but only loan finance or bridging fi-nance, then again it is advisable to access or develop multi-project investment vehi-cles, to channel in more credit insurance and in general to build financial risk management modalities.

2. Capabilities in Infrastructure Development, but no particular strengths in Project Finance.

Infrastructure investment will clearly lead to opportunities for studies, engineering services, supply, construction and operations and maintenance, yet in the end the opportunities are sector-specific.

Supply contracts will be easiest accessible in sectors where competition is better estab-lished, that is power and telecoms. The procedures for fairer tendering and for reasonable forms of dispute resolution are here better established compared to sectors where competi-


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tion is low (transportation and water). The analysis of Chapter 2 also indicated the expecta-tion that tender procedures will be more open in the more crowded market environment of Jabotabek compared to other areas of Indonesia, although cherry-picking by State-owned enterprises will remain a fact of life.

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Sectors which lower levels of competition may see foreign investment participation, but more likely in packaged development schemes which will include large Indonesian companies, in-cluding State-owned Enterprises. Participating in such foreign or foreign-local investment set-ups may still be beneficial for European companies, as long as scale-advantages or rela-tively risk-free sub-contracting modalities can be ascertained. Of special interest here are future multi-year construction contracts, e.g. for gas pipelines and potentially in the rail sec-tor.

With regard to business opportunities where know-how is more heavy on issues of opera-tions and maintenance (municipal water, toll road management, but also the management of air and sea terminals), investors need to be cautious and learn from past experiences. In case of new turn-key investments with a B.O.T. component, it is advised to focus on new ventures and not on ventures which need to receive revenue flows from existing operations. All O&M operations where revenues are in Rupiah and/or defined by tariffs set by third-party agencies are also high-risk.

A final segment of interest is small projects with a public service component which are fur-bished under public-private partnership schemes. Here, the experience points to the need to bring in also public overseas partners, as set-ups where the private partner is foreign and the public interest is catered for by Indonesian organisations offer no investment security to such private parties. Indonesian companies and local politics would overshadow foreign private interests in such ventures. Finally, public-interest projects should be understood here broadly: they may involve European municipal authorities which set out a public mission of international co-operation, but they may also be private-sector schemes taking advantage from such schemes as the Clean Development Mechanism and which aim at renewable en-ergy programmes in developing countries.

3. Partnering. A final note is here required on partnering. Indeed, many of the suggestions in the decision tree point to the need of partnering. It is however important, as laid out earlier in the Manual, that the reasons and modalities for business partnering have been changing in emerging markets such as Indonesia.

Past partnerships deals were strongly related to market access. Joint Venture partnering served a dual purpose to enhance licenses (legal access) and to facilitate access to re-sources and to distribution (physical access). However, the economic and subsequent so-cial-political crisis undermined these needs fundamentally:

• Local partners can often no longer ascertain business security;

• Local partners often failed to re-finance businesses in case of peak-crisis losses;

• For surviving businesses, local partners have often been no longer content with fac-ing decreasing returns as a result of lesser monopolistic practices and thus more market competition; and/or

• Local partners have been equally discontent to have their own entrepreneurial capa-bilities sidelined in their positions of minority shareholder, while foreign majority shareholders took the reigns in managing their businesses in an environment of en-hanced competition.

Therefore, European businesses will need to adapt themselves in working out new forms of alliances, which will need to focus more on complementary capabilities (e.g. to furnish pack-aged deals) and on broader regional coverage (covering other ASEAN countries as well). From a competition point of view, there is a downside in the sense that success will be less likely due to simple expertise but rather as a result of market concentration and market con-trol. This is visible in the increasing market concentration of multinationals in the consump-


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tion sector in Indonesia – as the Sampoerna business again so convincingly showed. Also in the infrastructure sector, there are clear tendencies of increased market concentration, as companies are either merging or exiting.

Regulators in Indonesia and Southeast Asia are unlikely to impact on or to reverse this ten-dency of concentration. They will first of all try to achieve a reasonable level of fair service delivery to which the private sector is contributing rather than only a hand-full of State-owned Enterprises. Opening up the market for enhanced competition and actively promoting in-creased foreign presence will be unlikely a policy objective as vigorous as it was in the 1990’s – for the simple reason that there will not be enough foreign companies willing to en-ter the market merely for the sake of giving consumers the enhanced competition.

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Annex 1. Legal and regulatory framework.

Foreign Investment in Indonesia

The Foreign Investment Law Foreign direct investment in Indonesia is governed by Law Number 1 of 1967 concerning Foreign Capital In-vestment, which was subsequently amended by Law Number 11 of 1970 as implemented by a number of regula-tions issued thereafter (the “Foreign Investment Law”). The government institution in charge of matters that pertain to foreign equity investment is the Investment Coordinating Board (Badan Koordinasi Penanaman Mo-dal or “BKPM”), which has been given comprehensive authority by virtue of a Presidential Decree. A foreign direct investment in Indonesia can be made by way of: (1) establishing or purchasing a special purpose vehicle in the form a limited liability company within the

framework of the Foreign Investment Law and pursuant to the Indonesian Company Law, Law Number 1 of 1995. This company is commonly known as a ‘PMA Company’ (Perusahaan Penanaman Modal Asing, or “PMA Company”);

(2) purchasing the shares of an existing company that engages in the field of infrastructure, that are listed in an Indonesian stock exchange. The purchase of the shares of listed companies is not subject to the provisions under the Foreign Investment Law.; or

(3) using a foreign legal entity (a non Indonesian company), i.e. by having the foreign legal entity establish a permanent establishment in Indonesia that will enter into a cooperation contract with BP Migas as explained in section [5.1.2]. This vehicle is especially for investment in upstream oil and gas sector.

Sectors open to Foreign Direct Investment The Foreign Investment Law stipulates the following: - The Government determines the fields of business that are open to foreign direct investment and sets forth

special conditions on such investment. - The Government has determined that certain business fields are closed to foreign direct investment. - Those business fields that are vital to the State and essential to the livelihood of the people are completely

closed to foreign investment, and cannot be undertaken by foreign investors without the participation of In-donesian businesses. These business fields are as follows: harbours; production, transmission and distribu-tion of electric power for the public, shipping, telecommunications, aviations, drinking water, public railways, development of atomic energy; and mass media. Industries performing a vital function in national defense such as the production of arms, ammunition, explosives, and war equipment are also absolutely closed to foreign direct investment.

Based on the above caveats, the Indonesian Government has from time to time issued a list of the business fields which are either open or closed to foreign direct investment. The list is known as the ‘Negative List’ and is is-sued by way of a Presidential Decree. The most recent Negative List is that in Presidential Decree No. 96 of 2000 as amended by Presidential Decree No. 118 of 2000. In practical terms, and based on the recent liberalization in the investment sector, all business sectors are open to foreign direct investment, with the following exceptions and qualifications: - fields of business which are absolutely closed to foreign investment as listed in the Negative List (please see

Schedule 1 Annex 1); - fields of activities that referred to as "strategic activities", which are significant for the State; the maximum for-

eign shareholding is 95% (these include, among others, public harbours, transmission and distribution of electric power for public use, telecommunications, shipping, aviation, public drinking water, public railways nuclear power generation, etc.);

- fields of business open to foreign investment with the requirement of a joint venture with domestic capital (Indonesian shareholder(s)), (please see Schedule 1 Annex 2);

- fields of business open to foreign investment under certain conditions, as listed in the Negative List (please see Schedule 1 Annex 3).

In addition to the Negative List, the Government of Indonesia under Presidential Decree No. 127/2001 has also specified certain fields of business that are reserved for small scale businesses and fields of business that are open to medium and large scale businesses with the requirement of partnership between the small scale business

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and medium and/or large scale business. The partnership may be carried out under various arrangements, includ-ing a share participation or nucleus plasma, as normally conducted in the business of plantation, sub-contracting, franchising, general trading, agency and/or other businesses. The partnership with the small scale business may also be carried out in the form of foreign investment, as long as the business concerned is not closed to foreign investment. The fields of business that are reserved for small-scale businesses as listed in Attachment I of Presi-dential Decree number 127 of 2001, are closed to foreign direct investment (please see the fields of business in Schedule 1 Annex 4). The fields of business that are open to medium and large scale enterprises, as listed in At-tachment II of Presidential Decree number 127 of 2001, are open to foreign investors provided that they work in cooperation with a small scale enterprise under the so called partnership program (please see Schedule 1 Annex 5). A 100% foreign-owned PMA Company can be established in the fields of business that are in the Negative List and not reserved for small-scale businesses. Law Number 9 of 1995 regarding small-scale businesses sets forth in its article 1 that a business undertaking is a small scale business if it: - has a maximum net asset of Rp. 200,000,00 (two hundred million Rupiah) excluding the land and the build-

ing where the business is carried out; or - has maximum annual sales proceeds of Rp. 1,000,000,000 (one billion Rupiah); - owned by an Indonesian citizen; - is independent, not a subsidiary or a branch of a company owned and not controlled directly or indirectly by

a medium scale or a large scale business or affiliated directly or indirectly with a medium scale or large scale business.

- Is in the form of an individual undertaking, a non-statutory business undertaking or a statutory business un-dertaking, including a cooperative.

As mentioned above, the partnership with small scale businesses can be equity partnership or non-equity partner-ship. In an equity partnership, the small-scale enterprise holds at least 20% of the share capital of the PMA com-pany, while the investor holds a maximum percentage of 80% of the PMA Company’s share capital. In a non-equity partnership, the foreign investor can hold up to 100% of the share capital of the PMA Company, but the PMA Company is required to enter into a contractual relationship with the small-scale enterprise. The objective of the partnership requirement is to help small-scale enterprises improve their management capabilities and in-crease their business opportunities. The partnership can take the form of among others, agency, sub-contracting, franchise, and other partnership arrangements. Although a foreign investor can own up to 100% of the share in a PMA Company, one needs to bear in mind that under the Indonesian Company Law, a limited liability company must at all times have at least two shareholders. In an attempt to elucidate the Negative List, which does not completely and comprehensively outline the condi-tions for the engagement in the lines of business that are available to foreign direct investment, the BKPM has also issued a handbook known as “Petunjuk Teknis Pelaksanaan Penanaman Modal” (Investment Implementa-tion Technical Guidelines) -- formerly known as “Informasi Peluang Usaha” or “IPU” (Business Opportunities Information). The IPU describe in greater details the fields of business that are open or closed to foreign invest-ment. This handbook has in fact become the ‘true’ negative list, since it makes it clear that the business fields included in the Negative List are merely broad categories that in fact cover a number of fields of activities that are closed to foreign investment.

Repatriation One important feature of the Foreign Investment Law is the guarantee that the Government will not nationalize a foreign investment or revoke rights to control a foreign investment. The exception to the foregoing is where it is declared by law to be in the national interest to do such nationalization and then only upon payment of mutually agreeable compensation determined in accordance with principles of international law. The Foreign Investment Law also assures that the foreign investor shall have the authority to appoint the management of the investment company and the right to repatriate capital in the form of after-tax profits, reimbursements for expenses of expa-triate manpower, depreciation of fixed assets, etc.

Disputes on Foreign Investment The Foreign Investment Law provides for arbitration of investment disputes. By virtue of Law Number 5 of 1968, Indonesia ratified the Convention on the Settlement of Investment Disputes between States and Nationals of other States (known as “ICSID”), thus allowing for such disputes to be submitted to international arbitration under the ICSID rules.


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Planned Changes in the Foreign Investment Law Over the past few years, the Government has developed plans to amend the existing Foreign Investment Law with the intention of simplifying the existing licensing procedures and providing legal certainty to investors in Indonesia. The main issues regarding the need to amend the Foreign Investment Law are, among others: - the need to eliminate discrimination in the treatment of foreign direct investment and that of domestic in-

vestment; - the need to simplify and expedite the establishment of a PMA Company; - the need to extend the duration or eliminate the time limit for the duration of a foreign direct investment

(currently, as noted in this report, a PMA company’s period is limited only to 30 years as of its commercial production or commencement of its activities, but can be further extended subject to obtaining a license for expansion of its investment).

The Coordinating Minister for Economy, Aburizal Bakrie, made an announcement in January of 2005 regarding the government’s plan to change the current Foreign Investment Law.. One significant proposed change is the change in the procedure for the establishment of a PMA Company. Instead of the requirement for the BKPM’s prior approval in the current procedure, the company is to be registered with the BKPM. It is intended that the role of the BKPM be changed from a licensing body to a registration body for PMA Companies and a promotion body for investment opportunities in Indonesia in general. It is interesting to note that in the process of changing the current law, the office of the Coordinating Minister for Economy invites the participation of the private sector, in the discussions of the draft and welcome inputs from the private and business sectors. From the draft new Foreign Investment Law which was available during the first week of March, among others the following key matters are noted: - the duration limitation of 30 years for PMA Companies has been lifted; - the establishment of a body which is responsible for investment matters, which will also be, among others,

the agency for the registration of PMA Companies; - the establishment of a PMA Company is stipulated to require the prior registration with an investment body;

the prior registration requirement does not eliminate the lengthy process of the PMA Company establish-ment, which involves dealings with other government agencies;

- the provisions that are too detailed for a law. In the discussions of the new Foreign Investment Law, we note that the following are the main concerns on the business community in Indonesia: - The current Foreign Investment Law may not need to be amended, but the implementing regulations regard-

ing the role of the BKPM needs to be amended to accommodate the plan for the registration of PMA com-panies and the plan for making BKPM a promoting body for investment.

- The amendment to the Foreign Investment Law (if required), and also the changes in the implementing regulations on the role of the BKPM, must take into consideration other laws which are related to the estab-lishment of a PMA Company, such as the Indonesian Company Law and the Law on Mandatory Company Registration. Under the current laws and regulations, there are four general steps in process of establishment of a PMA Company: (i) the processing of the license from BKPM (ii) the processing of the approval from the Minister of Law and Human Rights of the company’s deed of establishment; (iii) the registration of the deed of establishment with the Company Registration Office (iv) the processing of other ancillary licenses from several government institutions, including another license from the BKPM – the permanent operating license. In this respect, if the intention is to simplify the process, certain changes may also need to be con-sidered under other laws (such as the Indonesian Company Law and Mandatory Company Registration). The new Foreign Investment Law (or an amendment to the current law, as the case may be) may also need to contain waivers for PMA Companies to comply with other registration requirements under other laws which are understood to be unnecessary or redundant.

Based on the discussions on the new Foreign Investment, with the drafting team at the Office of the Coordinating Minister for Economy, further discussions between the team and the Minister are needed for the purpose of de-ciding on whether or not to change or replace the current Foreign Investment Law, and on whether adjustments are to be made to the other laws to synergize the concept for the simplification of the procedure for the estab-lishment of a PMA Company.

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Foreign Direct Investment in the Infrastructure Sector The power, transportation, water and sanitation, and telecommunications sub sectors of the infrastructure sector is open to foreign direct investment. Investment in these sub sectors also subject to the provisions of the Nega-tive List and the IPU as mentioned in section 3.1 above. Among the fields of business that are open to foreign direct investment in the infrastructure sector, as set out in the IPU, are the following. Energy Sector

Power Generation, Transmission and Distribution Power Support Services Oil and Gas Sector

Transportation Sector Railways Special Railways Harbours Airports Transportation Support Services Toll Roads

Telecommunications Sector Telecommunications Network Telecommunications Services

Water and Sanitations Development and Operations of Clear Water Waste Management Waste Water Management

In addition to the above infrastructure sub-sectors, foreign investors may participate in the development of infra-structure projects as supplier/contractor. For this purpose, they can establish a PMA Company, or, if they are a foreign construction service company, they can establish a representative office in Indonesia. Under the IPU, the lines of business available for construction services are as follows: - Construction Services - Plant Hire Services The specifics on the conditions and shareholding requirements are set out in Schedule 2, in “Other Services”. Foreign construction service companies are required to obtain a representative office license if they intend to operate in Indonesia in the field of construction consultancy services (consultants) and/or construction imple-mentation services (contractors). A foreign construction service company may handle projects in Indonesia only in a joint cooperation with an Indonesian party which must be a member of AKI/GAPENSI of qualification A, for a contractor. The permit for a foreign construction service company is valid for three years, at the end of which a new permit may be applied for. The foreign construction service company has the obligation to, among others, submit an annual report of its business activities to the Minister of Public Works and to guarantee the occurrence of a trans-fer of the technology to its Indonesian partner.

Establishment of a PMA Company Foreign Investment Approval For the establishment of the PMA Company, an application must be submitted to BKPM to obtain a foreign in-vestment approval (“PMA Approval”) which serves as provisional license to operate. The procedures for ob-taining the foreign investment approval is as set out in the Decision of the State Minister of Investment/Chairman of BKPM Number 57/SK/2004 on the Procedure for Filing Applications for Domestic and Foreign Capital Investments, as amended by Decision of the Minister of Investment/Chairman of BKPM No. 70/SK/2004 (“SK57/2004”). Upon issuance of the PMA Approval, a deed of establishment containing the Articles of Association of the PMA Company must be signed by the founders of the PMA Company before a notary public. The deed of establish-ment, after signing, will thereafter be submitted to the Minister of Law and Human Rights (“MOL”) to obtain approval. Only after the issuance of the MOL approval, the PMA Company obtains its status as a limited liability company. The PMA Company may, however, commence business activities prior to obtaining the MOL Ap-proval. Under Indonesian Law, the incorporation process is only completed after the MJHR Approval has been obtained and approved Articles of Association have been published in the Supplement to the State Gazette. At this point


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of time, the PMA Company gains limited liability status. Prior to the issuance of the MJHR Approval, the PMA Company may commence business activities and contracts may be entered into in the name of the PMA Com-pany, but the founders of the PMA Company remain personally liable until such contracts have been ratified by the first general meeting of shareholders of the PMA Company held after the MJHR Approval. The PMA Company is also required to obtain a permanent operating license after the company is ready to com-mence its commercial production or commercial operations. This license is known as a ‘Permanent Operating License’ that must be obtained from BKPM. Apart from the above, the PMA Company is also required to obtain other ancillary licenses from other Govern-ment Agencies, such as, the Certificate of Domicile, Company Registration Certificate, and Tax Registration Number.

Changes on Investment The PMA Company must also comply with the provisions stated under SK57/2004, if there’s any routine or in-cidental changes to the PMA Company’s investment plans as stated in its PMA Approval, prior approval from BKPM is required. These are, among others, the following: - any expansions or diversification of the PMA Company; - change in the PMA Company’s line of business; - any change in the PMA Company’s shareholders; - any change in the composition or numbers or the members of the Board of Directors or Commissioners of

the PMA Company; - any investment change which results the change in facility and financing sources.

Term of Investment The Foreign Investment Law stipulates that the validity of a foreign investment permit shall not exceed 30 years from the date the PMA Company commences commercial production, i.e., 30 years from the date of the PMA Company’s Permanent Operating License. Government Regulation Number 20 of 1994 states that the 30 year term may be extended beyond that term so long as the PMA Company continues to carry out its business for the benefit of the national economy and devel-opment. Absent such a showing, presumably, the provisions state that when the 30 year time limit is reached, the foreign investor must transfer it shares to an Indonesian, investor, and will be subject to mandatory liquidation if it fails to do so. BKPM began ameliorating this rule by stating that expansion permits and diversification permits granted to existing investment companies would also be valid for 30 years from the date of the permit. There is still some doubt, however, about the appropriateness of this policy.

Purchase of an Existing PMA Company Under the current regulations, it is possible for foreign investors to invest in an existing legal entity, which can be an existing PMA Company or a non-PMA Company. If the company to be acquired is a non PMA company, the company must be converted into a PMA company. The participation of the foreign investors must not exceed 95% as stipulated in the Decision of the Minister for the Mobilization of Investment Funds/Chairman of the BKPM number 15/SK/1994 concerning the Implement-ing Provisions on Share Ownership in Companies Established within the Framework of Foreign Investment (“SK 15/1994”). Pursuant to Article 17 of SK 15/1994, purchase of shares by a foreign entity(ies) in an existing company can be done only if the line of business of said company is open for foreign investment at the time of the purchase and the amount of shares of the Indonesian participants in such a company does not become less than 5% of the amount of the issued and paid-up capital.

Divestment Requirement Under the Foreign Investment Law, it is required for the foreign shareholder to divest part of its share to an In-donesian citizen or legal entity, within 15 (fifteen) years as of the date the PMA company obtains its Permanent Operating License. This stipulation is applied whereby a PMA company is 100% owned by foreigners. The per-centage of divestment has not been specified by the government, but government officials have publicly hinted that even a 1% divestment to local ownership can be acceptable.

Minimum Investment and Equity Requirements In the past, it was required that the amount of an investment must be at least US$ 1,000,000 in equity basis and loans. This minimum amount is no longer strictly applied, but the amount of investment acceptable to the BKPM will depend on the funds required for the type of investment concerned and required funds needed to maintain the PMA Company.

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There are no regulations limiting the debt to equity ratio (DER), but it has been a policy of BKPM that the DER does not exceed 3:1 (3 loans compared to 1 equity). For certain sectors which require large investment, the ac-cepted DER can be higher, such as 1:5 or 1:6. Under the Company Law and procedures of BKPM, the founders of a PMA Company are required to subscribe not less than 25% of the total authorized capital stated in the PMA approval at the time of the deed of establish-ment of the PMA Company is prepared by the Notary, and to pay into the PMA Account not less than 50% of the nominal value of the share capital subscribed. Upon issuance of the MJHR Approval, payment of the remain-ing 50% of the nominal value of the subscribed share capital must be paid into the PMA Account. The founders of the PMA Company are then required to subscribe to the remaining authorized but un-issued share capital, and pay up the nominal value thereof in full, as and when the additional capital is needed.

Management of Limited Liability Company It is a requirement under the Company Law that a limited liability company, including a PMA company, must have a Board of Directors (Direksi). The Board of Directors is responsible for the management of the Company in accordance with the interests and objects of the Company, and is the authorized to represent the Company both in and out of the court. The Board of Directors is responsible for determining Company policies and per-forming the day to day management of the Company, as well as making plans for the future and undertaking new activities in pursuance of the objects of the company. Besides a Board of Directors, a PMA Company must also have a Board of Commissioners (Komisaris) also sometimes referred to as a Board of Supervisions or Supervisory Directors. The duty of a Board of Commission-ers is to supervise the way the board of Directors discharges its management responsibilities and to provide the Board of Directors with advice. The Board of Commissioners has no executive functions, although it can take care of the management of the Company for a limited period of time in the absence of directors. The minimum number of Commissioner required is at least 1, which can be either a foreign citizen or an Indonesian citizen. A foreign commissioner is not expected to reside in Indonesia The members of the Board of Directors and Commissioners in a PMA Company must be consistent with the composition approved under the foreign investment approval issued by BKPM and the composition under the PMA Company’s Articles of Association. Schedule 3 sets out the key aspects on the steps required for obtaining the foreign investment license and other steps involved in the setting up of a PMA Company.

Government Procurement Mechanism The regulation on government procurement is Presidential Decree No. 80/2003 regarding Technical Guidelines on Government’s Procurement of Goods/Services (“Guidelines on Procurement”). Under the Guidelines on Procurement, the government’s general policies in its procurement of goods/services are as follows: 1. intensifying the use of domestic products, national designs and engineering with the target of expanding job

opportunities and developing domestic industries in the framework of enhancing the competitiveness of do-mestic goods/services in international trade;

2. enhancing the role of small-scale businesses, including small cooperatives and groups of communities in the procurement of goods/services;

3. simplifying the provisions and procedures for the purpose of speeding up decision makings in the procure-ment of goods/services;

4. enhancing the professionalism, independence and accountability of the users of the goods/services, the pro-curement committees/officials and the suppliers of the goods/providers of the services;

5. raising state revenue through the taxation sector; 6. enhancing the participation of national businesses; 7. requiring the selection of suppliers of goods/providers of services in the territory of the Republic of Indone-

sia; 8. requiring the transparent announcement of any plan for the procurement of goods/services, with the excep-

tion of confidential procurement of goods/services at the beginning of a budget realization. The Guidelines on Procurement covers the following aspects of the procurement: 1. the procurement of goods/services that is financed partly or wholly by government budgets (“APBN”) as

well as by regional government budgets (“APBD”); 2. the procurement of goods/services that is financed partly or wholly by overseas loans/grants (“PHLN”) in a

manner that is in accordance with or not contravening the guidance and provisions on the procurement of goods/services set out by the grantors of the said loans/grants;

3. the procurement of goods/services for investment within Bank Indonesia (BI), state owned legal entities (“BHMN”), BUMN, BUMD, that is financed either partly or wholly by APBN/APBD.


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The Guidelines on Procurement also provides for the establishment of a Procurement Committee (“Procure-ment Committee”) by the users of the goods and services. The following are the provisions with respect to the Procurement Committee: 1. The establishment of a Procurement Committee is compulsory for all procurement plans of above Rp.

50,000,000.00 (fifty million Rupiah). 2. Procurement of a value of up to Rp. 50,000,000,000.00 (fifty million Rupiah) can be done by the Procure-

ment Committee. 3. The members of the Procurement Committee comprise civil servants and members of the relevant institu-

tions or other technical institutions. The Procurement Committee members/officials must meet the following requirements: a. have moral integrity and discipline, and responsibility in executing tasks; b. understanding the whole job to be procured; c. understanding type of certain job becoming task of the said procurement committee/official; d. understanding content of document of procurement/method and procurement procedures on the basis of

this presidential decree; e. having no family relation with officials appointing and stipulating them as procurement commit-

tee/official; f. having certificate of expertise in procurement of government goods/services;

4. The task, authority and responsibility of procurement committee/official include: a. to prepare schedule and stipulate technical procedures as well as location of procurement; b. to formulate and prepare a self estimated price (“HPS”); c. to prepare documents of procurement; d. to announce procurement of goods/services through printed media and official billboard for public in-

formation and if possible, electronic media; e. to evaluate qualification of suppliers/providers through post-qualification or pre-qualification; f. to evaluate incoming bids; g. to propose prospective winner; h. to make report on process and result of procurement for users of goods/services; i. to sign integrity pact before the procurement of goods/service starts.

5. Procurement Committee comprises at least 3 (three) persons understanding procedures for procurement, substance of the said job/activities and other necessary fields, from apparatuses of the said institution or other institutions.

6. In order to prevent a conflict of interest in the procurement, the following persons cannot become Procure-ment Committee/official: a. users of goods/services and treasurers;

b. employees of the Financial and Development Supervisory Board (BPKP)/Inspectorate General of Minis-tries/Main Inspectorate of Non-government ministerial institutions/provincial/regency/city supervisory boards, internal supervisors of BI/BHMN/BUMN/BUMD, except procurement committee/official for the procurement of goods/services needed by their institutions.

The Guidelines on Procurement also stipulates that the suppliers of goods/providers of services must: 1. comply with the provisions of the prevailing in their activities as providers of goods/services; 2. possess the expertise, experience, as well as technical and managerial capabilities to supply the

goods/provide the services; 3. not be under court supervision, not be in the state of bankruptcy or have their business activities suspended,

and/or their executive directors who act for and on behalf of companies currently serving criminal sanctions; 4. be legally capable of signing contracts; 5. as taxpayers, have already paid their taxation liabilities in the latest year, as proven by the copies of their

latest annual income tax returns and tax payment form of income tax-article 29; 6. in the past 4 (four) years, have undertaken jobs to supply goods/provide services within the government and

private circles, including having sub-contract experience, except for suppliers of goods/providers of services which were established less than 3 (three) years ago;

7. have sufficient human resources, capital, equipment and other facilities necessary for the procurement of goods/services;

8. not be listed in the blacklist; 9. have a permanent and clear address which is reachable by post; The above requirements, excluding item 3, also apply to individual suppliers of goods/providers of services. Experts recruited to provide consultation services in the government procurement must: 1. have a taxpayer code number (NPWP) and evidence of their having settled their tax liabilities;

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2. be graduates of state-run universities or accredited private universities or must have already passed the State examination or are graduates of a overseas universities whose diploma has been legalized or is recognized by the authorized government institution in the higher education field;

3. have sufficient experience in the field.

Civil servants, employees of BI, BHMN/BUMN/BUMD are prohibited from becoming suppliers of goods/providers of services. Exception of this provision is where the person concerned takes a leave without pay from such institution Suppliers of goods/providers of services whose involvement will trigger a conflict of inter-est are prohibited from becoming suppliers of goods/providers of services. The evaluation of the compliance with the above requirements is conducted in prequalification or post-qualification assessments by the procure-ment committee/officials.

The policies on government procurement are developed by the Institution for the Development of Government Procurement Policies (LPKPP) which has been established by way of a separate Presidential Decree.

Selection of the Vendors for the Procurement, and Tender Procedures for Infrastructure Projects

In consideration of the lengthy processes and procedures, the above subject matters are dealt with separately in Schedule 4.

Other Matters.

A. Indonesian Judicial System and Business Disputes Resolutions

Indonesian Judicial System The Indonesian Judicial system consists of five types of lower courts, and a Supreme Court. The lower courts include: General Courts (which consist of two levels: the State District Court and State High Court); Military Courts (which consist of two levels, the Military Court and Military High Court); Administrative Courts (which consists of two levels, the Administrative Court and the Administrative High Court); Religious Courts (consist-ing of two levels, the Religious Court and the Religious High Court); and the Commercial Court (a specialized court for hearing insolvency cases with the possibility of appeal to a special bankruptcy tribunal of the Supreme Court). The Supreme Court is the highest judicial tribunal and the final court of appeal in Indonesia. The Courts are independent from the executive and legislative arms of the government.

Dispute Settlements Under the Indonesian business practice, settlement of disputes is usually handled by way of amicable settlement. If an amicable settlement cannot be reached, the parties can either elect to settle the dispute through court or through alternative dispute resolutions, such as mediation and arbitration.

Court Proceedings Settlement of disputes through court is known to be quite a lengthy and costly process.

Alternative Dispute Resolutions Indonesia recognizes the concept of Alternative Dispute Resolution (“ADR”). ADR falls within 3 (three) general categories: (1) Mediation, (2) Arbitration, and (3) Alternative Dispute Resolution inside the court (“CDR”). ADR (including arbitration) in Indonesia is governed by Law No. 30/1999 concerning Arbitration and Alterna-tive Dispute Settlements (“Law No. 30/1999”). Law No. 30/1999 replaced the provisions concerning arbitration which were embodied in the old Dutch originated Law on Civil Procedures. An international convention, gener-ally known as the New York Convention 1958, governs the recognition and enforcement of international arbitra-tion awards. International arbitration awards are enforceable in countries which are parties to that Convention. Indonesia is a signatory to the 1958 New York Convention and has adopted such convention into Indonesian law by way of Presidential Decree No. 34 of 1981. In addition, to enforce a foreign arbitral award, it is necessary to register the award with the Clerk of Central Jakarta District Court, obtain a writ of execution from the Chairman of the Central Jakarta District Court or, in case the award which involves the Republic of Indonesia as one of the parties in dispute, from the Supreme Court of the Republic of Indonesia (through the Central Jakarta District Court). Aside from a voluntary face-to-face negotiation based on consensus, Law No. 30/1999 recognizes a statutory mediation as referred to in article 6 of the Law No. 30/1999. Mediation can be carried out in several ways, such


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as consultation, negotiation, mediation, conciliation or expert determination. Mediation usually takes place if the disputed parties fail to achieve a resolution by negotiation. If the mediation methods mentioned above cannot resolve the dispute, the disputed parties, on the basis of a writ-ten agreement, can recommend another effort to resolve the matter by way of an arbitration (both institutional or ad-hoc) as specifically described in article 6, paragraph 9 of Law No. 30 year 1999. Article 1 paragraph 1 of Law No. 30 year 1999 defines arbitration as a mechanism of settling civil disputes out-side the general courts based upon an arbitration agreement entered into in writing by the disputed parties. Arbi-tration can be carried out between private individuals, entities, states or between states and private individuals. In addition to the foregoing methods of ADR, there is also an in-court alternative dispute resolution or “CDR”, which has been created to strengthen the courts as a place to find justice for all people. Court congestion and delays as well as backlog of cases are seen as part of the weaknesses of Indonesia’s present judicial system. Formal litigation through the courts is not generally considered as an appropriate method of dispute resolution, most of the time; however, resort to litigation is quite costly, time-consuming and unpredictable. If appeals are necessary to achieve a reasonable result, the whole process can take many years. CDR only applies in civil cases, where the law allows legal matters to be settled. In practice, CDR can be carried out in either of two ways: (1) compromise settlement, and (2) mediation, after the civil case is registered in the District Court.

B. Land Matters

As a matter of principle, perpetual ownership of land can only be owned by Indonesian individuals. Foreigners can, to a certain extent, but with certain conditions, own the right to use of land. In the case of a PMA Company, a PMA Company can for purposes of its investment in Indonesia acquire and hold specific land titles, i.e., the Right to Build, Right to Cultivate, Right to Use, and Right to Administer/Manage. These types of land shall be explained in this section.

Indonesian Land Law Indonesian land law is very complex, reflecting customary (“adat”) law developed over hundreds of years at the village level, as modified by Dutch Colonial rule, with an over layer of more recent central Government laws and regulations. The recent laws and regulations are an attempt to make Indonesia’s land law more usable for modern conditions without completely abandoning the communal concepts applicable to land in customary law, which communal concepts are also embodied in Indonesia’s constitution of 1945. Most lands in Indonesia are not registered with a Government land office, and thus without land certificates, which is the best evidence of title. Rights in unregistered (and thus uncertificated) land are based, in part, on un-written law of the jurisdiction where the land is located and, accordingly, is different in different locations and often is quite deficient in legal certainty.

The Basic Agrarian Law of 1960 The Indonesian Government’s attempt to adapt its land law to modern needs was through the adoption of the Basic Agrarian Law No. 5 of 1960 (the “Agrarian Law”). The Agrarian Law introduces classification of land rights and extends to all land a system of registration which is to result in the issuance of a land certificate. As mentioned above, the Agrarian Law is superimposed on customary (“adat”) law. Under the Agrarian Law, conceptually, all land is governed by adat law as long as this customary law does not contravene public interest and the welfare of the nation. It is therefore the State that determines the proper use of land, the relationship between land and individuals or groups of individuals, and the consequences of legal ac-tions concerning land. A notable change effected by the Agrarian Law is to permit land rights to be held by individuals rather than in common by the community, which is the status mandated under adat law. However, the adat law principle that the community has the ultimate right to approve of the party to whom the land is transferred is continued under the Agrarian Law. This final approval right is exercised through the system by which the party with current rights in the land “relinquishes” these rights to the State with a request that those rights be conveyed by the State to a particular purchaser.

Classification of Land Rights The Agrarian Law recognizes several types of land rights, of which the following are the most important: - Hak Milik (Right of Ownership); - Hak Guna Bangunan (Right to Build); - Hak Guna Usaha (Right to Cultivate);

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- Hak Pakai (Right to Use). - Hak Pengelolaan (Right to Administer/Manage) While all of these rights allow the holder to utilize the land concerned, they differ in their duration, in the nature of utilization allowed and in the ability of the right to be used for security purposes. A brief summary of each of these land classification follows.

Hak Milik/Right of Ownership This is the most extensive right available on Indonesian land, being unlimited in duration and utilization and available for hypothecation. This “Right of Ownership” is available only to individuals who are Indonesian citi-zens (natural persons). This Right of Ownership is conveyed by executing a deed before a Land Deed Of-fice/Notary reflecting the desired transaction.

Hak Guna Bangunan/Right to Build (“HGB”) A Hak Guna Bangunan title is the grant of a right in land for a maximum period of 30 years authorizing the holder to utilize the land and anything previously or thereafter build upon the land on an exclusive basis for that period. An HGB in principle can be extended for an additional maximum period of 20 years after the expiration of the first 30, but so far the Government has always preferred to grant a new HGB title for 30 years to the grant-ing of an extension of an existing title. Conceptually, it is similar to a long-term ground lease in the common law system. An HGB title may be held only by Indonesian citizens and Indonesian companies, including PMA Companies, that have their legal domicile in Indonesia. The title may be transferred by executing a notarial deed before a Land Deed Office/Notary. Any transfer must be registered with the National Land Office.

Hak Guna Usaha (the Right to Cultivate) The Hak Guna Usaha (“HGU”) is a right that is generally issued on government-owned land to Indonesian indi-viduals or legal entities, including PMA companies, for agriculture purposes. Its term is usually 35 years at the most, with a possible extension of a maximum of 25 years. Upon the expiration of its term, the holder may apply for a renewal of the land title for a period of 35 years at the most.

Hak Pakai (Right of Use) This is subsidiary right in land which may be granted by the holder of any of the land rights mentioned above or by the Government for land controlled by the government on behalf of the State. The Hak Pakai is the right to use and/or to collect products from the land. The Hak Pakai is limited in duration by the contract or decree, as the case may be. The granting of this right is usually for a 25 yeas at the most, with extension possibilities of 20 years at the most, and is ordinarily subject to specific restrictions on the intended use of the land. Indonesian citizens, corporations, foreign individuals and corporations may posses a Right of Use over land.

Right to Administer/Manage (Hak Pengelolaan) A Hak Pengelolaan, or “right to manage”, is granted to governmental authorities, state agencies and state enter-prises to administer government land. The holder of Hak Pengelolaan may grant rights of use in the land to a third party, including a Hak Guna Bangunan or a Hak Pakai without diminishing his right to manage the land. A Right to Manage is not available for security purposes. Titles are evidenced by the issuance of certificates of land titles by the relevant Land Office. The rights men-tioned above are the basis for any transaction concerning land. Any purchase, lease, rent or any other types of transaction will involve one of these titles. Therefore, the above titles are the rights held and/or owned by a per-son or entity which can be transferred to other person or entity. Hak Pengelolaan is not specifically mentioned in the Agrarian Law but the government has granted the right to a number of government institutions involving in large scale of infrastructure such as harbours and housing.

Imposition of Security Except for the Hak Pengelolaan, all of the titles of land mentioned above can be used for security purposes by way of execution of granting of a Hak Tanggungan (mortgage).

Registration of Land Titles Government Regulation No. 24 of 1997 imposes land right holders the obligation to register their land rights. In spite of the requirement, the fact is that most lands in Indonesia are not currently registered. Although privately held lands located in urban areas are now properly registered and documented under the pro-cedures stipulated by the Agrarian Law, still, many privately held lands in rural areas are not. Often, the only


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documentation available to support a claim of right is the so-called “girik” right, which is actually a land tax re-ceipt and not evidence of title, but which is often taken into consideration in establishing title to land.

Procedures to Transfer Land Title The various procedures are described below.

1. Location Permit Pursuant to the Regulation of the State Minister for Agrarian Affairs/Head of the National Land Agency Number 02/1999, a PMA Company that intends to acquire a land title in its name must first obtain a Location Permit, which is a permit for the acquisition of land for a certain usage which must be in line with the designation set forth in the spatial layout of the region concerned. To obtain a Location Permit, an application therefore must be submitted to the Local Government where the land is located. The holder of a Location Permit has a priority, but not an exclusive, right to acquire the land in the designated area. In principle, however, the original land owner is free to sell its land to any other interested party.

2. Land Transfer Documentation Following the issuance of the Location Permit, the Company concerned has a period of 12 (twelve) months to arrange for the relinquishment of the land concerned by the land owners, for which a deed of relinquishment will need to be executed before a land deed officer who could be a notary or a Camat or the Head of the Land Office of the Kabupaten (Regency under which jurisdiction the land concerned is located). These individual land owners cannot directly transfer the land to a company. To change the original “right of ownership” into one of the land title mentioned above, the original land owner must first release his/her right of ownership in the land back to the State (the State is considered to be the ultimate holder of all land in Indonesia) for the benefit of the purchaser (the Company). By this deed, the land concerned becomes government land . After the execution of deed of relinquishment, the PMA Company may proceed with the submission of its appli-cation for a land title. For this purpose, the Company must apply to the Head of the National Land Agency/State Minister for Agrarian Affairs (Jakarta) for issuance of a title in the Company’s name. If the land located in more than 1 (one) regency, the application copy should also be given to each of the Head of Land Office in Regency level.

3. Granting the Title Following its receipt of the title application, the Land Office of Provincial level will proceed with its measure-ment of the land in question, and its examination of the pertaining documents. At the satisfactory completion of these acts, this Land Office will issue a recommendation letter to the Head of the National Land Agency/State Minister for Agrarian Affairs. If the recommendation from the Land Office in Provincial level is accepted, the Head of the National Land Agency/State Minister for Agrarian Affairs will issue a Decree on the Granting of the Right (Surat Keputusan Pemberian Hak/”SKPH”) in the name of the Company. The Decree will contain land specification, including the location, the land measurement, the type and duration of the right, the cost/retribution fees which must be paid to the State for the Granting of the Right concerned. It should be noted that the issuance of the SKPH in the name of the Company cannot be considered as a valid legal right with respect to the granting of the title to the Company of the land concerned. This SKPH can only be considered as a conditional granting of land rights. The granting of the right will be subject to the fulfillment of all condition as stipulated in this SKPH decree and the issuance of the land title.

4. Certificate of title in the name of the Company Following the submission of the original SKPH and the fulfillment of all conditions as set forth in the SKPH decree, including the submission of the original evidence of the retribution payment/administration fee and any other fees, the Head of Local Land Office (Kabupaten level) will register the land and issue the registration cer-tificate under the name of Company. We wish to mention that with the enactment of the Regional Autonomy Law No. 22/1999 (as revoked by Law No. 32/2004), it is possible that the Local Government will impose additional requirements to PMA companies that are applying for land titles.

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5. Land acquisition issues Delays in land acquisition/procurement have been a major bottleneck to key infrastructure projects, and that the Government will soon issue a revision to the Presidential Decree No. 55 of 1993 (on the Land Acquisition for Development Activities for Public Interest, “Presidential Decree 55”) for more efficient and timely land acquisi-tion. Presidential Decree No. 55 of 1993, in essence, governs the procurement of land for development activities which are for public interest carried out and subsequently owned by the Government which are not for profit. The areas of development include development of infrastructure projects. The proposed new regulation will pro-vide, among others, a time limit for an amicable settlement between the land owners and the committee for land acquisition. The infrastructure sector that is governed by the Draft Regulation has been expanded, to include, among others, development of toll roads. The Draft Regulation concerns land acquisition for public interest development carried out by the Government, and does not stipulate acquisition of land for infrastructure projects by the private sector.

SCHEDULE 1 - NEGATIVE LIST ANNEX A1: List of Business Fields Completely Closed to Investment in the Infrastruc-ture Sector

COMMUNICATIONS SECTOR 1. Air Traffic System providers (ATS providers) as well as ship classification and survey statutoria services. 2. Management and operation of radio frequency spectra and satellite orbit monitoring stations.

MINING AND ENERGY SECTOR 3. Mining of radioactive minerals.

ANNEX A2: List of Business Fields in the Infrastructure Sector which are Closed to Investment for Companies with Foreign Capital and/or Foreign Legal Entities.

COMMUNICATIONS SECTOR 1. Taxi/bus transport services. 2. Small-scale shipping.

ANNEX B: List of Business Fields in the Infrastructure Sector which are Open to In-vestment by Way of Joint Venture between Foreign Capital and Domestic Capital 1. Building and operation of seaports. 2. Electricity production, transmission and distribution. 3. Shipping. 4. Processing and provision of clean water to the public. 5. Public railway system. 6. Atomic power plants. 7. Medical services, including building and operation of hospitals, medical check-ups, clinical laboratories,

mental rehabilitation services, public health maintenance security, medical equipment rental, assistance services for health aid and evacuation of patients in emergency condition, hospital management services, and services for testing, maintenance and repair of medical equipment.

8. Telecommunications. 9. Scheduled/unscheduled commercial air transport.


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ANNEX C: List of Business Fields in the Infrastructure Sector which are Open to In-vestment Under Certain Conditions 1. Electricity planning and supervision consulting services.

Open to foreign investment on the provision that: a. Hydroelectric plants (PLTA) with a capacity above 50MW; b. Steam plants (PLTU) with a capacity above 100MW; c. Geothermal plants (PLTP) with a capacity above 55MW; d. Main electrical relay stations with a voltage above 500KV; e. Transmission networks with a voltage above 500KV.

12. Electricity equipment construction, maintenance, installation services, development of technology that supports supplying electricity and testing of electricity installations. Open to foreign investment on the provision that: a. Main electrical relay stations with a voltage above 500KV; b. Transmission networks with a voltage above 500KV.

13. Petroleum and natural gas drilling services. Open to foreign investment on the provision that: a. only offshore drilling; b. if locations outside Eastern Indonesia, must be in cooperation with national partners operating in

similar fields. 14. Power plant businesses.

- open to locations outside Java, Bali and Madura. TRADING SECTOR

15. Restaurants - open to foreign investment on the special provision that they must be located in tourism areas/zones

and/or integrated with hotels.

16. Games of skill services - open to foreign investment on the special provision that they must be located in tourism areas/zones

and/or integrated with hotels.

ANNEX D: SECTORS/TYPES OF BUSINESS IN THE INFRASTRUCTURE SECTOR WHICH ARE RESERVED FOR SMALL-SCALE ENTERPRISES

COMMUNICATIONS

Rural transportation, river transportation, lake transportation and water transportation with 30 GT vessel.

TELECOMMUNICATIONS

Telecommunications services including telephone stalls, internet stalls, and cable installation for house and building.

ANNEX E: Sectors/Types of Business in the Infrastructure Sector Open to Medium-Scale or Large-Scale Enterprises in Cooperation with Small-Scale Enterprise under the Partnership System

TRANSPORTATION 1. Business of taxis, loading services, vessels for the transport of goods, community vessels and safekeeping

services

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SCHEDULE 2 – FIELD OF BUSINESS AVAILABLE IN THE INFRA-STRUCTURE SECTOR I. ENERGY Field of Business Special Requirements Maximum

Foreign Participation

1. Power Generation Joint Venture with Indonesian parties. Projects are solicited, namely, determined by the Minister re-sponsible in the power sector. The appointment/designation shall undergo a competitive and transparent selection process.

[Up to 95%]

Transmission and Distribution

Since activities in transmission and distribution of electricity constitutes natural monopoly, the first opportunity shall be given to State Owned Enterprises/Regional Government Owned En-terprises provided if for certain conditions, the State Owned Enterprises/Regional Government Owned Enterprises are not be able to invest, then they can cooperate with other legal entities, and if such cooperation is not possible, it can be conducted by other legal entities. Although the transmission and distribution business are open for the private sector, however, so far, no licenses have been issued to the private sector.

up to 95%

2. Power Support Ser-vices

Services in the field of power consulting ser-vices, development and installation of power equipment and mainte-nance of power equip-ment.

For PMA: a. PLTA (hydro-powered generation) with the capacity of more

than 50 MW b. PLTU (steam-powered generation) having a capacity of more

than 100 MW c. PLTP (geo-thermal powered generation) having a capacity of

more than 55 MW d. Main electrical relay stations with GIS System (Gas Insu-

lated Switchgear) e. under water cable transmissions network

Not stated Based on research it

can be 100%.

Services in the field of technology develop-ment for equipment that supports power supply and commis-sioning of power in-stallation.

For PMA: a. Main electrical relay stations with GIS System (Gas Insu-

lated Switchgear) b. under water cable transmissions network

Not stated based on

research it can be 100%

Power Installation Op-erations Services

Not available to PMAs, only available to PMDN Not stated based on

research it can be 100%.

3. Mineral Resources General Mining For PMAs, granted in the form of a Contract of Work, through a

joint venture with Indonesian legal entities/Indonesian nationals Up to 95%

Coal Mining For PMAs, granted in the form of a Coal Contract of Work, through a joint venture with Indonesian legal entities/Indonesian nationals

Up to 95%


Guidebook page 129

The upstream oil and gas business activities (i.e., exploration and exploitation), can be engaged by:

Non-Indonesian entities, in the form of a Permanent Establish-ment (Bentuk Usaha Tetap), without having to establish a PMA Company, subject to the execution of a Cooperation Contract with BP Migas; or

Foreign contractors can have

100% par-ticipating interest in the Coop-

eration Contract, subject to require-ment to

offer cer-tain per-

centage of interest to local com-

panies

Upstream Oil and Gas

An Indonesian legal entity (which may include PMA Compa-nies) subject to the execution of a Cooperation Contract with BP Migas.

Not speci-fied

Refinery and Process-ing of Oil and Gas

Must obtain approval from the Minister of Energy and Mineral Resources

Not Speci-fied

For Onshore Drilling, only available for PMAs with drilling equipment of above 2000HP, and must be a joint venture with Indonesian parties

Up to 49% Oil and Gas Drilling Services

Offshore Drilling Oil and Gas Mining

Support Services Must be a joint venture with Indonesian parties Up to 95%

II TRANSPORTATION

1. Railways General Requirement: Investors must cooperate with the Oper-ating Body (PT. Kereta Api Indonesia);

For railway transportation with no railway network Up to 95% For public railway transportation which already has a railway

network and infrastructure Up to 49%

2. Special Railways For own use only, must be a joint venture with Indonesian legal entity(ies) If using infrastructure of the Government, the company must cooperate with Operating Body, PT. Kereta Api Indonesia.

Up to 95%

3. Transportation on the Rivers and Lakes

Must be a joint venture with Indonesia legal entity(ies) The joint venture company shall be incorporated solely to en-gage in transport business on rivers and lakes. The joint venture company at least must have 1 unit of vessel that meets the requirements of safety vessel and harbour techni-cal specification.

Up to 95%

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4. Sea Transportation

a Domestic Transporta-tion

Closed to PMA

b Overseas Transporta-tion

Must be in the form of a joint venture company. Such joint venture company must have an Indonesian flag ves-sel with a minimum size of GT 5000.

Up to 95%

c Transportation Support Services

Marine Warehouse, Must be in cooperation with the local PT. Pelabuhan Indonesia [Not Specified]

Marine Transportation Equipment Lease Ser-vices,

Must be in cooperation with the local PT. Pelabuhan Indonesia [Not Specified]

Loading-Unloading Services,

Must be in the form of a joint venture with a national loading-unloading services company/ Indonesian local company/ Indo-nesian nationals

Up to 95%

Outside-of-Port Con-tainer Depot Services

Must be in the form of a joint venture with a national container depot services company/Indonesian local company/Indonesian nationals

Up to 95%

d Harbours Harbours: Reception

Facilities and Ship to Ship Transfer

Must be in cooperation with the local PT. Pelabuhan Indonesia Up to 49%

Container Terminal Must be in cooperation with the local PT. Pelabuhan Indonesia Up to 95% 5. Airports a Public Airports Must be in the form of a joint venture with the Operating Body

of airports. Up to 49%

b Special Airports The operations can be undertaken by the Government, Provin-cial Government, Regencies and Indonesian entities for own purpose. For public purposes, can be established, if it fulfils certain requirements.

[Not Specified]

c Airport Support Ser-vices

Direct Support Ser-vices

Must be a joint venture with an airport operator or Indonesian entity

Up to 49%

Direct/Indirect Support Services

Must be a joint venture with an airport operator or Indonesian entity

Up to 95%

6. Toll roads Undertaken by PT. Jasa Marga as the operator, foreign investors can be in cooperation with or in a joint venture with PT. Jasa Marga

Provision of toll-roads/bridges - Development, Op-

erations, and Main-tenance of Toll Roads and Bridges

- Development of Flyover Intersections

Other Services - Rest Areas/Services

and Advertising

Undertaken by PT. Jasa Marga as the operator, foreign investors can be in cooperation with or in a joint venture with PT. Jasa Marga

[Up to 95%]


Guidebook page 131

III TELE- COMMUNI- CATIONS

1 Provision of Tele-communications Net-work

Provision of fixed networks, comprising local, long distance, international and closed connections. Provision of mobile network, comprising terrestrial, cellular and satellite. Provision of telecommunications may also provide telecommu-nications services PMA is also available for satellite-based mobile networks and Very Small Aperture (VSAT) and telephony-based networks.

Up to 95%

2 Provision of Tele-communications Ser-vices

Provision of: basic telephone services, telephone services with added value, and multimedia services.

Up to 95%

3 Provision of Special Telecommunications

Telecommunications for own use, state defense and broadcast-ing.

[Not Specified]

IV WATER AND SANITATION

1 Development and Op-rations

of Clean Water

Must cooperate with the relevant Regional Drinking Water Company (Perusahaan Daerah Air Minum) or in the event that the Regional Drinking Water Company is not available in rele-vant region, with a national company.

[Not Specified]

2 Waste Management Must cooperate with Regional Government of the relevant prov-ince and/or regency and the Regional Sanitation Company (Pe-rusahaan Daerah Kebersihan)

[Not Specified]

3 Waste Water Man-gement

must cooperate with Regional Government of the relevant prov-ince and/or regency and Regional Company of Sanitary Services (Perusahaan Daerah Kebersihan)

[Not Specified]

V. OTHER SERVICES

1 Construction Services and Construction Con-sulting Services (Building, Civil, Elec-trical and Mechanical)

Must be a joint venture with a national company.

Foreign participant must have experience and has developed various engineering techniques and has international experience, and is registered with the Lembaga Pengembangan Jasa Kon-struksi Nasional (LPJKN) – the Institution for the Development of National Construction Services.

[Not Specified]

2 Plant Hire Services Not a leasing business.

Equipment must be owned, and cannot be hire-purchased.

[Not Specified]

3. Construction Services Foreign established companies can also participate in construc-tion of projects by establishing its representative office in Indo-nesia and in cooperation with a local construction company

EU – Asia-Invest


SCHEDULE 3 – PMA COMPANY ESTABLISHMENT ANNEX 1: Setting Up a PMA Company

Steps for Establishment of a PMA Company: How to obtain the Foreign Investment License The application and procedures to obtain the approval on the intended investment are determined in the Decree of the Minister of Investment/Chairman of BKPM Number 57/SK/2004 concerning “Application Guidelines and Procedures for Investment Established in the Framework of Domestic and Foreign Investment” (“SK57/2004”). A. The Foreign Investment License The principal license for a foreign investment project is the foreign investment provisional license (the “Foreign Investment License”). To obtain a Foreign Investment License, an application must be submitted to the BKPM by using a prescribed form which is called the Model I/PMA application form (see attached). Pursuant to SK57/2004, the Foreign Investment License shall be issued 10 (ten) days as of the complete submission of the application.

B. Model I/PMA Application

The Model I/PMA application form contains the basic information on the intended investment, such as: (i) names of the applicants; (ii) intended line of business; (iii) total equity and loan capitalization; (iv) location of project, and (v) etc. To enable you to complete the Model I/PMA application (see attached form in Annex 1), the following details must be provided in each of the section in the application: 1. Part I-A (of the Model I/PMA Application): please insert the description of the participants (prospective

shareholders) of the PMA Company, (including address, telephone and fax number of the participants). Note: Pursuant to Law Number 1 of 1995 on Company Law, a limited liability company must have at least 2 (two) shareholders.

2. Part II-1: please determine the name of the PMA Company. Note: The proposed name of the PMA Company shall be tentative, since it will be further subject to the ap-proval of the Minister of Law and Human Rights. We can, however, check with the Ministry of Law and Human Rights whether the proposed name is acceptable.

3. Part II-3: please state the location of the project (regency and province), and tentative address of the PMA Company.

4. Part II-4 (annual production): please specify as noted. Note: (a) the ‘name of products’ column shall be inserted by the line of business of the PMA Company; (b) the ‘unit’ column shall be inserted by US Dollars; (c) the ‘capacity’ column shall be inserted by the basic capacity of the services stated in US Dollars.

5. Part II-6 (required land area): please specify the land area required, as noted. Note: If no land area is required, it should be explained that the PMA Company will lease an office space.

6. Part II-7 (employment), please specify the following: (a) the number of foreign/Indonesian Directors and Commissioners of the PMA Company; (b) number of foreign/Indonesian professionals. Note: The position of the foreign professional should be specified. (c) number of foreign/Indonesian workers.

7. Part II-8 (allocation of investment funds), please specify the appropriation of investment funds as noted. 8. Part II-9 (source of investment funds), please specify the source of investment funds as noted.

Note: Please note that the end amount of Part II-8 and Part II-9 must be the same. 9. Part II-10 (equity capital), please specify the equity capital as noted.

Note: As stated in the application, the issued capital in this Part II-10 must equal to the equity in Part II-9.a. 10. Part II-11 (shareholding), please specify the amount of shareholding of each shareholders. 11. Part II-12 (implementation to be completed), please insert as noted.

C. Attachments to the Model I/PMA Application

The Model I/PMA application form must be accompanied by the following documents: 1. documents of the applicants (prospective shareholders of the PMA Company):


Guidebook page 133

(a) copy of Articles of Association of the foreign entity; (b) copy of a valid passport for foreign individual (if the other shareholder is an individual);

2. explanation of the business activities to be conducted by the PMA Company (including a flowchart visualiz-ing the production process);

3. powers of attorney to sign the Model I/PMA application form if it is not signed by the applicants.

D. Deed of Establishment

Upon receipt of the Foreign Investment License, the PMA Company must be incorporated by the applicants. Such incorporation shall be reflected under a (notarial) deed of establishment which contains an Articles of As-sociation to be drawn up by a notary public. These Articles of Association must be approved by the Minister of Law and Human Rights. The PMA Company does not attain the status as a legal entity until such approval of the Minister of Law and Human Rights has been issued. The following documents are required to be accompanied upon the submission of the Articles of Association to the Ministry of Law and Human Rights to obtain approval of the Minister of Law and Human Rights:

1. Taxpayer Identification Number (NPWP)

This registration is done with the Tax Office.

2. Certificate of Domicile (Surat Keterangan Domisili)

This certificate is granted by the Head of the Village where the PMA Company is domiciled. Pursuant to the Company Law, the Minister of Justice and Human Rights will issue an approval within 60 days after receipt of the application. Practically, the estimated time for obtaining the approval from the Minister of Law and Human Rights on the Articles of Association is between 1 (one) to 2 (two) months after receipt of the application. After the Minister of Justice and Human Rights approval has been obtained by the PMA Company, the Articles of Association must be registered with the Department of Trade where the PMA Company has its domicile, and published in the State Gazette (Berita Negara) of the Republic of Indonesia. After the above requirements have been fulfilled, under Indonesian Law, the incorporation process of a PMA Company is considered to be completed, subject to further follow up steps in E below.

E. Follow up Steps. The following are the follow ups and the routines that must be undertaken by the PMA Company after it has completed the establishment process in step D above.

(1 Reporting on Off-shore Loans The PMA Company may receive loans up to the maximum amount stated in the PMA Approval. All loans and other forms of indebtedness to be received by the PMA Company from overseas sources must be reported to Bank Indonesia within the designated reporting periods.

(2) Master List Approval and Limited Import License

(a) The Master List Pursuant to SK57/2004, the importation of capital goods and basic/complementary materials for which import duty privileges are sought, require approval from BKPM. For such approval, the PMA Company must submit a list of capital goods and basic/complementary for which import duty privileges are sought, known as the ‘Master List’. The Master List must specify the item of equipment to be imported (as specifically as possible, including serial numbers), the country of origin, quantity and item price. The specifications, flow diagrams, layout drawings, and production calculations accompanied in the Master List is to facilitate the evaluation by BKPM. Approval for the import of capital goods and basic/complementary materials with facilities will be issued by BKPM in the form of an Approval Letter of customs facilities for capital goods and basic/complementary mate-rials together with Master List of Capital Goods.

(b) Limited Importer Identification Number After the PMA Company has filed and obtained approval for its Master List, the PMA Company must again go to BKPM to obtain a Limited Importer Registration Number (Angka Pengenal Importir Terbatas, commonly referred to as APIT), for the importation of capital goods and basic/complementary materials.

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(3) Manpower Plan Approval For the Master List, the PMA Company must submit a Manpower Plan (“Rencana Penggunaan Tenaga Kerja” commonly referred to as ‘RPTK’, the “Manpower Plan”) reflecting the number of expatriate positions stated in the PMA Approval. The application can be submitted/processed to BKPM or the Department of Manpower. BKPM or Department of Manpower will issue the final approval, but only after it has received the opinions of the Technical Department responsible for the supervision of the sector of investment concerned. Each of such departments has jointly determined with the Department of Manpower the types of positions and job descriptions which may be filled by foreign personnel. The Manpower Plan must state the minimum qualifications for all positions to be filled by foreigners, the num-ber, names and identity card numbers of Indonesian employees who will be assigned as counterparts and the program for training of Indonesian staff to replace the foreigner(s). When the PMA Company has received and approved the Manpower Plan, separate applications must be filed for each foreign person to be employed.

(4) Registration Requirements There are a number of registration requirements (which apply to all companies in Indonesia) which new invest-ment companies must adhere to, as follows:

(a) Tax Registration An application to the Directorate General of Taxes of the Department of Finance for a “Tax Number”, or NPWP (“NPWP”) must be filed before business can commence. The NPWP is normally issued within a few days after application. The application must be submitted together with a copy of the PMA Company’s Articles of Associa-tion.

(b) Company Registration Requirement Under Law Number 3 of 1982 concerning Mandatory Registration of Companies, there is a mandatory registra-tion of all business enterprises. This registration is intended to form the basis of a public registry and is main-tained by the Department of Industry and Trade. The PMA Company is required to register with the Department of Trade within 30 days after approval of its Ar-ticles of Association by the Minister of Law and Human Rights and to display the certificate of registration (Tanda Daftar Perusahaan or TDP) at the PMA Company’s place of business.

(c) Labour Registration Under Law Number 7 of 1981, all enterprises having at least 6 employees must register with the Department of Manpower. The manager or Director of the PMA Company must submit a written report (“Report Form”) on all matters, particularly relating to its personnel and the PMA Company within 30 days after the establishment of the PMA Company. The Report Form is to be submitted to the Regional Office of the Department of Manpower where the PMA Company has its domicile, and it should contain information, among others, in respect of the name, address and type of business of the PMA Company, its date of establishment, its share capital, the number and classification (including nationality) of the employees, the employee benefit programs, the employee training programs, work-ing hours, the schedule of the workers. The report is to be filed annually, following the first report. In the event of the discontinuance, resumption, re-moval or liquidation and re-establishment of the PMA Company, a report must also be filed at the latest 30 days after such event occurs. The information needed to accompany the Report Form is as follows: - Company identities; - Personnel relationships; - Manpower protection; and - Employment opportunities. (Information as meant above are, among others, name of the PMA Company, address of the PMA Company, Company leadership, corporate capital, the process of production, terms of work, conditions of work, expansion plans, reduction of employment and vocational training schemes for workers).

(d) Approval for the Company Regulations (Employment Policies) For enterprises employing 10 employees or more, a set of Company Regulations must be drawn up in line with Department of Manpower guidelines. The Department of Manpower must approve the Company Regulations prior to their announcement to employees.


Guidebook page 135

(5) Local Level Regulations A number of local permits and licenses will need to be obtained by a new investment company, such as location permit (“Izin Lokasi”)7 and license under Nuisance Act or Hindrance Ordinance (“Izin Undang-Undang Gang-guan”)8.

(6) Reporting Requirements BKPM requires approved investment companies to submit semi-annual reports on the progress of their invest-ments throughout the life of the company. This report is known as the investment progress report (Laporan Kegiatan Penanaman Modal or LKPM) and must be submitted in January and July of each year. For companies that have obtained a Permanent Operating License, the report is submitted annually to BKPM at the latest on January 31 on the following year.

(7) Permanent Operating License (or Permanent Business License) After all requirements of the PMA Approval have been fulfilled, the PMA Company must apply to BKPM for the issuance of a Permanent Operating License (Izin Usaha Tetap or “IUT”).

(8) Other Licenses The steps mentioned above sets out the steps to be taken by the PMA Company, from the establishment of the PMA Company up to the time the PMA Company obtains its IUT. The PMA Company must also comply with the provisions stated under SK57/2004, if there are any routine or incidental changes to the PMA Company’s investment plans as stated in its PMA Approval, such as, among others: - any expansions or diversification of the PMA Company; - change in the PMA Company’s line of business; - any change in the PMA Company’s shareholders; - any change in the composition or numbers or the members of the Board of Directors or Commissioners of the

PMA Company; - any investment change which results the change in facility and financing sources;

the prior approval of BKPM is required.

7 This will be applicable if the PMA Company acquires land for purposes of its investment plan. 8 If the PMA Company is a services company and not a manufacturing company, and is located in an office building, this will not be applica-ble.

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ANNEX 2: Form of Model I Application Submitted to BKPM in 2 (two) copies -----------------------------------------------------------

Lampiran 2 SK Kepala BKPM No. 57/SK/2004 MODEL I/PMA

INVESTMENT APPLICATION

IN TERMS OF FOREIGN INVESTMENT LAW This investment application under the Foreign Investment Law No. 1 of 1967 and No. 11 of 1970 is herewith submitted to BKPM on behalf of the Government of the Republic of Indonesia and Implementation of Presiden-tial Decree Number 29 of 2004 concerning.[sic!] I. DESCRIPTION OF THE PARTICIPANTS

A. Foreign Participant(s) 1. Name of company : 2. Main line of business : 3. Address (incl. Phone, telex, and fax

number) :

B. Indonesian Participant(s)

1. Name (company, cooperative or indi-vidual)

:

2. Tax Registration Code (NPWP) : 3. • Main line of business

• Investment status : :

PMA, PMDN or Non PMA/PMDN

4. Address (incl. Phone, telex, and fax number)

:

II. DESCRIPTION OF THE PROPOSED PMA COMPANY

1. Name of company : 2. Main line of business : 3. Location of the project

a. Regency b. Province

: :

4. Annual Production: Name of Designed Capacity

Product(s)/Services Value Amount Remarks 5. Annual sales of products:

Name of Export Domestic Market Product(s)/Services Value Market

Amount Sales Amount Internal Use

Amount

Estimated total export value: US$ 6. Land area required : Sq.M/Ha 7. Employment

Expatriate Indonesian a. Commissioner(s) b. Director(s) c. Professional(s)

• Manager(s) • Expert(s)

d. Worker(s) XXXXXXXXX ………………… Total

Note: Expatriate professionals position should be specified


Guidebook page 137

8. Allocation of investment fund a. Fixed Capital Cost of land & land development : US$ Cost of building : US$ Cost of machinery, equipment & spare

parts :

US$

Other Miscellaneous : US$ -------------------------------- Sub total : US$ b. Working capital (one turn over opera-

tion) :

US$

-------------------------------- Total US$

Note: If more than one location/line of business, Investment Funds should be listed for each location and/or line of business.

9. Source of Investment Funds a. Equity : US$ b. Loan : US$ -------------------------------- Total : US$

10. Equity Capital a. Authorized capital : US$ b. Issued capital : US$ c. Paid-up capital : US$

Note: Issued capital should be equal to equity.

11. Shareholding a. Foreign partcipant(s) US$ % Sub Total b. Indonesian participant(s) Sub total c. Total (a+b)

12. Implementation to be completed within :

………. months, from the date of the issuance of the Government’s Approval

III. DECLARATION 1. We acknowledge that the company(ies) shall be obliged to take preventive measures against any pol-

lution resulting from the operation of our investment project, at our joint venture company’s own expense, and in conformity with the applicable laws and regulations.

2. This application has been properly and duly executed and we (the participants) are responsible for its accuracy, correctness and completeness, including all data and documents attached hereto

Place and date of signing

Foreign Applicant(s) Indonesian Applicant(s)

Stamp duty Rp. 6,000

Name:

Title:

Name:

Title:

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ENCLOSURE

1. By foreign participant:

a. Articles of association of the company in English or Indonesian language; or b. Copy of valid passport for foreign individual.

2. By Foreign Investment Company (PMA): a. Articles of association of the company and any amendment(s). b. Tax Registration Code Number (NPWP).

3. By Indonesian participant: a. Articles of association of the company and any amendment(s) or Identity Card for Individual. b. Tax Registration Code Number (NPWP).

4. a. Flowchart of the production process and a raw materials requirement for processing industries. b. Explanation of business activities for services sector.

5. Power of attorney to sign the application if the participant(s) are represented by another party.

6. a. Other requirements from the Sectoral Ministry concerned, if any, as stated among others in the "Technical Guidance’s Book on Investment Implementation".

b. Certain sectors namely mining sector which has extraction activity, energy sector, palm oil planta-tion, and fishery must obtain a Letter of Recommendation by the related/technical ministries.

c. For the palm oil processing industry which does not have raw material supplied by its own planta-tion, the raw material guarantee documents supplied by the plantation must be completed, and rec-ognized by the Plantation Office of the local Regency/Municipal

7. In the business sector required for partnership cooperation: a. Agreement between small scale enterprise and medium/large scale enterprise outlining among oth-

ers name and address of each party, pattern of partnership, right and obligation of each party as well as guidance provided for small scale enterprise.

b. Letter of statement from the small scale enterprise outlining that the enterprise fulfils the criteria of small scale enterprise based on Law No 9, 1995.


Guidebook page 139

SCHEDULE 4 – PROCUREMENT AND TENDERS ANNEX A: Selection of Vendors for Procurement Public Tender Suppliers of goods/providers of contract services/other services are principally selected through method of public tender. Public tender is a method of selection of suppliers of goods/providers of contract services/other services transparently by broad announcement through mass media and official billboard for public information so that the interested and qualified public and business entities can take part. In the case of the quantity of capable suppliers of goods/providers of contract services/other services being be-lieved limited, namely for complicated jobs, suppliers of goods/providers of contract services/other services can be selected by method of limited tender and announced broadly through mass media and official billboard by mentioning suppliers of goods/providers of services believed capable, to open opportunity for suppliers of goods/providers of services that fulfill qualification. In the case of public or limited tender being deemed inefficient financially, suppliers of goods/providers of ser-vices can be selected by method of direct appointment, namely selection of suppliers of goods/providers of ser-vices by means of comparing bids as many as possible, at least 3 (three) bids and suppliers of goods/providers of services already passing pre-qualification as well as negotiating technically and financially and it must be an-nounced through at least one official billboard for public information and the internet, if possible. In certain and special conditions, suppliers of goods/providers of services can be selected by means of direct appointment of one supplier of goods/provider of services by negotiating technically and financially so as to ob-tain a reasonable price and be accountable technically.

Submission of Bid Documents In selection of suppliers of goods/providers of contract services/other services, any of the three methods of sub-mission of bid documents can be chosen on the basis of types of goods/services to be procured and the method must be mentioned in the tender document. They include: a. single-envelope method; b. double-envelope method; c. two-phase method. The single-envelope method is the submission of bid documents, consisting of administrative, technical require-ments and bid price, which are inserted into one covered envelope, to Procurement Committee/Procurement Of-ficial. The double-envelope method is the submission of bid documents, wherein administrative and technical requirements are inserted into the first envelope, while the bid price is put into the second envelope and later the first and second enveloped are inserted into one envelope (covering envelope) and conveyed to procurement committee/official. The two-phase method is the submission of bid documents, wherein administrative and tech-nical requirements are inserted into the first covered envelope, while the bid price is put into the second covered enveloped, which are conveyed in two phases separately and in different time.

Evaluation of Bids In selection of suppliers of goods/providers of contract services/other services, any of the three methods of evaluation of bids can be chosen on the basis of types of goods/services to be procured and the method must be mentioned in tender documents. They include: a. competitive system; b. value system; c. cost evaluation system during the economic period. The competitive system is evaluation of bids by means of examining and comparing bid documents to the ful-fillment of requirements already stipulated in the documents of selection of suppliers of goods/providers of ser-vices with of goods/providers of services with sequence of evaluation starting from evaluation of administrative requirements, technical requirements and reasonability of price and suppliers of goods/providers of services fail-ing to pass the evaluation in every phase are declared failed. The value system is evaluation of bids by means of scoring every element which is evaluated on the basis of criteria and value already stipulated in document of selection of suppliers of goods/providers of services, later comparing the total score of every bid of participants to bids of other participants. The cost evaluation system during the economic period is evaluation of bids by means of scoring technical elements and price is evaluated according the economic period of the offered goods on the basis of criteria and value stipulated in document of selection of suppliers of goods/providers of services, later the value of the elements is converted into unit of certain currency and the total of every bid participants is compared to bids of other participants.

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In evaluating bid documents, Procurement Committee/Procurement Official selecting suppliers of goods/providers of services are not allowed to change, supplement and reduce the criteria and procedures for evaluation by whatever reason and/or take other post-bidding actions.

Participants, the Use of Domestics Goods/Services and Price As a general rule in procurement of goods and services, government institutions are obliged: to maximize the use of domestic goods/services including national design and engineering in the procurement of goods/services; a. to maximize the use of national suppliers of goods/providers of services; b. to maximize the provision of packages of jobs for small-scale businesses, including small cooperatives and

community groups. The obligation of government institutions as described above is executed in every phase of procurement starting from preparation to completion of agreement/contract. In light of that the agreement for procurement must men-tion requirements for using: a. Indonesian National Standard (SNI) or other standards in force and/or equivalent international standard

stipulated by the authorized institutions; b. domestic production in accordance with the capability of national industry; c. domestic expert and/or suppliers of goods/providers of services. Procurement through international tenders should involve national suppliers of goods/providers of services maxi-mally. Procurement financed by export credits or other credits must be done by fair competition with the requirements most benefiting the state financially and technically by maximizing the use of domestic components and national suppliers of goods/providers of services. Selection of suppliers of goods/services financed by export credits or other credits must be done in the country. In the case of export or overseas grants being accompanied by condi-tion that procurement of goods/services only can be done in countries providing the export credits/grant, efforts to use domestic goods/services only can be done in countries providing the export credits/grant, efforts to use domestic goods/services and involve national suppliers of goods/providers of services must be made maximally.

Foreign companies can take part in the procurement of goods/services with the value of: a. above Rp. 50,000,000,000.00 (fifty billion rupiahs), in the case of contract services; b. above Rp. 10,000,000,000.00 (ten billion rupiahs), in the case of contract services; c. above Rp. 5,000,000,000.00 (five billion rupiahs), in the case of contract services; Foreign companies executing the jobs as described above must promote business cooperation with national com-panies, in the form of partnership, sub contract and others, if capable national company exists in the said field. Exception can only be made for the procurement of defense materials and equipment within the Defense Minis-try/Military stipulated by the Minister of Defense/Military Commander/Chiefs of Staff. Price preference of domestic production and national providers of contract services must be mentioned in docu-ments of procurement. In the case of the procurement of international goods/services being financed by overseas loans, the price preference of domestic production is maximally amounting to 15% (fifteen percent) above the bid price of imported goods, excluding import duty. The preference price of contract services executed by na-tional contractors is amounting to 7.5% (seven point five percent) above the lowest bid price of foreign contrac-tors. Procurement of goods/services should refer to the list of inventory of domestic goods/services based on certain criteria, fields, sub-field, types and groups of goods/services. Regulation of the list of inventory and dissemina-tion of information on the domestic goods/services are issued by the ministry overseeing the industry and trade. The Guidance on Procurement stipulates that the value of procurement of goods/contract services up to Rp. 1,000,000,000.00 (one billion rupiahs) is designated to small-scale businesses, including small cooperatives, except jobs demanding technical competence which cannot be fulfilled by small-scale businesses, including co-operatives.


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ANNEX B: Tender Procedures for Infrastructure For each infrastructure project in Indonesia, every private company which intends to participate must follow a very important procedure, namely bidding requirement as regulated under Presidential Decree Number 7 of 1998 concerning the Cooperation between the Government and Private Companies in the Scheme of Development and Management of Infrastructure (“Decree No. 7”). The following is the general procedure of bidding requirement pursuant to Decree No. 7 (a detailed procedure will be also described below): Each Minister, who is responsible for each infrastructure project, must firstly convene a pre-qualification of pri-vate companies by taking into consideration the experience of the bidders, past performance and capability (fi-nancial and otherwise). Those companies which pass the pre-qualification will then be eligible to participate in a tender. The Minister will then submit the result of the tender appraisal, along with its recommendation, to the Coordinating Minister of Economic Affairs, as the Chairman of the Procurement Evaluation Team, to obtain their approval. Once the Procurement Evaluation Team approves the winning bidder of the relevant project, then they have to enter into a cooperation agreement with the relevant Minister. The cooperation agreement must at least contain certain basic provisions: the scope or works, term, tariff, the rights and obligations, default sanc-tions, dispute settlement clause, termination and the re-transfer of the infrastructure and/or its management to the Indonesian Government or State/Regional Owned Companies. Please note, however, that pursuant to Presidential Decree Number 81 of 2001 concerning the Committee for the Acceleration of Infrastructure Development Policy (“Decree No. 81”), Decree No. 7 shall no longer be valid insofar matters therein are already stipulated or contradictory to Decree No. 81. Decree No. 81, however, does not provide for provisions on the tender procedure and therefore such tender procedure in Decree No. 7 shall still apply insofar its provisions are not contradictory to Decree No. 81. Under Decree No. 81, a committee, which consists of several Ministers and Secretary Generals from several De-partments, has been established in order to accelerate the development of infrastructure projects (including power projects) (the “Committee”). The Committee has the tasks to develop and issue policies, propose solutions for problems relating to the development of infrastructure projects. Decree No. 81 requires further actions to be done by the Committee in order to implement its tasks, such as the amendments of Decree No. 7, issuance of new policies, establishment of sub committees, etc. Further, Decree No. 81 requires the Committee to complete the amendments of Decree No. 7 within 6 months after 21 June 2001.

Status of Decree No. 7: Based on our research with the Committee, we were informed that the amendments of Decree No. 7 is currently being drafted and submitted to State Secretary. There are still further steps to be taken before the issuance of the new regulation. Furthermore, we have also received a formal letter from the Committee providing, along the lines that, despite the revocation of Decree No. 7 by Decree No. 81, the existing tender requirement for govern-ment related projects is still applicable, as regulated under Decree No. 7, since Decree No. 81 does not substan-tially regulate the tender procedure.

Detailed Procedure of Bidding Requirement: The following is the detailed of tender procedure as required by Decree No. 7:

Step I. Determination of the Cooperation Projects and Selection of Private Companies 1. The obligations of minister responsible for each infrastructure project (“Minister”): (a) The Minister shall be required to carry-out or manage the implementation of the pre-feasibility studies of the

respective projects to be proposed to Bappenas which will be further considered for inclusion into the list of infrastructure projects.

(b) Before proposing cooperation projects, the Minister shall be required to evaluate whether the said pre-feasibility studies have fulfilled the requirements needed, wherein the said projects are technically and eco-nomically feasible, and follow the following principles: (1) the technical explanation identifying and covering all relevant aspects of the projects; (2) the estimation of the initial costs including all relevant aspects of the projects; (3) the financial analysis according to the scope of the projects and the public to be served; (4) the adequate identification and specification of designs and standards of performance; (5) the complete identification of the regions and public to be served by the projects; (6) the identification of the project locations which shall be in accordance with the prevailing spatial plans; (7) the analysis of the demand according to the scope of the projects and public to be served by the pro-

jects;

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(8) the clear identification and the estimates of the costs in accordance with all steps of projects develop-ment, including, subsidies, contracts with the government and financial concessions;

(9) the environmental considerations fulfilling relevant requirements as well as identification of all antici-patory steps suitable for overcoming all negative impacts of the projects;

(10) the extensive study on the social aspects of the eviction of and compensations to be paid to the public affected by the projects;

(11) the time period of implementation, by taking into consideration the scope and degrees of difficulty of the projects;

(12) the identification of socio-economic benefits by using appropriate methodology; (13) the extensive study on why the projects are attractive to private parties; (14) all required approvals as pre-requisites to the implementation of projects, including consents on envi-

ronmental analysis, procedures for evicting the community affected by the projects, approvals from PKLN, government licenses and permits; and

(15) the most appropriate method in selecting private parties (either one-step competitive tender, two-step competitive tender or simplified competitive tender), and justification of the recommended method.

2. The obligations of Bappenas shall be the following: (a) examining whether all proposals of the projects are accompanied by pre-feasibility studies. (b) re-reviewing the pre-feasibility studies independently and studying the supporting documents. The said

review shall be executed to determine whether the said pre-feasibility studies have fulfilled the require-ments as elaborated above.

(c) providing input to the Minister whether or not the said project proposals can be included into the list of infrastructure projects.

(d) Bappenas shall include the proposals fulfilling the requirements into the list of infrastructure projects. (e) Bappenas shall periodically renew and issue the list of the approved infrastructure projects and provide

the copies of such list for the parties requiring such list.

3. The projects in the value of Rp. 50,000,000,000 or higher, must be done through an open tender process.

4. The projects with clear technical specifications shall be processed by one-step tender.

5. The two-step tender shall be applied to the large-scale projects whose technical specifications still need to be developed, wherein: (1) the technical specifications available are inadequate and incomplete for a competitive bidding, however

there is clear technical criteria to evaluate the technical proposals; (2) there are more than one technical qualification.

6. The decision to apply one or two-step tender shall be made by the Minister after consulting with Bappenas, following the fulfillment of the requirements for pre-feasibility studies and before issuing the pre-qualification invitations.

Step II. Pre-qualification

1. The Minister shall evaluate all potential candidates on the basis of the following pre-qualification proce-dures: a. Before conducting pre-qualification, the Minister shall invite any parties through advertisement. The

advertisement shall indicate the following: - names and location of projects; - names, addresses, telephone and facsimile numbers of the Minister; - names of contact persons and venues where the documents of pre-qualification can be obtained; - the period and date of the closing of pre-qualification and procedures which must be undertaken by the

interested parties to file applications for pre-qualification; and - the provisions on whether tenders are executed in accordance with the one and two-step system.

b. Within a period of 7 days after the applications for pre-qualification are received, the Minister shall ad-vertise the invitations through mass media.

c. After the Minister has advertised the invitations, the Minister shall be required to provide the pre-qualification documents for interested parties. Such pre-qualification documents shall indicate: - names and locations of projects; - scope and cost estimates of the said projects; - names, addresses, telephone and facsimile numbers of the Minister; - time period and date of the closing of pre-qualification (not less than 60 days from the date of advertise-

ment) as well as procedures that must be followed by private parties to file applications for pre-qualification.


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d. The potential bidders shall be required to complete the documents of pre-qualification, concerning the following matters: - the experience in the said sector; - the performance in the similar projects, including references from previous clients of the same projects; - the similar experience in the same geographical, topographical and climate conditions; - the capacity relating to personnel affairs and equipment; and - the financial capability of project implementation.

e. The Minister shall be required to conclude pre-qualification of potential bidders within a period of 30 days after the closing date of pre-qualification.

f. The Minister shall evaluate whether potential bidders are capable to implement the projects in accor-dance with criteria of pre-qualification.

g. The Minister shall notify in writing all potential bidders passing pre-qualification and at the same time inform those failing to pass the pre-qualification along with the relevant reasons. The Minister shall pro-vide copies of pre-feasibility studies for all participants passing pre-qualification.

h. The disqualified bidders may submit requests to the Procurement Evaluation Team in connection with the decision of the Minister on their disqualification. The said request must be received by the Procure-ment Evaluation Team within a period of 15 days after the disqualified bidders receive the decision on the disqualification from the Minister. The Procurement Evaluation Team shall make decisions on the said requests within a period of time stipulated later. The decision of the Procurement Evaluation Team on the said requests shall be final and binding.

i. The Minister shall be required to deliver the list of all pre-qualification participants to the Procurement Evaluation Team.

2. In the case of a two-step tender system being applied, the Minister shall be required:

a. to determine technical criteria and specifications clearly indicating the minimum requirements for opera-tion and performance of the projects, as well as to request the candidates passing pre-qualification to file technical proposals;

b. to discuss the said technical proposals with participants of pre-qualification on the basis of technical stan-dards and parameters of the projects;

c. to invite pre-qualification participants to deliver their bids on the basis of standard form and technical pa-rameter by observing the tender requirements as regulated in the tender documents.

3. (a) Foreign companies may be involved in pre-qualification. (b) Foreign companies passing the pre-qualification shall be entitled to participate in the tender. (c) In the case of the said foreign companies winning the tenders, the relevant companies shall be required to

set up an Indonesian legal entity to implement the development and/or management of the said infra-structures, according to Government Regulation No. 20 of 1994.

Step III. Tender Documents

The Minister shall be required to prepare and deliver tender documents to all participants passing pre-qualification (“Successful Pre-qualified Bidders”):

1. The tender documents shall clearly determine the tender rules and shall attach the following:

(1) the invitation for tender;

(2) the directives for the Successful Pre-qualified Bidders, covering: a. general explanation and objectives of the projects, including a clear statement on the objectives,

scope, expected results, public to be served, designs and minimum standard of performance and environmental standards;

b. procedures for filing bids, including the date, time period and location for filing the bids, guaran-tees for bids, and validity periods of the respective bids as well as the allowed procedures for deliv-ering bids;

c. date of the opening of the tenders proposal; d. principles of determination and adjustment of tariffs, charges, costs and rental fees; e. guarantees provided by the Minister; f. the need for establishing a legal entity, if necessary; g. the share of the Minister and/or other agencies in financing part of the projects; h. assistance or enhancement to be provided by the Minister; i. tables clearly indicating the risks to be allocated to the Minister, private parties and users.

(3) the tender application forms;

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(4) the general and specific requirements to be applied in the contracts;

(5) the copies of pre-feasibility studies;

(6) the copies of the contract concept describing the forms of cooperation (such as: BOT, BOO, concession granting, etc.) and the maximum period of the construction;

(7) the guarantees for pro forma bids;

(8) the guarantees for pro forma implementation;

(9) the attachments, including relevant additional information, such as: economic, social, demographic and environmental data required to improve the quality of the bids; and

(10) other documents that the Minister considers useful for the bidders.

2. The bids and other documents delivered by the Successful Pre-qualified Bidders and matters relating to the bids shall be made in the Indonesian language or English. In the case of dispute arising from the implemen-tation, the documents in Indonesian language shall prevail.

3. Additional information, explanations, rectifications and amendments to the tender documents shall be for-mally delivered in writing to the Successful Pre-qualified Bidders.

4. All Successful Pre-qualified Bidders may be given additional time to the length of the period agreed in the tender process, in the case of amendments to the tender documents are urgently required.

5. Bid guarantees under the name of investors shall be required in the tender. The amount of bid guarantees shall reflect the amount of the losses that are borne by the Minister which might arise in the case where the Successful Pre-qualified Bidders resign or fail to sign the contracts. Total bid guarantees shall be determined by the Minister.

6. All bids shall be, to the greatest extent, used the Indonesian Rupiah.

7. The tender documents shall clearly indicate whether the adjustments to the project financing are permitted, and events and/or conditions where the cost adjustments are permitted.

8. The tender documents shall indicate clearly that the Successful Pre-qualified Bidders are required to deliver guarantees of performance in forms of bank guarantees under its name in the amount equivalent to 5% of the estimated contract value. Bank guarantees can be obtained from a bank in Indonesia or international banks having branch offices in Indonesia. The guarantees shall be held by the Successful Pre-qualified Bidders and have a validity period until: (1) the physical completion of the projects; and (2) 12 months after the projects start operation.

9. Unless specified otherwise, the delivery of bids shall be not later than 90 days as of the date the documents is issued.

10. The bids submitted after the time and date stipulated shall be returned without being opened.

11. The Successful Pre-qualified Bidders can be requested to extend the validity period of their bids without modifying their bids letter. The Successful Pre-qualified Bidders’ bid failing to fulfill the said matter shall be returned along with the guarantees of their bids:

12. The Minister shall conduct pre-tender process, not less than 21 days and not later than 45 days after the ten-der documents are issued.

13. The date, time and location of pre-tender process shall be given to the Successful Pre-qualified Bidders. All changes in the time and location of pre-tender process will be informed to the Successful Pre-qualified Bid-ders through letters and facsimile.

14. None of the provisions stated in the said pre-tender process shall change the limitations and the conditions of the tender documents, unless they are made as written supplements from the Successful Pre-qualified Bidders. The Minister will issue the additional explanation in writing to all Successful Pre-qualified Bidders.

15. The Successful Pre-qualified Bidders may file written questions to the Minister to gather explanations on the tender documents, or data or information relating to the tenders. The Minister will send additional notifica-tions in writing to the Successful Pre-qualified Bidders and the Procurement Evaluation Team through fac-simile or other electronic media.


Guidebook page 145

16. The Successful Pre-qualified Bidders shall be responsible for its evaluation and understanding over all re-quirements, terminologies and condition of tender documents or other documents issued by the Minister.

17. The final time, date and venue of the delivery of bids shall be included in the tender documents. The tender documents will be opened publicly at a designated time and place.

18. The Successful Pre-qualified Bidders cannot amend, change or substitute their bids after the bids are opened.

Step IV. Bids Evaluation

1. Evaluation of the bids shall be performed as follows: (1) After the bids are opened, the Minister is required to ensure their conformity to all terminologies

and requirements of the tender documents. (2) All bids shall be further evaluated to ensure that the said bids are fully complied with the required

technical criteria: a. The basic designs at least shall fulfill the technical requirements and environmental standards stipu-

lated in the tender documents. b. The organizational and operational structures proposed to the projects. c. The financing plans shall be completed with the calculation of all financing of project development,

and its start-up operations. The uncertainty in the financial planning shall become the basis for re-jecting a bid. It should also be calculated the availability of the reserve fund to cover the possi-bilities of excessive cost or cash flow deficits in the start-up operation.

(3) The evaluation of financing shall only be examined to the bids having passing technical evaluation: a. The comparison and evaluation of the financial proposals must be performed by using the “present

value of financial discounting” method. Discount tariffs applied to this evaluation shall be tariffs of Bank Indonesia Certificate for three months effective on the day the tender is opened, or any other tariffs approved by the Procurement Evaluation Team to evaluate the financial condition of the co-operation projects between private companies and the government;

b. The financial flows used in tender documents shall be in accordance with minimum technical de-signs and standards of performance, planning and specifications stipulated in the tender documents;

c. The financial flows of all bids shall be evaluated at the same period as stipulated in the tender documents. The bids showing the financial flows that are less or larger than the period stipulated in the tender documents will be disqualified;

d. The currency used in the bids evaluation shall be Indonesian Rupiah; e. All bids shall be evaluated extensively, to ensure that all calculations are included, covering:

i. the placement of staff and their financing; ii. the costs of operation and maintenance; iii. the adequate working capital (including among others, cash revenue, inventory of spare parts,

other inventories, rental fees and down payments); iv. the replacement and renewal of equipment during the development and operational period; v. the licenses, permits and payments related to the licenses of technology; vi. the tax income and other taxes. f. All bids must be evaluated accurately to ensure that the projection of demand and growth rate -

stipulated in analysis is reasonable and widely consistent with the projection of demand con-tained in pre-feasibility studies and/or tender documents. In the case the projection of demand covered as part of tender documents, this version will also be valid for pre-feasibility studies;

g. The calculation of tariffs shall be in accordance with those stipulated in the tender documents; h. All supports gained from the public, including those contained in the financial proposals must

be clearly and reasonably indicated and included in the analysis; i. The timetable of the projects implementation shall be consistent with the financial flows as

contained in the financial analysis; j. All debts repayment, financial arrangement, interest and debts amortization must be clearly in-

dicated and calculated in the financial analysis; k. In accordance with the matters above, the Minister will recommend the Successful Pre-qualified

Bidders whose bid fulfill the requirements, technical evaluations are satisfactory and who make the financing proposals: (i). the proposals for subsidized tariffs, charges and costs and rental fees proposed in the forms of

Build Operate Transfer (BOT), Build Own Operate (BOO), Develop Operate Transfer (DOT), Rehabilitate Operate Transfer (ROT), Rehabilitate Operate Own (ROO), and other similar forms, resulting in the lowest deduction from the present value;

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(ii). the proposals for amortization payment timetable in the forms of Build Transfer (BT), Build Lease and Transfer (BLT), Build Transfer and Operate (BTO), and other similar forms, result-ing in the lowest deduction from the present value; or

(iii). the proposals for the timetable of the financing to parties in charge in leasing and other similar forms resulting in the highest deduction from the present value.

2. In the case the private party serving as the initiator of a project and if such project is offered to the public, the initiator shall be entitled to obtain additional value in the tender evaluation whose amount is determined by the Minister, by fulfilling the following requirements: a. the bidder has submitted the project proposal to the Minister based on the relevant private party’s initia-

tive; b. the bidder has performed the pre-feasibility study resulting in the project listed in the list of infrastruc-

ture projects; c. the pre-feasibility study is opened to all other participants; d. the bidder has passed the tender pre-qualification and his/her bid has fulfilled the technical require-

ments; e. There are more than one bids that fulfill the technical requirements.

V. The Rejection of Bids

1. The Minister may reject the existing bids, and can also repeat the tender.

2. Repeating tender shall be based on the following considerations: (1) the submitted bids do not fulfill the requirements stipulated in the tender documents; or (2) the tender requirements are not fulfilled, where there are only less than two bids complying with the re-

quirements.

3. In case there is only one bid that technically fulfills the requirements and the Minister proposes to make a negotiation with the said single bidder. Prior to the negotiation, the Minister is required to obtain an ap-proval from the Procurement Evaluation Team.

4. The negotiation as mentioned in point 3 above must ensure that the bid has a goal to achieve the best result for the interest of the public and the State of Indonesia.

5. If the Procurement Evaluation Team approves the negotiation with single bidder fulfilling the said require-ments, then all other bids shall be rejected.

6. The abovementioned single bidder can be a company or a group of companies or a combination of compa-nies proposing a tender collectively.

7. Within a period of 120 days from the closing date of the tender, the Minister shall deliver the following mat-ters to the Procurement Evaluation Team for further observation: (1) The report of evaluation results and recommendations of the Minister to make contracts. (2) The draft of contracts with the Successful Pre-qualified Bidders.

8. Within a period of 28 days after the Minister delivers the documents set out in point 7 and in the case the Procurement Evaluation Team approves the tender process and knows that all principles, procedures and government policies contained in the attachment of Decree No. 7 have been fulfilled, the Procurement Evaluation Team shall approve the recommendations of the Minister on the results of the tender.

9. The Procurement Evaluation Team shall not issue any approval for the projects which do not fulfill the pro-visions under Decree No. 7.

Step VI. Simplified Competitive Tender 1. The procedures for tendering the infrastructure projects with an estimated cost less that Rp. 50,000,000,000

can be executed in a simpler way. 2. The simplified tender procedures shall be stipulated by the relevant Ministers, Governors or Heads of Sec-

ond level regions (Regents or Majors). 3. The simplified tender procedures shall refer to the following provisions:

(i) Bids shall only be allowed to be carried out by the Successful Pre-qualified Bidders. (ii) Pre-qualification will be executed through a transparent and consistent process. (iii) All invitations to join pre-qualification will be delivered to the Chamber of Commerce (Kamar Dagang

Industri or “KADIN”), the National Association of Indonesian Consultants (Ikatan Konsultan Indone-sia or “INKINDO”) as well as the Group of Indonesian Construction Entrepreneur (Gabungan Pen-gusaha Konstruksi Indonesia or “GAPENSI”) and will be advertised in: a. mass media


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b. printed media, including newspapers, commercial publications; c. business news.

(iv) All parties delivering the pre-qualification documents before the closing date of bids will be considered, and the results will be informed.

(v) At least five of the lowest bidder will be allowed to participate in tenders. (vi) The opening of bids will be publicly done and all Successful Pre-qualified Bidders are invited to be pre-

sent. (vii) All bids will be evaluated, whether it is responsive and technically fulfills the requirements. The tender

committee will evaluate the financing proposals on the basis of criteria of evaluation. (viii) The Minister will report the result of bids to the Procurement Evaluation Team.

Step VII. Procedures for Notifying the Successful Bidder

After the Procurement Evaluation Team approves the results of the selection of private party: 1. the results of selection shall be published and announced to the public; 2. the Minister shall inform all un-successful pre-qualified bidders regarding the results of evaluation along

with explanations; 3. within a period of 14 days after the publication or 15 days after the written notification of the unsuccessful

bids, the un-successful pre-qualified bidders may file objections to the Procurement Evaluation Team; 4. in relation to the objection set out in point 3 above, the Procurement Evaluation Team shall issue its decision

within a period of 30 days after the date the said objection is received. The decision of the Procurement Evaluation Team shall be final.

5. in the case that any objection arise, the Minister is not allowed to decide anything on the said project, in-cluding signing contracts with the successful bidder, but shall wait until the decisions of the Procurement Evaluation Team is issued.

6. after the decision of the Procurement Evaluation Team is delivered to the successful bidder, the Minister will take required steps to finalize the contracts and afterwards notice the successful bidder to start their ac-tivities.

7. the rights and obligations of parties in the infrastructural development cooperation projects shall be ex-plained in detail in a contract, in accordance with Decree No. 7.

8. the amendments and supplements to provisions on the scope of the contract can be made at any time on the basis of mutual agreement by notifying the private parties in writing and vice versa. The addition and reduc-tion of the works as a result of the changes of the contract shall be adjusted to the changes in project costs and/or the completion period of the project.

Step VIII. Monitoring and Evaluation 1. The Minister shall be responsible for the administrative affairs and the monitoring of the project’s imple-

mentation and shall report the results to Bappenas every six months. 2. The Minister shall be required to perform financial audits on the implementation of development and opera-

tion of the projects annually, and such audit shall be performed by independent auditors. 3. Within a period of six months after the completion of projects, the Minister shall report the projects comple-

tion to Bappenas, containing recommendations and other matters that can be obtained during the implemen-tation of the projects starting from the report of preparations, development up to the operation of the said facilities. .

4. Except stipulated in the contracts, as of the date of signing the contracts until the completion of projects, or if otherwise determined, the Minister and/or private parties may file objections relating to the physical im-plementation of the projects, or other matters relating to the implementation of the contracts, to the Pro-curement Evaluation Team for its considerations.

***

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Annex 2. Directory of Major Indonesian Companies in the Infrastructure Sector. This directory focuses mainly on State-owned Enterprises active in various infrastructure sectors infrastructure. A limited sample of private Indonesian companies is mentioned as well. Financial key figures are derived from various public sources and the information is in-dicative only.

The selection is ranked by highest profit to lowest profit, or loss.

Banking PT Bank Mandiri

Headquarters : DKI Jakarta; founded : 1998 General Banking services. The bank is the result of a merger of 4 state banks which were all heavily affected by the financial crisis of 1997. Website : http://www.bankmandiri.co.id Revenues : Rp 27231 bn Profit : Rp 4586 bn (financial report of 2003) Assets : Rp 249436 bn Liabilities : Rp 229041 bn (excl. equity)

Power PT PLN Headquarters : DKI Jakarta Electricity power supply: generation, transmission and distribution, and its supporting services all over Indonesia. Website : http://www.pln.co.id Revenues : Rp 54431 bn Profit : Rp 3558 bn (financial report of 2003) Assets : Rp 207616 bn Liabilities : Rp 57873 bn (excl. equity)

Telecoms PT Telekomunikasi Indonesia Tbk Headquarters : Bandung City, West Java National telecommunication company. Website : www.telkom.co.id Revenues : Rp 16109 bn Profit : Rp 2875 bn (financial report of 2004 H1) Assets : Rp 55823 bn Liabilities : Rp 427812 bn (excl. equity)

Banking PT Bank BRI Headquarters : DKI Jakarta Delivering the best banking services with emphasis on the services to micro, small, and me-dium enterprises, to support their economic development. Website : http://www.bri.co.id Revenues : Rp 16008 bn Profit : Rp 2502 bn (financial report of 2003) Assets : Rp 94710 bn Liabilities : Rp 85716 bn (excl. equity)

Telecoms PT Indosat Tbk Headquarters : DKI Jakarta On November 2003, following the signing of the Merger Deed to merge Satelindo, IM3 and Bi-magraha into Indosat, Indosat emerges as a cellular focused Full Network Service Provider (FNSP). By consolidating its cellular, fixed telecommunications and MIDI services into a single organization, Indosat is well-positioned to be the telecommunication service provider with the comprehensive range of products offering in Indonesia. Website : http://www.indosat.com0 Revenues : Rp 5074 bn Profit : Rp 718 bn (financial report of 38139) Assets : Rp 27704 bn Liabilities : Rp 15245 bn (excl. equity)

Gas PT Perusahaan Gas Negara Headquarters : DKI Jakarta PGN manages 4,140km of transmission and distribution pipelines situated in six major distribu-tion markets and two major transmission markets to serve industrial, commercial, and house-hold customers. Website : www.pgn.co.id Revenues : Rp 3596 bn Profit : Rp 519 bn (financial report of 2003) Assets : Rp 9112 bn Liabilities : Rp 5796 bn (excl. equity)


Guidebook page 149

Ports PT Pelabuhan Indonesia II Headquarters : DKI Jakarta Managing port and its supporting services, such as logistic services, terminal, hospital, port in-formation system, etc, in Jakarta harbour Website : http://portal.inaport2.co.id Revenues : Rp 1312 bn Profit : Rp 497 bn (financial report of 2003) Assets : Rp 4172 bn Liabilities : Rp 1781 bn (excl. equity)

Banking PT Bank BNI Tbk Headquarters : DKI Jakarta Banking Services: Corpoparte Banking, Consumer Banking, Commercial Banking, Treasury Banking business. Website : http://www.bni.co.id Revenues : Rp 7161 bn Profit : Rp 419 bn (financial report of 2003) Assets : Rp 131246 bn Liabilities : Rp 121230 bn (excl. equity)

Airports PT Angkasa Pura I Headquarters : DKI Jakarta Airport services company which are providing direct and indirect services for airport business and its acitivities such as: supplying, development, and supporting facility for airplane, terminal, cargo, airfare services, electricity, water treatment and drainage, hotel, restaurant, etc. Website : http://www.angkasapura1.co.id Revenues : Rp 767 bn Profit : Rp 418 bn (financial report of 2001) Assets : Rp 2800 bn Liabilities : Rp 238 bn (excl. equity)

Banking PT Bank Ekspor Indonesia Headquarters : DKI Jakarta; founded : Export finance institution. Website : http://www.bexi.co.id0 Revenues : Rp 602 bn Profit : Rp 293 bn (financial report of 2003) Assets : Rp 4989 bn Liabilities : Rp 1290 bn (excl. equity)

Airports PT Angkasa Pura II Headquarters : DKI Jakarta Airport and Air Traffic Services. Website : http://www.angkasapura2.co.id Revenues : Rp 1300 bn Profit : Rp 285 bn (financial report of 2003) Assets : Rp 3340 bn Liabilities : Rp 236 bn (excl. equity)

Toll Roads PT Jasa Marga Headquarters : DKI Jakarta; founded : 1978 Planning, building, maintaining and operating toll roads and related infrastructure amenities. Website : http://www.jasamarga.com Revenues : Rp 1346 bn Profit : Rp 250 bn (financial report of 2003) Assets : Rp 6017 bn Liabilities : Rp 4296 bn (excl. equity)

Ports PT Pelabuhan Indonesia III Headquarters : Surabaya City, East Java; founded : Managing port and its supporting services, such as logistic services, terminal, hospital, port in-formation system, consutancy, training and education, etc, in Surabaya harbour Website : http://www.pp3.co.id Revenues : Rp 1386 bn Profit : Rp 226 bn (financial report of 2003) Assets : Rp 2503 bn Liabilities : Rp 664 bn (excl. equity)

Ports PT Pelabuhan Indonesia I Headquarters : Medan City, North Sumatera Managing port and its supporting services, such as logistic services, terminal, hospital, port in-formation system, consutancy, training and education, etc. Website : http://www.inaport1.co.id Revenues : Rp 444 bn Profit : Rp 122 bn (financial report of 2003) Assets : Rp 1033 bn Liabilities : Rp 184 bn (excl. equity)

Toll Roads CMNP Headquarters : DKI Jakarta; founded : -- (private company) Toll road construction, maintenance and operations (BOT) Website : N/A Revenues : Rp 203 bn Profit : Rp 53 bn (financial report of 0) Assets : Rp 1579 bn Liabilities : Rp 484 bn (excl. equity)

EU – Asia-Invest


Construction PT Adhi Karya Headquarters : DKI Jakarta Indonesia's largest construction firm. The company presently comprises 6 divisions, 11 branches, 3 subsidiaries, and 4 joint operation. Website : http://www.adhikarya.com/new Revenues : Rp 2235 bn Profit : Rp 44 bn (financial report of 2003) Assets : Rp 1343 bn Liabilities : Rp 1116 bn (excl. equity)

Construction PT Wijaya Karya Headquarters : DKI Jakarta Known as WIKA and providing engineering and general contracting, including EPC contracting. Also active in the manufacturing and trade of building materials and in real estate development. Website : http://www.wika.co.id/12 Revenues : Rp 1858 bn Profit : Rp 41 bn (financial report of 2003) Assets : Rp 1344 bn Liabilities : Rp 1104 bn (excl. equity)

Construction PT Hutama Karya Headquarters : DKI Jakarta; founded : 1973 Construction services in Civil Works, Mechanical, Electrical, Telecommunication and Instrumen-talization. Also building maintanance and renovation. 25 subsidiary companies throughout In-donesia. Website : http://www.hutama-karya.com Revenues : Rp 1329 bn Profit : Rp 32.5 bn (financial report of 2003) Assets : Rp 1270 bn Liabilities : Rp 1171 bn (excl. equity)

Ports PT Pelabuhan Indonesia IV Headquarters : Makassar City, South Sulawesi Managing port and its supporting services, such as logistic services, terminal, hospital, port in-formation system, etc, in Makassar harbour Website : N/A Revenues : Rp 258 bn Profit : Rp 28 bn (financial report of 2003) Assets : Rp 645 bn Liabilities : Rp 213 bn (excl. equity)

Energy (private) Medco Energy International Headquarters : DKI Jakarta; founded : 1980 One of the first Indonesian drilling contractors, MedcoEnergi has transformed into an integrated energy company with business involvement in oil and gas exploration and production, drilling services, methanol production and most recently power generation. Website : http://www.medcoenergi.com Revenues : Rp 229 bn Profit : Rp 27 bn (financial report of 0) Assets : Rp 979 bn Liabilities : Rp 450 bn (excl. equity)

Shipping Djakarta Lyod Headquarters : DKI Jakarta Shipping Website : http://www.dlloyd.co.id Revenues : Rp 350 bn Profit : Rp 25 bn (financial report of 2001) Assets : Rp 1000 bn Liabilities : Rp 1000 bn (excl. equity)

Industrial Est. PT Kawasan Berikat Nusantara Headquarters : DKI Jakarta "Berikat" regional management, Industrial Park Management, Logistic Services Website : http://www.kbnepz.com Revenues : Rp 129 bn Profit : Rp 25 bn (financial report of 2003) Assets : Rp 361 bn Liabilities : Rp 45 bn (excl. equity)

Construction PT Pembangunan Perumahan Headquarters : DKI Jakarta PP is a leading company in designing and constructing high-rise buildings and also other civil works (fossil power plant, dam, tunnel, port and cable bridges). ISO 9001 : 2000 certified, the first Indonesian contractor earning this certificate in 1994. Website : http://www.pt-pp.com Revenues : Rp n/a bn Profit : Rp 20 bn (financial report of 2002) Assets : Rp 1270 bn Liabilities : Rp 790 bn (excl. equity)


Guidebook page 151

Transport Perum PPD Headquarters : DKI Jakarta Bus public transportation services in DKI Jakarta and its surrounding area. Website : N/A Revenues : Rp 78 bn Profit : Rp 20 bn (financial report of 2001) Assets : Rp 93 bn Liabilities : Rp 121 bn (excl. equity)

Industrial Est. PT Jakarta Industrial Estate Pulogadung Headquarters : DKI Jakarta Selling and renting land industry and its supporting services Website : www.jiep.co.id Revenues : Rp 21 bn Profit : Rp 15 bn (financial report of 2003) Assets : Rp 124 bn Liabilities : Rp 20 bn (excl. equity)

Construction PT Waskita Karya Headquarters : DKI Jakarta; founded : 1960 General civil works contractor engaging in roads, bridges, harbors airports, buildings, sewer-ages, cement and power plants, factories and other industrial facilities. Website : http://www.waskita.co.id Revenues : Rp 560 bn Profit : Rp 14 bn (financial report of 2001) Assets : Rp 434 bn Liabilities : Rp 250 bn (excl. equity)

Construction PT Nindya Karya Headquarters : DKI Jakarta Engineering, general construction and real estate. Website : N/A Revenues : Rp 518 bn Profit : Rp 13 bn (financial report of 2003) Assets : Rp 379 bn Liabilities : Rp 336 bn (excl. equity)

Construction PT Istaka Karya Headquarters : DKI Jakarta; founded : ca.1980 Originally set up as PT Indonesian Consortium of Construction Industries, for large projects mainly in Indonesia, but also in Saudi Arabia. In 1986, changed its company name to Istaka Karya, active in general contracting and constructing services. Website : http://www.istaka.net Revenues : Rp 358 bn Profit : Rp 10 bn (financial report of 2003) Assets : Rp 309 bn Liabilities : Rp 248 bn (excl. equity)

Industrial Est. Kawasan Industri Jababeka Headquarters : DKI Jakarta; founded : ca.1990 (private company) 1,300 ha industrial estate operation to the east of Jakarta. The site's major components include the Jababeka Industrial Estate (JIE), the Cikarang Baru Kota Hijau residential community and will also include a high technology park. Website : http://www.jababeka.com Revenues : Rp 83 bn Profit : Rp 8 bn (financial report of 2004) Assets : Rp 1981 bn Liabilities : Rp 516 bn (excl. equity)

Consulting PT Indah Karya Headquarters : Bandung City, West Java; founded : 1961 Provides construction services, including surveying, planning, design, engineering and project management. Core business are government projects, but it will also associate for private-sector projects. Website : http://www.indahkarya.co.id Revenues : Rp 17 bn Profit : Rp 6 bn (financial report of 2003) Assets : Rp 19 bn Liabilities : Rp 17 bn (excl. equity)

Railways PT Kereta Api Indonesia Headquarters : Bandung City, West Java Train services for passangers and goods. Website : http://www.kereta-api.com Revenues : Rp 2181 bn Profit : Rp 5 bn (financial report of 2003) Assets : Rp 4073 bn Liabilities : Rp 1729 bn (excl. equity)

EU – Asia-Invest


Water Perum Jasa Tirta I Headquarters : Malang City, East Java Providing services for water management, water resources management, and managing its wa-ter infrastructure for Brantas and Bengawan Solo river Website : http://www.jasatirta1.go.id Revenues : Rp 50 bn Profit : Rp 4 bn (financial report of 2003) Assets : Rp 47 bn Liabilities : Rp 0 bn (excl. equity)

Construction Bukaka Teknik Persada Headquarters : Cileunsi, Bogor, West Java (private) Services for design and engineering, construction and manufacturing related to infrastructure sector particularly in the energy, transportation and telecommunication fields. Specialisations in steel construction, airport equipment and machinery for construction. Website : www.bukaka.com Revenues : Rp 144 bn Profit : Rp 3 bn (financial report of 0) Assets : Rp 442 bn Liabilities : Rp 1341 bn (excl. equity)

Industrial Est. PT Kawasan Industri Medan Headquarters : Medan City, North Sumatera Selling and renting land industry and its supporting services Website : N/A Revenues : Rp 29 bn Profit : Rp 3 bn (financial report of 2003) Assets : Rp 80 bn Liabilities : Rp 45 bn (excl. equity)

Water Perum Jasa Tirta II Headquarters : Purwakarta District, West Java; founded : 1999 Sales of hydro-power and water from the West Java Jatiluhur dams. Website : http://www.jasatirta2.co.id Revenues : Rp 111 bn Profit : Rp 2 bn (financial report of 2003) Assets : Rp 196 bn Liabilities : Rp 26 bn (excl. equity)

Transport Perum DAMRI Headquarters : DKI Jakarta Inter-city bus transportation services Website : http://www.damri.co.id Revenues : Rp 154 bn Profit : Rp 2 bn (financial report of 2000) Assets : Rp 129 bn Liabilities : Rp 24 bn (excl. equity)

Construction PT Brantas Abipraya Headquarters : DKI Jakarta; founded : 1980 Constructors services in Civil Engineering, Mechanical-Electrical and Maintenance. Rental of construction equipment. Website : N/A6 Revenues : Rp 209 bn Profit : Rp 1.3 bn (financial report of 2003) Assets : Rp 191 bn Liabilities : Rp 171 bn (excl. equity)

Shipping Angkutan Sungai Danau & Penyeberangan Headquarters : DKI Jakarta Shipping transportation services and ferry terminal management Website : http://www.ferry-asdp.co.id2 Revenues : Rp 178 bn Profit : Rp 1 bn (financial report of 2001) Assets : Rp 463 bn Liabilities : Rp 248 bn (excl. equity)

Consulting PT Virama Karya Headquarters : DKI Jakarta; founded : 1993 Technical and management consulting services. Website : N/A Revenues : Rp 9 bn Profit : Rp 0.64 bn (financial report of 2003) Assets : Rp 18 bn Liabilities : Rp 6 bn (excl. equity)

Industrial Est. PT PDI Pulau Batam Headquarters : Batam City; founded : 1973 Warehousing, Expedition and Documentation, Transportation and Loading Services Website : http://www.perserobatam.go.id Revenues : Rp 48 bn Profit : Rp 0.5 bn (financial report of 2003) Assets : Rp 36 bn Liabilities : Rp 4 bn (excl. equity)


Guidebook page 153

Construction PT Amarta Karya Headquarters : Bekasi District, West Java; founded : 1962 Construction in civil works, including steel structures and Mechanical & Electrical, as well con-struction service delivery. Certified ISO 9001:2000. Website : http://www.amartakarya.com Revenues : Rp 79 bn Profit : Rp 0.453 bn (financial report of 2003) Assets : Rp 97 bn Liabilities : Rp 87 bn (excl. equity)

Industrial Est. PT Kawasan Industri Wijaya Kusuma Headquarters : Semarang City, Central Java Selling and renting land industry and its supporting services. Shareholders: Central Gov. (60%); East Java Province (30%); Kab. Cilacap (10%) Website : N/A Revenues : Rp 5 bn Profit : Rp 0.137 bn (financial report of 2003) Assets : Rp 37 bn Liabilities : Rp 13 bn (excl. equity)

Shipping Pelayaran Bahtera Adiguna Headquarters : DKI Jakarta Shipping transportation and supporting services, such as training and education for shippers, consultancy, expedition, forwarding, etc. Website : http://www.bahteradhiguna.co.id Revenues : Rp 97 bn Profit : Rp -1 bn (financial report of 2003) Assets : Rp 90 bn Liabilities : Rp 59 bn (excl. equity)

Telecoms Excelcomindo Pratama Headquarters : DKI Jakarta; founded : 1996 (private) Providing GSM cellular network service in Indonesia by using a GSM 900 technology base which was subsequently complemented with a 1800 technology base Website : http://www.xl.co.id Revenues : Rp 1254 bn Profit : Rp -85 bn (financial report of 0) Assets : Rp 6474 bn Liabilities : Rp 5470 bn (excl. equity)

Shipping Pelayaran Nasional Indonesia Headquarters : DKI Jakarta: Shipping transportation, especially passanger shipping Website : http://www.pelni.co.id Revenues : Rp 1364 bn Profit : Rp -383 bn (financial report of 2003) Assets : Rp 4913 bn Liabilities : Rp 4467 bn (excl. equity)

EU – Asia-Invest


Annex 3. Selected List of Consulted Persons, Compa-nies and Institutions.

A full list of European companies present in Indonesia can be accessed via the directory of Eurocham : “EuroBusiness 05; European Indonesian Business Directory 2005” (www.eurobusinessindo.com).

ADPI (Association of Indonesian Fund Pension)

Drs. H. Satino, chairman Email : n/a

Alcatel Asia Pacific Christian Reinaudo, President Email : [email protected]

Alcatel Indonesia Jan Glinski, President Director Email : [email protected]

Alstom Kus Prakoso, Business Development Manager Email : [email protected]

Amsterdam Schiphol Airport Mr. A J Vogels Email:[email protected]

Bank BNP PARIBAS Indonesia, PT Francois FICHAUX, President Director, Country Manager for Indonesia Email: [email protected]

Bank Indonesia Miranda S. Goeltom, Senior Deputy Governor Email : [email protected]

BAPPENAS Dr. Ir. Suyono Dikun, MSc, Deputy Minister of Infrastructure Email : [email protected]

BCEOM Oliver Bechet, Country manager for Indonesia Email: [email protected]; [email protected]

Bouygues Construction Dominique Gazal (Ms), Vice President Business Development for A Email: [email protected]

Bukaka Marga Utama, PT Handoko P. Anggraito, Chief Operating Officer Email : n/a

Calyon Pierre Zerdoun, Country Manager Email : [email protected]

Degremont (Indonesia), PT Eric Van Den Berghe, President Director Email: [email protected]


Guidebook page 155

Directorate General Electricity & Energy Utilization Yogo Pratomo, Director General Email : n/a

EKONID Jan Ronnfeld, Director Email : [email protected]

Embassy of the Federal Republic of Germany Wolfgang Piecha, Minister Counsellor, Deputy Chief of Mission, Head of Economic Section Email: [email protected]

Ericsson Indonesia, PT Gaspar Woza, Manage Services Task Force Global Services - South East Asia Region Email:[email protected]

Fratekindo, PT Alain Pierre Mignon, President Director (Chairman of IFCCI) Email : [email protected]

German-Indonesian Chamber of Industry and Commerce Jan H. Ronnfeld, Managing Director Email: [email protected]

Glendale Partners Rod Williams, Director Email : [email protected]

Glendale Partners Scott Younger, Commissioner Email : [email protected]

Groupe Agence Francaise De Developpement Roger Goudiard, Director – Asia Department Email: [email protected]

Halcrow Group Ltd Indro Harry, Country Manager Email : [email protected]

HSBC Securities Indonesia, PT Eddy Soeparno, Director and Head of Cooperate Finance and Advisory, Indonesia Email: [email protected]

INA (Indonesia Netherlands Association) Elmar Bouma, Email : [email protected]

International Finance Corporation (IFC) German Vegarra, Country Manager Email : [email protected]

International Finance Corporation (IFC) Saud Siddique, Principal Investment Officer –Infrastructure, East Asia & Pacific Department Email: [email protected]

Jardine Matheson Leonard van Hien, Country Chairman Email : [email protected]

KKPPI Bambang Susantono, Ph.D., Asst. to the Deputy for Transportation & Telecommunication Infra-structure Development Email : [email protected]

Ministry of Energy & Mineral Resources Luluk Sumiarso, Secretary General Email : n/a

Motorola Inc Amit Sharma, Vice President Email: [email protected]

EU – Asia-Invest


Mott MacDonald Indonesia, PT David Parry, President-Director Email : [email protected]; [email protected]

ONDEO Services Bernard Lafrogne Email : [email protected]

Paiton Energy, PT Ronald P. Landry, President Director Email : [email protected]

Perusahaan Pengelolaan Aset, PT (State-Owned Asset Management Company) Raden Pardede, Vice President Director Email : [email protected]

Pirelli Cables ASEAN Mr. Stefano Poli, Chief Executive Officer Email: [email protected]

Pirelli Luigi Carlo Gastel, General Representative, Regional Representative Office Indonesia Email:[email protected]

PLN Bambang Hermawanto, Deputy Director for System Planning Email : [email protected]

Rolls-Royce International Ltd Mike F. grey, Regional Director-Indonesia Email : [email protected]

Royal KPN N.V. Drs. Nico Noort, Senior Advisor Europen Affairs Email: [email protected]; [email protected]

RWE Power Aktiengesellschaft Manfred Lang Email:[email protected]

RWE Solutions Indonesia Iwan Surjosukotjo, Chief Representative Email : [email protected]

Siemens Indonesia, PT Juergen Lagleder, President Director & CEO Email : [email protected]

Sofrecom Frederic Huet, President Director Email : [email protected]

SUEZ Pascal Roger Email: [email protected]

Thales F. Honore, Delegate for Indonesia Email : [email protected]

Thames PAM Jaya Ian Menzies, Head of Structured Finance, International Region Email : [email protected]

Thames PAM Jaya John Trew, President Director Email : [email protected]

The Hongkong and Shanghai banking Cooperation Limited Mervyn Fong, Deputy Chief Executive Officer Email: [email protected]


Guidebook page 157

The Jardine matherson Group Leonard van Hien, Chairman Email: [email protected]

The University of Indonesia Prof. DR. Dorodjatun Kuntjoro-Jakti Email : [email protected]

The World Bank Keshav Varma, Sector Director Email: Kvarma @WorldBank.org

The World Bank Migara Jayawardena, Senior Infrastructure Economist, World Bank office, Jakarta Email: [email protected]

Total E & P Indonesie Roland Festor, President & GM Email : [email protected]

Tractebel Katja Damman, External Communication Department Email : [email protected]

Vivendi Water Systems Jean de Vauxclairs,-- Email : [email protected]

WMD Water Waterleidingmaatschappij Drenthe K.J. Hoogsteen, Director Email: [email protected]

WSP International Michael Ellis, Country Director Email : [email protected]; [email protected]

EU – Asia-Invest


Annex 4. Bibliography and Sources of Information. ADB (2002)

Regulatory Framework for Private and Public Water Supply and Wastewater Enterprises. Design of a Regulatory and In-stitutional Strategy (Final Interim Report). Jakarta : ADB (Shaw, Stone & Webster Consultants)

AIRPORT (2005) The Flight to Boosting Mobility - Strategic Direction for the Airport Sector in Indonesia. (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January; paper for discussion purposes)

ANNUAL ECONOMIC REPORT (2004) Annual Economic Report December 2004. Accelerating the Momentum of Economic Growth. Jakarta : Coordinating Minister of Economic Affairs

ANWAR, J. (2005) Indonesia Infrastructure Summit 2005.Bridging the Financing Gap. Jakarta : Ministry of Finance of the Republic of Indonesia (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

BAIETTI, A. (2001) Private Infrastructure in East Asia. Lesson Learned in the Aftermath of the Crisis. Washington, D.C. : World Bank

BAIRD, M. (2005) Infrastructure Development in East Asia : Lessons for Indonesia. Jakarta : World Bank (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

BAPPENAS (2004) List of Projects and Technical Assistance Proposals. Jakarta : Ministry of National Development Planning / National Development Planning Agency

BAPPENAS (2005) Indonesia : Notes on Reconstruction. The December 26, 2004 Natural Disaster. Jakarta : Bappenas

BAPPENAS (2005a) Indonesia : Preliminary Damage and Loss Assessment. Jakarta : Bappenas

BAPPENAS (2005b) Infrastructure Road Map.Strategic Initiatives to Accelerate Infrastructure Development in Indonesia. Jakarta : State Ministry of National Development Planing / Bappenas (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

BKPM (2005) Trend of Investment Approvals & Permanent Licences, Januari 2005. Jakarta : Biro Perencanaan dan Informasi Badan Koordinasi Penanaman Modal (Monthly Report)

BPS (2000) Building Construction Statistics for Member of the Indonesian Contractors Association 1998. Jakarta : BPS-Statistics Indonesia

BPS (2000a) Building Construction Statistics for non Member of the Indonesian Contractors Association 1998. Jakarta : BPS-Statistics Indonesia

BPS (2000b) Economic Indicators August 2000. Jakarta : BPS-Statistics Indonesia

BPS (2000c) Expenditure for Consumption of Indonesia Per Province 1999. Jakarta : BPS-Statistics Indonesia

BPS (2000d) Welfare Indicators 1999. Jakarta : BPS-Statistics Indonesia

BPS (2001) Hasil Sensus Penduduk tahun 2000.Estimasi Fertilitas, Mortalitas dan Migrasi. Jakarta : BPS-Statistics Indonesia

BPS (2001a) Statistical year book of Indonesia 2000. Jakarta : BPS-Statistics Indonesia


Guidebook page 159

BPS (2002) Construction Statistics 2001. Jakarta : BPS-Statistics Indonesia

BPS (2002a) Proyeksi Penduduk Indonesia per Propinsi. Menurut kelompok umur dan jenis kelamin 2000 - 2010. Jakarta : BPS-Statistics Indonesia

BPS (2003) Statistical year book of Indonesia 2003. Jakarta : BPS-Statistics Indonesia

BPS (2003a) Environmental Statistics of Indonesia 2002. Jakarta : BPS-Statistics Indonesia

BPS (2003b) Proyeksi Angkatan Kerja Indonesia 2003 - 2010. Jakarta : BPS-Statistics Indonesia

BPS (2003c) Transportation and Communication Statistics 2002. Jakarta : BPS-Statistics Indonesia

BPS (2004) Construction Statistics 2003. Jakarta : BPS-Statistics Indonesia

BPS (2004a) Economic Indicators November 2004. Jakarta : BPS-Statistics Indonesia

BPS (2004b) Expenditure for Consumption of Indonesia Per Province 2004. Jakarta : BPS-Statistics Indonesia

BPS (2004c) Labor Forces Situation in Indonesia August 2003. Jakarta : BPS-Statistics Indonesia

BPS (2004d) Laporan Perekonomian Indonesia 2003. Jakarta : BPS-Statistics Indonesia

BPS (2004e) Welfare Statistics 2004. National Socio-Economic Survey. Jakarta : BPS-Statistics Indonesia

CALLAHAN, T. (ed.) (2001) Lights on / Light out. Indonesia Energy Future. Conclusions Paper. (Conference at Grand Hyatt Jakarta, 19 June 2001 organised by CastleAsia and Indonesian Business Club)

FULLER, D.E. (2005) Mobilising Capital for Domestic gas Supply under the Constraints of Customer Credit Quality or " Credit Where Credit is Due ". (Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20 January 2005)

GOELTOM, M. (2005) Indonesian Macroeconomic outlook and Financial Institution's View on Indonesia Country Risk. (Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20 January 2005)

HARRIS, C.; HODGES, J.; PADMESH SHUKLA (2003) Infrastructure Projects - A Review of Canceled Projects. Washington DC : World Bank (PPI Advisory Facility, Note Number 252, January 2003)

HARRIS, E. (2003) Private Participation in Infrastructure in Developing Countries. Trend, Impact, and Policy Lessons. Washington, D.C. : World Bank

HASTINGS, A. (2005) Opportunities/Challenges for Domestic Gas Commercialization in Indonesia. Jakarta : PT Indomedia Gemilang Komunikasi (Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20 January 2005)

IBBA (ca. 1999) Infrastructure Indonesia. A Study. 1997-8. Jakarta : IBBA

INDUSTRIAL ESTATES (ca. 1996) Directory 1994 - 1995 Guide book for Investor. Indonesian Industrial Estate and Export Processing Zone. Jakarta : Indonesian Industrial Estate Association

EU – Asia-Invest


INFRASTRUCTURE AGENDA (2004) 100-day Infrastructure Agenda of the United Indonesia Cabinet. in: Media Infrastruktur, Vol.1 No.5, Nov.-Dec. 2004, pp.4-6)

INFRASTRUCTURE DEVELOPMENT (2005) Infrastructure Development in Indonesia. Investment Opportunities. Supplementary Information Jakarta : Coordinating Minister of Economic Affairs (Publication presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

INFRASTRUCTURE DEVELOPMENT (2005a) A Perspective on Infrastructure Development in Indonesia. Jakarta : Coordinating Minister of Economic Affairs (Publication presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

INFRASTRUCTURE DEVELOPMENT (2005b) Infrastructure Development in Indonesia. An Investment Opportunity. Jakarta : Coordinating Minister of Economic Affairs (Publication presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

INVESTMENT (ca. 2005) Indonesia : Scaling Up Private Investments in the Power Sector A Risk Management Framework. Jakarta : Draft for Discussion

IRAWAN, P.B. ; IFTIKHAR, A.; ISLAM, I (2000) Labour Market Dynamics in Indonesia. Analysis of 18 Key Indicators of the labour Market (KILM) 1986-1999. Jakarta : International Labour Office - Jakarta

IUIDP (ca. 1990) Instructions for Using the 1988-1989 IUIDP Manual. Jakarta : Ministry of Public Works; the Second Permanent Working Group for Programme Implementation Urban Devel-opment Coordinating Team

JAMSOSTEK (2004) Annual Report 2003. PT Jamsostek (Persero). Jakarta : PT Jamsostek (Persero)

KPPOD (2003) Regional Investment Attractiveness, 2003. A Survey of Business Perception. Jakarta : Regional Autonomy Watch (KPPOD), The Asia Foundation

KUSUMA, A. (2005) Impact of the Indonesia Regulation for the New Oil and Gas Law to the Indonesia gas Business Opportunities. (Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20 January 2005)

LERCHE, D. (1999) Industrial Estates in Indonesia. A Guide for the Investor. Koln (Germany) : DEG

MERRILL, S. and SOEROTO, E. (2001) Improvements in the Housing Finance Sector. Jakarta : Republic of Indonesia Ministry of Settlements and Regional Infrastructure (Project Report)

PEUI (2004) Indonesia Energy Outlook & Statistics 2004. Depok (Indonesia) : Pengkajian Energi Universitas Indonesia Universitas Indonesia (PEUI)

PGN (2004) Annual Report 2003. Gas Negara. Jakarta : PT Perusahaan Gas Negara (Persero)

PGN (2005a) Duri - Dumai - Medan Phase I - Gas Transmission Project. Jakarta : PT Perusahaan Gas Negara (Persero)

PRIVATIZATION (2001) National Privatization Conference. Conclusions Paper. (Conference at Regent Jakarta, 2 October 2001, organised by CastleAsia and InterMatrix Communications)

PUBLIC WORKS (2005) Regulatory Reform and Potensial - Private Investment in Toll-Road. Jakarta : Minister of Public Works (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

PUBLIC WORKS (2005a) Regulatory Reform and Potential Private Investment in Water Supply and Sanitation. Jakarta : Minister of Public Works Republic Indonesia (Paper Presetation on the Infrastructure Summit 2005, Jakarta, Januari 17-18)

PUBLIC WORKS (2005b) Toll Road Investment Opportunities in Indonesia. Jakarta : Directorate General of Ministry of Public Works (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

RADELET, S.; SACHS, J. and JONG-WHA LEE (1997) Development Discussion Papers.Economic Growth in Asia. USA : Harvard Institute for International Development


Guidebook page 161

RANTETODING, PATANA. (2005) Policy Program, and Public-Private Partnership Opportunity in Water Supply Development in Indonesia. Jakarta : Ministry of Public Works (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

REGULATORY REFORM (2005) Regulatory Reform for Securing Certainty and Predictability. Jakarta : Ministry of justice and Human Rights (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

RIAU (2004) Presentation to the Gubernur Riau - Pekanbaru-Dumai Toll Highway Indonesia. (Report produced by Kumpulan Darul Ehsan Berhad, Selangor-Malaysia and presented on 20 January 2004)

RIAU (2004a) Presentation to Gubernur Riau - Water Supply Project - Riau Province, Indonesia. (Report produced by Kumpulan Darul Ehsan Berhad, Selangor-Malaysia and presented on 20 January 2004)

RIAU (2005) Laporan Gubernur Riau pada Infrastructure Summit 2005. (unpublished document)

SCOTT, B. (2005) Future Gas Utilisation in Indonesia : Regulation Beyond the Upstream Sector. (Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20 January 2005)

SEAPORTS (2005) The Voyage to Increasing Trade - Strategic Direction for the Port Sector in Indonesia. (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January; paper for discussion purposes)

SUGIHARTO (2005) Indonesia Infrastructure Summit : "Public Private Partnership for Infrastructure Development". Jakarta : Ministry of State-Owned Enterprises, Republic of Indonesia (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

SUKARMA, R. and POLLARD, R. (2002) Indonesia - Overview of Sanitation and Sewerage Experience and Policy Options. Jakarta : World Bank (Urban Development Sector Unit Indonesia, Country Management Unit, East Asia and Pacific Re-gion)

TRANSPORT (1997) Sector Summary : Transport Infrastructure in Indonesia. Jakarta : British Embassy, Jakarta

UNITED NATIONS (2005) Indian Ocean Earthquake - Tsunami 2005. Flash Appeal. New York : United Nations

WHITELEY, D.E. (2001) Mortgage Insurance Feasibility Analysis Indonesia. Jakarta : Republic of Indonesia Ministry of Settlements and Regional Infrastructure (Project Report)

WIDIARTO and HOEK-SMIT, M. (2001) Institutional Arranggement and funding Mechanism for Housing Assistance Program. Jakarta : Republic of Indonesia Ministry of Settlements and Regional Infrastructure (Project Report)

WMD (2004) In close Cooperation - A Framework for the WMD project "Drinking water supply East Indonesia”. (Unpublished report for Waterleidingmaatschappij Drenthe NV (WMD), Assen, the Netherlands, Version 1, Augsut 2004)

WORLD BANK (2003) Indonesia Country assistance Strategy for years 2004 - 2007. Jakarta : World Bank

WORLD BANK (2003) The Water Resources Sector Strategy : An Overview.Managing and Developing Water Resources to Reduce Poverty. Washington, D.C. : World Bank

WORLD BANK (2003) Urban Poverty in East Asia a review of Indonesia, the Philippines and Vietnam. Jakarta : World Bank

WORLD BANK (2004) Combating Corruption in Indonesia. Enhancing Accountability for Development. Jakarta : World Bank

WORLD BANK (2004) World Development Report. Making Service Work for Poor People. Washington, D.C. : World Bank

WORLD BANK (2005) Indonesia : New Directions. Jakarta : World Bank (The World Bank Brief for The Consultative Group on Indonesia, January 19-20, 2005)

EU – Asia-Invest


WORLD BANK (2005a) Averting an Infrastructure Crisis. A Framework for Policy and Action. 2nd Edition. Jakarta : World Bank (East Asia and Pacific Regon Infrastructure Department)

WORLD BANK (2005b) Connecting to Economic Growth. Strategic Priorities for the Telecommunication in Indonesia. Jakarta : World Bank, JBIC, ADB (Infrastructure Policy Brief)

WORLD BANK (2005c) Energizing Economic Growth. Strategic Priorities for Power Gas Sector in Indonesia. Jakarta : World Bank, JBIC, ADB (Infrastructure Policy Brief)

WORLD BANK (2005d) Indonesia : Averting an Infrastructure Crisis. Jakarta : World Bank, JBIC, ADB (Infrastructure Policy Brief)

WORLD BANK (2005e) Making Economic Growth Flow. Strategic Priorities for Water Suplpy & Sanitation in Indonesia. Jakarta : World Bank, JBIC, ADB (Infrastructure Policy Brief)

WORLD BANK (2005f) The Road to Economic Growth. Strategic Priorities for the Road Sector in Indonesia. Jakarta : World Bank, JBIC, ADB (Infrastructure Policy Brief)

WORLD BANK (ca. 2001) Private Infrastructure - A Review of Projects with Private Participation, 1990 - 2000. Washington D.C. : World Bank (PPI Advisory Facility, Viewpoint)

YUSGIANTORO, P. (2005) Gas Regulation and Utilization in Indonesia. Jakarta : Department of Energy and Mineral Resources (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)

YUSGIANTORO, P. (2005a) Policy Reform and Priority Infrastructure Projects for Private Participation. Jakarta : Department of Energy and Mineral Resources (Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)


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