Indonesia - Infrastructure Bottlenecks - 14!02!11!06!16

l Global Research l
Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com
Contents
Highlights 1
Overview 2
Land infrastructure 3
Seaports 12
Airports 17
Electricity 22
Government support 28
Scenario analysis 31
Infrastructure bonds 35
Appendix 1: Sectors closed to foreign
investment in infrastructure 40
Appendix 2: Procedures for direct
investment in the transport sector 41

Tai Hui, +65 6596 8244
Tai.Hui@sc.com

Fauzi Ichsan, +62 21 2555 0117
Fauzi.Ichsan@sc.com

Edward Lee Wee Kok, +65 6596 8252
Lee.Wee-Kok@sc.com

Eric Alexander Sugandi, +62 21 2555 0596
Eric.Alexander-Sugandi@sc.com

Jennifer Kusuma, +65 6596 8250
Jennifer.Kusuma@sc.com

Special Report | 06:00 GMT 14 February 2011
Indonesia Infrastructure bottlenecks

Highlights
Poor infrastructure conditions are the main factor preventing Indonesias economy
from growing at its potential rate of 8%. Inadequate infrastructure also results in
high inflation compared to most of Indonesias peers in South East Asia.
Infrastructure development has been slow in the past decade and has relied
heavily on government spending. The government has not allocated sufficient
funding for infrastructure development, while participation from private investors is
still far below what is needed.
Land infrastructure is concentrated on the island of Java, which contributes about
58% of Indonesias GDP and is home to about 59% of the population. The
government is now focusing on developing a trans-Java toll-road system, but land
clearance remains an issue.
Compared to other ASEAN-5 countries, Indonesias main airports and seaports
are outdated and, in some cases, overcrowded. Meanwhile, electricity supply
needs to be boosted to meet surging domestic demand.
We run scenarios to assess the impact of infrastructure development in the
transport and electricity sectors. Under the best of our most plausible scenarios,
Indonesias economy will grow in a range of 7.1-7.6% during the 2011-14 period if
the private-sector participation rate reaches 50% of what is required and the
government increases spending on transport infrastructure by 20% a year (ceteris
paribus). Under an alternative scenario, if state-owned electricity company PLN
increases annual capex by 20% and private-sector participation reaches 50% of
what is needed, growth can reach 6.9-7.5%. Otherwise, we expect the economy
to grow by only 6.5-7% during the period.
The government is preparing to issue infrastructure bonds to help finance
infrastructure projects.

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14 February 2011 2
Overview
Ten years ago, investors in Indonesias real economy would have identified legal
uncertainty and corruption as the biggest hurdles to investment followed by the
chaotic transition to regional autonomy, weak infrastructure, unfriendly labour laws,
and tax and customs issues. Today, all six of these hurdles remain. But while
President Yudhoyonos anti-corruption drive has helped to address corruption and
excessive red tape, weak infrastructure particularly the lack of trans-Java and
trans-Sumatra highways, inadequate power supply and insufficient seaport facilities
in the worlds biggest archipelago has become the biggest impediment to foreign
direct investment (FDI).

Under the IMF programme from 1998-2004, Yudhoyonos predecessors focused
primarily on fiscal prudence at the expense of maintaining the quality of existing
infrastructure, let alone building new projects. While this cut public debt to 27% of
GDP in 2010 from 80% in 2000, weak infrastructure is preventing Indonesias GDP
growth from reaching its potential rate of 8%. Table 1 compares the quality of
infrastructure across selected Asian countries.

Partly as a result of infrastructure bottlenecks, real GDP growth has averaged only
5.1% over the last nine years. Household consumption accounts for the biggest
share of GDP (around 60%), and contributed 2.6ppt of the 5.1% GDP growth over
the period. Investment (23% of GDP) contributed 1.3ppt, with the balance generated
by net exports and government consumption. The investment growth rate therefore
needs to double in order to raise GDP growth to its potential level.

The government has repeatedly said that Indonesia needs around USD 30bn
annually (4% of nominal GDP) in infrastructure investment in the next five years. We
believe the economic benefits will exceed the amount invested, as better
infrastructure stimulates both household spending and private investment.

In The Super-Cycle Report, we projected that Indonesia could potentially become
one of the worlds five largest economies by 2030, given its population and ample
natural resources. This is based on an average real GDP growth assumption of 7%
between 2010 and 2030. However, this will be difficult to achieve if infrastructure
bottlenecks are not resolved quickly, which is crucial to reducing inflation to a more
moderate level and facilitating a more even distribution of economic growth across
the country.

Table 1: Infrastructure quality in selected Asian countries (Global Competitiveness Report, 2010-2011)
Country Singapore Malaysia Thailand China Indonesia India Philippines
Roads 6.6 5.7 5.1 4.3 3.5 3.3 2.8
Railroad 5.8 4.7 3.0 4.3 3.0 4.6 1.7
Seaport 6.8 5.6 5.0 4.3 3.6 3.9 2.8
Air transport 6.9 5.9 5.9 4.4 4.6 4.6 3.6
Electricity 6.7 5.7 5.7 5.3 3.6 3.1 3.4
Score (out of 7)* 6.6 5.5 4.9 4.1 3.7 3.6 3.2
* 1 = extremely under-developed; 7 = efficient by international standards Source: World Economic Forum
Unless infrastructure conditions
improve, it will be difficult for
Indonesian growth to reach its
potential
We believe Indonesias economy
could potentially become one of the
worlds five largest by 2030

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14 February 2011 3
Land infrastructure
As the largest country in South East Asia, Indonesia has the regions biggest
networks of roads and railways (see Table 2). That said, the mere length of these
networks can be a misleading measure of the sufficiency of a countrys transport
infrastructure for the following reasons: (1) each country has different criteria for road
classification; (2) this measure ignores differences in road and rail quality; and (3) it
ignores differences in geographical conditions and population distribution.

Indonesias ratio of road distance to square kilometre of area is one of the lowest in the
region, indicating that the road system is inadequate to cover the countrys almost 2mn
square kilometre land area. The road and railroad systems are concentrated in Java
Island, which accounts for only about 7% of Indonesias total land area, while bigger
islands such as Kalimantan and Papua still have limited land transport infrastructure.

Roads
Indonesias current road system does not provide optimum support for the countrys
economic growth. Since 2000, road construction by the central government, typically
of roads that run across different provinces, has been negligible (Chart 1). Following
the political crisis in 1998, when former strongman Soehartos fall from power raised
the risk of secessionist movements in resource-rich provinces, Indonesia introduced
regional autonomy. This radically decentralised the central governments powers and
responsibilities to 33 provincial and 497 municipal governments.
Table 2: Land area, length of roads, and length of railways in selected Asian
countries (2009)

Land area
(000 km
2
)
Roads*
(000 km)
Road
coverage (%)
Railways
(000 km)
China 9,570 3,860 40 86
India 2,973 3,320 112 64
Indonesia 1,905 473 25 9
Thailand 517 212 41 5
Malaysia 329 100 30 2
Philippines 300 202 67 1
* Including highways and toll roads
Sources: CIA World Factbook, CEIC, Standard Chartered Research

Chart 1: Road development by level of government authority
Excluding expressways and toll roads

0
100
200
300
400
500
Before
1968
1974 1979 1984 1989 1994 1999 2002 2003 2004 2005 2006 2007 2008 2009
'
0
0
0

k
m
National (central government) Provincial Municipal

Source: Ministry of Public Works, Central Agency of Statistics
Indonesias road network has
hardly expanded in the past decade
due to land clearance difficulties
Road and railroad systems are
overstretched in a country with
almost 2mn square kilometres of
land area

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14 February 2011 4
However, the single biggest hurdle to road construction is land clearance. In socialist
countries like China, locations can be quickly prepared for infrastructure projects
because land is owned by the state. However, in a democracy like Indonesia,
relocating people who are living on land needed for projects even squatters, who
have no legal right to live there requires government compensation that must be
approved by the parliament and the state auditor.

Moreover, the governments infrastructure blueprints are often accessible to
politically connected land speculators, who buy the potentially affected land from
farmers in order to get much higher prices selling it to the government. Even if 90%
of the land for a planned road has been acquired, the un-cleared 10% can prevent
the project from being built. Parliament is currently in the process of passing a land
acquisition law that will give the state the power to forcibly buy land for public
projects; President Yudhoyono is expected to sign this into law in 2011. While this
gives the state more legal protection, landowners can still contest such purchases
through the courts.

In addition to project implementation hurdles, there is a mismatch between the
distribution of roads and the concentration of economic activity. Only about 58% of
Indonesias roads are on Java and Sumatra islands, which contribute around 81% of
GDP (see Charts 2 and 3). Sumatra is larger than Java in terms of area (25% versus
7% of Indonesias total land area) and has more roads (34% of the total versus
Javas 24%). However, about 59% of Indonesias population lives on Java, which
contributes 58% of national GDP, while Sumatra contributes only 23%. Meanwhile,
the lack of proper road systems in other resource-rich but less populated islands
(such as Kalimantan, Sulawesi and Papua) prevents their gross regional domestic
product (GRDP) from reaching their potential growth rates.

Poor road infrastructure creates continuous acute traffic congestion in Jakarta,
Indonesias capital. Jakarta contributes about 13% of GDP and accounts for around
50% of deposits and 49% of loans in the countrys banking system. However, road
development in the city has been much slower than growth in the number of cars and
motorcycles (see Chart 4).

Chart 2: Distribution of roads by island, including toll
roads (2009)
Chart 3: GDP distribution by island (2009)
24%
33%
11%
17%
5%
10%
Java Sumatra Kalimantan Sulawesi Papua Other islands

58%
24%
9%
5%
1%
3%
Java Sumatra Kalimantan Sulawesi Papua Other islands
Sources: Central Agency of Statistics, Toll Road Management Agency
(BPJT), Standard Chartered Research

Source: Central Agency of Statistics
The national road system is still
concentrated in J ava and Sumatra

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14 February 2011 5
From 2005-09, the number of motorcycles rose by 24% annually and the number of
cars rose by 22%, while the distance of usable roads actually declined from 7,226km
in 2005 to 6,506km in 2009. According to the Ministry of Transportation (MoT), the
economic cost of traffic congestion in Jakarta is IDR 5.5trn (USD 0.6bn) per year,
while the cost of air pollution is IDR 2.8trn (USD 0.3bn). The ministry also estimates
that 63% of Jakartas residents spend 20-30% of their income on transport.

Toll roads
The government aims to expedite toll-road development to promote broader
economic development. Toll roads are expected to cut intra-city transport times,
cutting average transport costs, allowing the smooth distribution of goods, and
facilitating economic activity. Indonesia currently has a total of about 742km of toll
roads (see Table 3). According to the government, the ideal distance is 3,088km.
Therefore, 2,337km of new roads have to be built, at an estimated cost of IDR
216.8trn (USD 24bn). Most toll-road investments are expected to be funded by
private investors, as the government has said that it can only build 70.5km, or 2.6%,
of the planned toll roads. Before building toll roads, private investors must bid for a
toll-road concession from the government (known as a PPJT).

Table 3: Toll-road developments in Indonesia (as of September 2010)
Status
Number of
routes
Length (km)
Investment cost
(IDR trn)
Existing 28 741.9 -
PPJT granted* 20 768.7 66.8
In the process of obtaining PPJT 4 154.2 10.3
In preparation for bidding 11 475.4 34.2
To be built by the government 3 70.5 6.6
Other planned toll roads 20 877.1 99.1
Total target 86 3,087.8 216.8
* Toll-road concession agreement with the government;
Source: Toll Road Management Agency (BPJT)

Chart 4: Population of cars and motorcycles vs. distance of roads in Greater
Jakarta

0
2
4
6
8
2005 2006 2007 2008 2009
m
i
l
l
i
o
n
s
0
2,000
4,000
6,000
8,000
k
i
l
o
m
e
t
r
e
s
Registered motorcycles Registered cars Length of roads (RHS)

Sources: Central Agency of Statistics, Indonesian Police, Toll Road Management Agency
(BPJT), Standard Chartered Research
Ideally, Indonesia needs to extend
its road network by almost 2,400km,
triple the current capacity
Congestion in the capital, J akarta,
creates significant opportunity
costs for the national and regional
economies

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14 February 2011 6
61% of Indonesias existing toll roads are in West Java and Banten (two provinces
bordering Jakarta that together contribute 14% of Indonesias GDP see Chart 5).
Toll-road projects planned for the near future (those in possession of PPJT) will also
be concentrated in these two provinces.

The government also targets the completion of a trans-Java toll-road system that will
link the western and eastern edges of the island by 2014. This network will span
1,193km and will connect Merak port (in Banten province) to Banyuwangi port (in
East Java). As of September 2010, only about 9% of the targeted length of the trans-
Java toll roads had been completed.

The central government is currently prioritising the development of 10 sections of the
trans-Java toll-road system, stretching 652km from Cikampek in West Java to
Surabaya in East Java (see Chart 6). This road network should provide a better
alternative to the overcrowded conventional Northern Java coastal (Pantura) road
system. As of early October 2010, the Ministry of Public Works had cleared about
Chart 5: Distribution of operating toll roads and toll-road projects that have
obtained PPJT (as of September 2010)

0
200
400
600
800
West Java &
Banten
Jakarta Central Java &
Yogyakarta
East Java Sumatra Sulawesi
k
m
Operating Obtained PJPT and under construction Obtained PPJT but yet to start construction

Sources: Toll Road Management Agency (BPJT), Standard Chartered Research

Chart 6: Existing and planned toll roads in Java (as of September 2010)
Sources: Toll Road Management Agency (BPJT), Standard Chartered Research
Existing toll roads and planned toll-
road construction are still
concentrated in West J ava and
Banten

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14 February 2011 7
36% of the land for the 10 sections of the network at a cost of IDR 1.7trn (USD
0.2bn), but another IDR 3.2trn (USD 0.4bn) is required to complete the land
acquisition process in 2011. The second section (Palimanan-Kanci in West Java) is
already operating; the investment cost to build the remaining sections (excluding the
land acquisition cost, which is allocated in the national budget) is estimated to reach
IDR 31.8trn (USD 3.5bn).

Bridges
As is the case for roads, the central government has been passive in building new
bridges over the past decade. In fact, new bridge development has dropped
significantly in terms of both numbers and length (see Charts 7 and 8). These
declines were mainly caused by sharp cuts in government infrastructure spending, in
particular during the tight budget years following the Asian financial crisis, when the
government was placed under IMF supervision. As of end-2008, 13% of central
government-owned bridges were heavily damaged or in complete disrepair. In terms
of length, 17% of the 333km of national bridges were heavily damaged or
dysfunctional in 2008.

Given that Indonesias resource-rich islands namely Sumatra, Kalimantan, and
Papua have many rivers, maintaining existing bridges and building new ones is
crucial to ensuring smooth transport of mining and forest products. Using bridges
instead of river transport significantly reduces transport costs and time. Well-
maintained bridges therefore help to promote economic growth and reduce logistical
bottlenecks that often result in supply-side inflationary pressures. Moreover, without
adequate support from bridges, the economic impact of developing new road
systems will be less than optimal.

In addition to conventional bridges owned by the central government and local
governments, Indonesia has one toll bridge: the 5.4km Suramadu Bridge connecting
Surabaya and Bangkalan on Madura Island (both in East Java province). It was
constructed from 2003-09 and is the countrys first inter-island bridge. The bridges
construction cost was IDR 4.5trn (USD 440mn), financed by the central government
and the East Java provincial government (which together contributed about 55% of
the total funding) and the Chinese government (the remaining 45%, which came in
the form of a soft loan). State-owned company Jasa Marga was appointed to operate
the Suramadu Bridge.

Chart 7: Number of new national bridges built Chart 8: Length of new national bridges built
0
1,000
2,000
3,000
4,000
5,000
6,000
Before 1970 1970-79 1980-89 1990-99 2000-08
Sumatra Java Kalimantan
Sulawesi Bali, NTB, and NTT Maluku
Papua

0
20
40
60
80
100
120
140
Before 1970 1970-79 1980-89 1990-99 2000-08
k
m
Sumatra Java Kalimantan
Papua
Source: Ministry of Public Works

Source: Ministry of Public Works
Construction of new bridges and
maintenance of existing ones is
crucial to supporting land transport,
which is much cheaper than river
transport

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14 February 2011 8
The government plans to build the 29km Sunda Strait Bridge connecting Banten
province in Java and Lampung province in Sumatra by 2030. Total funding needed
for the bridge is expected to reach IDR 140trn, with most of the financing to come
from private investors. The government expects Sunda Strait construction to start in
2013 at the earliest.

Railroads
Trains are a popular mode of transport in Indonesia for both passengers and cargo,
as they can travel faster than other land transport modes. Yet the poor condition of
existing railroads and the slow pace of new railroad construction have resulted in low
quality of service (including delays and, in extreme cases, accidents). We believe
that the construction of new railroads will help to expedite economic growth,
especially if trans-island networks can be built in resource-rich islands outside Java,
such as Sumatra and Kalimantan. The government has identified railroad
construction as a key priority of its transport infrastructure development programme.

Train transport is heavily concentrated in Java, where about 59% of Indonesias
population lives. In 2010, 97% of Indonesias total train passengers were in Java,
while the number of train passengers in Sumatra was very low (see Chart 9). Most
train passengers in Java are commuters living in Jakarta and surrounding cities (the
so-called Jabotabek area); this area accounted for 63% of Javas total train
passengers in 2010. This is understandable given Javas higher population that
Sumatras. Cargo transport, however, is more active in Sumatra than in Java. In
2010, Sumatra accounted for about 80% of the volume of goods transported by train
in Indonesia (see Chart 10).

While the government and parliament passed a law in 2007 to privatise the countrys
railroad network and abolish the monopoly rights of state-owned PT Kereta Api
Indonesia (KAI), the company is still the countrys sole railroad operator. The
government also continues to provide subsidies to PT KAI (for low-income
passengers) under the public service obligation (PSO) in the budget.

As of 2009, Indonesias railroad network totaled 4,819km, compared to 472,406km of
conventional roads and 742km of operating toll roads. Railroad development is
relatively slow, with the network growing by only 1.1% per year on average from
2004-09, versus 4.9% for the road network. The short distance covered by the
Chart 9: Number of train passengers
mn
Chart 10: Amount of goods transported by train
000 tonnes
0
50
100
150
200
250
2006 2007 2008 2009 2010
Java Jabotabek Java non-Jabotabek Sumatra

0
5
10
15
20
2006 2007 2008 2009 2010
Sumatra Java
Sources: Central Agency of Statistics, PT KAI

Sources: Central Agency of Statistics, PT KAI
Passenger train transport is heavily
concentrated in J ava, while cargo
traffic is greater in Sumatra

Special Report

14 February 2011 9
nations rail network is not the only problem. The infrastructure is also old and in poor
condition, with rails often used for more than 25 years (versus 5-10 years maximum
in advanced countries such as Japan).

The MoT is therefore focused primarily on repairing and modernising the countrys
outdated rail infrastructure, including changing old wooden rail sleepers to concrete-
based sleepers. The ministry is also expanding the network, albeit at a slow pace,
including the construction of double-track railways from Jakarta to Surabaya in East
Java (expected to be completed by 2014).

The railroad system is still concentrated in Java, the only island in Indonesia with a
trans-island network (see Chart 11). Railroads in Sumatra were built more
sporadically and are designed to transport goods (in particular coal) from mining sites
to seaports (see Chart 12). The government plans to build a trans-Sumatra railroad
system linking all provinces on the island, due for completion by 2020. It faces
difficulties in meeting the financing requirements for the project, although some
investors from China have expressed interest in participating.

Most of Indonesias existing railways are owned by the government through the MoT.
As in the case of toll roads, financing and land clearance are the main obstacles to
constructing new railroads. To address financing problems, the government is inviting
private investors, local governments and co-operatives to participate in the railway
development programme.

Chart 13 shows the procedures an investor needs to go through in order to develop
public railroads. Different levels of railroads (national, provincial and local) require
construction permits and operating licences from the different levels of government.
All types of railroad construction and operation must also technically be approved by
the MoT. As Chart 14 shows, similar procedures apply for investors wanting to build
non-public special-purpose railroads.

Some private investors have expressed interest in investing in new railroad projects.
These projects include special-purpose tracks for transporting coal (Muara Wahau to
Bengalon in East Kalimantan, Palaci to Bangkuang in Central Kalimantan, and
Tanjung Enim in South Sumatra to Srengsem in Lampung); the Sukarno-Hatta airport
railway linking the international airport to Jakarta; and a mass rapid transit system in
Jakarta, financed by the Japan International Cooperation Agency and expected to
start operating in 2016.

The government has liberalised the
railroad construction business in
order to encourage private
investment

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14 February 2011 10
Chart 11: Existing railroad system in Java
Sources: Directorate General of Railways of the Ministry of Transportation, Standard Chartered Research

Chart 12: Existing railroad system in Sumatra
Sources: Directorate General of Railways of the Ministry of Transportation, Standard Chartered Research

Special Report

14 February 2011 11
Chart 13: Procedures to invest in the development of public railroads

Natioa

Minister of Transportation Minister of Transportation Minister of Transportation
Governor
Governor
(with technical approval from the
Minister of Transportation)
Governor
Mayor / Regent
Mayor / Regent
Mayor / Regent
Investor
National railroad
Provincial railroad
Local railroad
Business registration Construction permit Operating licence
Source: Ministry of Transportation

Chart 14: Procedures to invest in the development of special-purpose railroads

Minister of Transportation Minister of Transportation
Governor
Governor
Mayor / Regent
Mayor / Regent
Operating licence Construction permit Investor
National railroad
Provincial railroad
Local railroad


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14 February 2011 12
Seaports
Because Indonesia is an archipelago, with total sea area of about 3mn square
kilometres and 17,508 islands, sea transport is crucial from both an economic and a
defence point of view. Yet in our view, Indonesia lacks seaports to cater efficiently to
inter-island and international trade. Indonesian seaports are relatively small and
outdated compared to other countries in the South East Asia. Improving and
upgrading these seaports will help to accelerate economic growth, especially in the
eastern part of Indonesia, where land transport infrastructure is limited.

The MoT is responsible for co-ordinating sea transport and managing non-
commercial ports, but commercial ports are managed by the state-owned companies
Pelindo I, II, III, and IV (which are under the jurisdiction of the Ministry of State
Owned Enterprises). Indonesias shipping sector is considered a competitive market,
with domestic and foreign shipping companies free to enter. The number of shipping
companies operating in Indonesia, transporting both passengers and cargo, rose
from 1,269 in 2005 to 1,754 in 2009.

As Chart 15 shows, the number of sea transport passengers fluctuates sharply from
year to year in response to factors including domestic GDP growth, crude oil prices,
Chart 15: Number of passengers departing by sea
transport (mn)
Chart 16: Loaded sea cargo
mn tonnes
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008
-30
-15
0
15
30
45
%
Number of passengers Growth (RHS)

0
100
200
300
400
500
2000 2001 2002 2003 2004 2005 2006 2007 2008
Inter-islands International
Sources: Central Agency of Statistics, Port Administration Office

Sources: Central Agency of Statistics, Port Administration Office

Chart 17: Distribution of seaports in Indonesia by class
2009
Chart 18: Distribution of seaports in Indonesia by island
2009
5%
31%
57%
2%
1%
3%
1%
Prime
Class I
Class II
Class III
Class IV
Class V
Under supervision of the Ministry of Transport

12%
23%
7%
10%
9%
18%
21%
Java Sumatra Kalimantan
Papua
*Includes commercial and government-managed seaports;

Indonesias seaport capacity still
lags behind ASEAN peers, but its
development is crucial considering
that the country has over 17,000
islands

Special Report

14 February 2011 13
and airfares. Our study reveals that passenger sea transport growth has negative
correlations with both oil prices and the number of air passengers (which implies
some degree of substitutability between sea and air transport for some passengers),
but has a positive correlation with domestic GDP growth. Meanwhile, sea cargo
transport activity has been relatively stable, except in 2007, when it surged as rising
oil prices pushed up the cost of air cargo transport (see Chart 16).

As of 2009, Indonesia had 111 commercial seaports operated by Pelindo I, II, III, and
IV and 534 seaports managed by the government, ranging from Prime class (the
highest ranking) to Class IV. Although Indonesia has 645 operational seaports, only
four are classified as Prime (Port Tanjung Priok Jakarta, Port Tanjung Perak
Surabaya, Port Belawan Medan and Port Makassar) and 14 are Class I (see
Chart 17). While some lower-class seaports can still accommodate large-tonnage
ships, Prime and Class I seaports are considered suitable to cater to international
shipping activity.

Chart 19: Distribution of unloaded inter-island sea cargo
by island (2008)
Chart 20: Distribution of loaded inter-island sea cargo
by island (2008)
Java Sumatra
Kalimantan Sulawesi
Bali, NTB, and NTT Maluku
Papua

Java Sumatra
Kalimantan Sulawesi
Bali, NTB, and NTT Maluku
Papua


Chart 21: Strategic seaports in Indonesia
Only a few Indonesian seaports are
considered suitable to cater for
international shipping activity

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14 February 2011 14
Seaports serve both passengers and cargo on inter-island routes. They play a
particularly vital role in eastern Indonesia, in particular Papua, where the road system
does not connect all cities and towns (see Chart 18). However, Kalimantan
(especially South Kalimantan) is the countrys most active hub for sea cargo activity
(see Charts 19 and 20). South Kalimantan has only two commercial seaports, but the
province accounted for 34% of Indonesias sea cargo loaded for inter-island trade
and 38% of sea cargo loaded for international trade in 2008, according to the Central
Agency of Statistics. Most cargo transported through South Kalimantan and East
Kalimantan consists of natural resource-based products such as coal and timber.

In its medium-term plan to 2014, the MoT focuses on upgrading the countrys 25
strategic seaports (Chart 21). The ministry aims to enhance the capabilities of these
seaports to service international trade, while reducing Indonesias dependence on
international ports in neighbouring countries. The ministry also plans to strengthen
123 feeder ports to support the 25 strategic seaports and facilitate inter-island trade
within Indonesian waters.

Among the 25 strategic ports, Port Tanjung Priok and Port Tanjung Perak
(Indonesias two largest seaports) are already overloaded and undergoing
expansion. The countrys other main seaports can handle current cargo flows but
also need to be expanded in the medium term (Table 4). Moreover, compared to
ASEAN peers, Indonesias main seaports are relatively small and outdated. Tanjung
Priok, for instance, can only cater to vessels of up to 50,000 deadweight tones
(DWT); in comparison, the maximum DWT levels are 150,000 for the Port of
Singapore, 130,000 for Port Klang in Malaysia, and 120,000 for Laem Chabang port
in Thailand.

Table 4: Container cargo handling capacity of Indonesias six main seaports
Port name
Estimated optimum
capacity of container
flows per year
(million TEUs*)
Number of container
flows in 2009
(million TEUs*)
Development plan
Tanjung Priok (Jakarta) 4.0 4.2
Capacity expansion to 9.5mn TEUs of container
flows; construction started in late 2010, expected
to be completed in 2020
Tanjung Perak Surabaya
(East Java)
2.0 2.4
Development of Socah port in Madura (East Java)
as part of Tanjung Perak expansion
Tanjung Emas Semarang
(Central Java)

1.0 0.4 Terminals can still handle current container flows
Belawan Medan
(North Sumatra)
0.6 0.3 Capacity expansion to 1mn TEUs by 2013
Makassar
(South Sulawesi)
0.5 0.4
Terminals can still handle current container flows
but are expected to be overloaded by 2013
Banjarmasin
(South Kalimantan)
0.3 0.2 Capacity expansion to 0.7mn TEUs by 2014
*Twenty-foot equivalent units Sources: Standard Chartered Research, Warta Gafeksi, various media reports
The government is aiming to
upgrade 25 strategic seaports by
2014

Special Report

14 February 2011 15
Capacity additions are not the only improvements needed at Indonesian seaports.
Operational efficiency and quality of service also need to be enhanced. A survey
conducted by the ASEAN Port Association in 2008 shows that the efficiency of Port
Tanjung Priok and Port Tanjung Perak, as measured by vessel berthing times and
waiting hours, is relatively low compared to other major ASEAN seaports (see
Table 5). The two ports also scored poorly in terms of quality of service, as measured
by the availability of port workers and equipment, the availability of a cargo location
system, and clear procedures for settling claims on losses or damages.

To modernise and increase the capacity of existing seaports, the government and
parliament passed a sea transport law in 2008 that encourages private investors,
local governments and co-operatives to participate in seaport development. Investors
can choose to invest through the public-private partnership (PPP) model, establishing
joint venture companies with Pelindo or buying shares in Pelindo once Pelindo is
listed in the stock market. Chart 22 shows the procedures investors need to follow to
develop commercial ports under the PPP scheme; Chart 23 shows the procedures
for special port terminals. The government has taken measures to improve the
efficiency and service quality of the countrys strategic seaports, including ordering all
Prime and Class I seaports to operate 24 hours a day, seven days a week (this
started with the four Prime seaports in 2010) and introducing the so-called National
Single Window for electronic processing of export-import documents in January
2010.

Table 5: Comparison of competitiveness among major ASEAN seaports in handling cargo
ASEAN-wide Port Network Survey 2008

Container
cargo handling
(per gang
hour)
Vessel
berthing time
(hours)
Vessel waiting
time
(hours)
Availability of
port workers &
equipment
upon request
Availability of
cargo location
system
Availability of
procedures for
settling claims
on losses or
damages to
life / properties
Tanjung Priok
(Indonesia)
23.3 boxes 50-57 2
Not always
available during
peak times
No

No
Tanjung Perak
(Indonesia)
10 boxes 65 2
Shortage of
available
equipment
No No
Laem Chabang
(Thailand)
35 boxes 8 0.4 Yes Yes Yes
Bangkok (Thailand) 21.3 boxes 17.7 1.8 Yes Yes Yes
Manila
International
Container Terminal
(Philippines)
28 boxes
No answer
given
No answer
given
Yes No Yes
Subic (Philippines) 27 moves 7 1-1.5 Yes
No answer
given
Yes
Singapore 31.3 boxes
Varies from
vessel to vessel
2 Yes Yes Yes
Source: ASEAN Ports Association
In addition to capacity expansion,
the quality of service and
operational efficiency of Indonesias
seaports need to be improved

Special Report

14 February 2011 16
Chart 22: Procedures to invest in the development of commercial seaports

Minister of
Transportati
on
Minister of
Transportati
on
Minister of
Transportati
on
DGST**
Minister of
Transportati
on
Minister of
Transportati
on
Minister of
Transportati
on
DGST** DGST**
Minister of
Transportati
on
Governor Governor Governor Governor
Minister of
Transportati
on
Minister of
Transportati
on
Governor DGST**
Minister of
Transportati
on
Mayor /
Regent
Mayor /
Regent
Mayor /
Regent
Mayor /
Regent
Minister of
Transportati
on
Minister of
Transportati
on
Mayor /
Regent
DGST**

Main port
Collector /
hub port
Feeder
port
Investor
Location
license
Master
plan
license
DLKR &
DLKP*
license
Cons-
truction
license
Opera-
ting
license
Internati
onal
trade
license
Dredging
reclama-
tion
license
24 hrs
operation
license
Container
terminal
license
Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation

Chart 23: Procedures to invest in the development of special seaports

Minister of
Transportation
DGST
Minister of
Transportation
Minister of
Transportation
DGST
Minister of
Transportation
Minister of
Transportation
Governor Governor Governor Governor
Minister of
Transportation
Minister of
Transportation
Mayor / Regent Mayor / Regent Mayor / Regent
Mayor /
Regent
Minister of
Transportation

Investor
Location licence
(incl. spatial plan
& safety
compliance

Construction
licence
Operating
licence
Dredging
reclamation
licence
24 hrs
operation
licence
Container
terminal
licence
International
Inter-province
Intra-province
Notes: * DLKR = working area plan; DLKP = plan for area of interest; ** DGST = Director General of Sea Transport under the Ministry of Transportation

Special Report

14 February 2011 17
Airports
Air transport is a faster but more expensive alternative to sea transport on inter-island
and international routes. Following government deregulation of air transport in 1999,
the passenger transport business grew significantly particularly domestic air travel,
where the annual number of passengers grew by 34% on average from 2000-04
(Chart 24). The emergence of low-cost carriers drove rapid passenger growth during
this period. Yet growth slowed from 2005, possibly due to rising crude oil prices (which
increased ticket prices) and the increasing number of domestic air traffic incidents (50
cases in 2005, 85 in 2006, 62 in 2007, 81 in 2008 and 102 in 2009). According to the
MoT, Indonesia currently has 15 airlines operating scheduled flights and 30 charter
airlines.

Indonesias cargo air transport business is more volatile than the passenger business.
There are currently two scheduled cargo carriers (one domestic and one international)
and three domestic non-scheduled (charter) cargo carriers operating in the country. As
Chart 25 shows, fluctuations in air cargo volume are determined more by domestic
cargo than by international cargo, which is relatively stable. Growth in loaded air cargo
is driven by factors including oil prices (which has a negative correlation with the
amount of loaded cargo) and domestic GDP growth (positive correlation with the
amount of loaded cargo).

Air transport (both passenger and cargo) is concentrated in Java, given that 59% of
Indonesias population lives on the island and that Indonesias two biggest airports,
Sukarno-Hatta and Juanda, are located there. In 2009, airports in Java accounted for
about 51% of Indonesias domestic air passenger departures, 58% of international air
passenger departures, 45% of domestic air cargo departures, and 81% of
international air cargo departures.

As of 2009, there were 27 international airports and 163 domestic airports in
Indonesia, ranging from Class I (the highest) to Class V (the lowest) and including
special-purpose privately operated airports under the supervision of the MoT (see
Charts 26-28). All commercial public airports are currently operated by the state-
owned PT Angkasa Pura I and Angkasa Pura II. Non-commercial public airports are
operated by the MoT, non-public special-purpose airports are operated by state-
owned and private companies, and military airports are operated by the air force.
Chart 24: Number of departed aircraft passengers (mn) Chart 25: Number of loaded air cargo (000 tonnes)
0
10
20
30
40
50
60
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Domestic International

0
50
100
150
200
250
300
350
400
450
500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Domestic International
Sources: Central Agency of Statistics, PT Angkasa Pura I and II,
Ministry of Transportation

Sources: Central Agency of Statistics, PT Angkasa Pura I and II,
Faster income growth will result in a
surge in demand for domestic and
international air transport in the
coming years
Air passenger and cargo transport
activity is still concentrated in J ava

Special Report

14 February 2011 18
About 56% of Indonesias airports are located in the eastern part of the country,
particularly in Papua (36% of total airports), where air transport is the only way to reach
the interior of the island. The airports in Papua and neighbouring Maluku are small,
mostly Class IV or below. As air is the only way to transport goods, cities and towns in
Papua tend to have higher food prices (in particular for rice, spices and vegetables)
than their counterparts in western Indonesia.

Most of the countrys main airports are already overloaded in terms of handling
passengers, so capacity expansion is badly needed (see Table 6). In 2009, for
example, Jakartas Sukarno-Hatta Airport, the countrys largest, had to accommodate
69% more passengers than its optimum capacity. The most overloaded of the major
airports is Polonia Airport in Medan (North Sumatra), which is only designed to
accommodate 900,000 passengers but catered to 5mn passengers in 2009. Some
major airports are also overloaded in terms of cargo handling, and their capacity
must be urgently expanded (see Table 7).

Chart 26: Distribution of airports in Indonesia by class*
2009
Chart 27: Distribution of airports in Indonesia by island
2009
11%
10%
20%
28%
7%
24%
Class I
Class II
Class III
Class IV
Class V
Under supervision by the Ministry of Transportation

7%
15%
13%
11%
10%
9%
35%
Papua
*Includes commercial and government-run airports;


Chart 28: Main international airports in Indonesia
Airports play a crucial role in inter-
and intra-island transport in eastern
Indonesia
Most of Indonesias main airports
are already overloaded in terms of
passenger and cargo handling

Special Report

14 February 2011 19
Table 6: Number of passengers and optimum capacity of Indonesias seven main airports
Airport name
Number of
passengers* in
2009
(million)
Estimated optimum
handling capacity
(million passengers
pear year*)
Development plan
Sukarno-Hatta Tangerang
(Banten)
37.1 22.0
Capacity expansion to 60mn passengers a year
by 2015
Juanda Surabaya
(East Java)
10.6 7.0
Capacity expansion to 14mn passengers per year
starting in 2011 by re-opening old terminals
Hasanuddin Makassar
(South Sulawesi)
5.1 7.0
Completed upgrade and expansion in 2008;
current capacity is able to handle passengers
Ngurah Rai Denpasar
(Bali)
9.6 6.5 Capacity expansion to 13mn passengers by 2013
Polonia Medan
(North Sumatra)
5.0 0.9
To be replaced by Kuala Namu Airport (optimum
capacity of 8mn passengers) by 2012
Sepinggan Balikpapan
(East Kalimantan)
4.0 1.5
Capacity expansion to 10mn passengers;
construction period from 2011-15
Adi Sucipto Yogyakarta
(Special Region of
Yogyakarta)
3.2 1.0
Bidding process for project to expand capacity to
2.5mn passengers started in 2010
* Includes passengers arriving at, departing from or transiting through the respective airport;
Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research

Table 7: Cargo flows and cargo-handling capacity of Indonesias seven main airports
Airport name
Cargo handled in
2009
(tonnes)
Estimated optimum
cargo-handling
capacity per year*
(tonnes)
Development plan
Sukarno-Hatta Tangerang
(Banten)
433,180 300,000
Capacity expansion to 1mn tonnes a year by
relocating cargo terminals from the east side of
the airport to the west side; project to start in 2016
Juanda Surabaya
(East Java)
61,871 120,000
Current cargo terminals have sufficient capacity to
handle cargo flows
Sultan Hasanuddin
Makassar
(South Sulawesi)
32,420 60,000
Construction of additional temporary cargo
terminal was completed in 2010, expanding total
optimum annual capacity to 60,000 tonnes of
cargo; current cargo terminals can handle cargo
flows
Ngurah Rai Denpasar
(Bali)
64,924 50,000
Capacity expansion by building an additional
6,000 square metre international cargo terminal
that will expand total optimum capacity to around
100,000 tonnes of cargo per year by 2013
Polonia Medan
(North Sumatra)
34,837 10,000
To be replaced by Kuala Namu airport (optimum
cargo capacity of 65,000 tonnes per year) by
2012
Sepinggan Balikpapan
(East Kalimantan)
28,978 35,000
Current capacity can still handle cargo flows;
Sepinggan Airport has been designated by the
Ministry of Transportation as one of 14 airports to
be upgraded to international cargo airports by
2015
Adi Sucipto Yogyakarta
(Special Region of
Yogyakarta)
11,209 5,000
Provincial government of the Special Region of
Yogyakarta plans to build new international
terminal in Kulon Progo to be started by 2020
* Includes passengers arriving at, departing from or transiting through the respective airports;
Sources: PT Angkasa Pura II Annual Report, media reports, Standard Chartered Research

Special Report

14 February 2011 20
Sukarno-Hatta Airport, Indonesias largest airport, lags behind major airports in other
ASEAN-5 countries in terms of its capacity to handle passengers and cargo (see
Table 8). Sukarno-Hatta Airports optimum passenger capacity is only about 30% of
Singapores Changi Airport and 50% of Bangkoks Suvarnabhumi Airport. Meanwhile,
Sukarno-Hatta Airports optimum cargo-handling capacity is only 10% of its
counterparts in Singapore and Thailand.

Financing and land clearance issues are the two main hurdles faced by PT Angkasa
Pura in upgrading and expanding existing commercial airports and building new
ones. The government sees private-sector investment in airports as one solution to
the financing problem. To facilitate such investment, the government and parliament
passed an aviation law in 2009 that allows private investors to invest in airport
development, either through PT Angkasa Pura (by forming joint ventures or buying
shares once PT Angkasa Pura I and II are listed on the stock market) or by directly
developing new airports under the PPP scheme.

To develop a new public airport, an investor must first obtain a location licence from
the MoT, signed by the minister. This licence approves proposals for the master plan,
working area (DLKR), area of interest (DLKP), safe operation area (KKOP), and
noise pollution levels (Chart 29). Once the location licence is obtained, the investor
must obtain a construction licence from the MoT (also signed by the minister). When
construction is completed, the investor requests either registered status or an Airport
Operation Certificate (AOC); again, this must be signed by the minister. Registered
status is given to airports that can cater to planes with maximum capacity of 30
passenger seats or a maximum weight of 5,700kg, and that meet particular
requirements on personnel, facilities, and airport operation procedures. An AOC is
granted to an airport that can handle planes with maximum capacity of more than 30
passenger seats or a maximum weight greater than 5,700kg, and has met
requirements on personnel, airport operation procedures, and flight operation safety
management. Special-purpose airports are built by companies with a special need for
their own airports, i.e., mining companies that need to transport cargo or staff by air.

The required procedures for investing in the development of special-purpose (non-
public) airports are shown in Chart 30.

In its PPP Book 2010, the government gave private investors opportunities to invest
in the development of seven airports through the PPP scheme. The MoT estimates
Table 8: Comparison of major ASEAN airports (2010)

Estimated optimum
number of passengers
handled per year
(millions)
Estimated optimum
amount of cargo handled
per year
(tonnes)
Sukarno-Hatta (Indonesia 22.0 300,000
Ninoy Aquino
(Philippines)
25.0 600,000
Kuala Lumpur
(Malaysia)
40.0 1,200,000
Suvarnabhumi
(Thailand)
45.0 3,000,000
Changi (Singapore) 73.0 3,000,000
Sources: PT Angkasa Pura II, Suvarnabhumi Airport, Changi Airport, media reports, Standard
Chartered Research
Sukarno-Hatta Airport lags behind
the main airports in other ASEAN-5
countries
The government and the parliament
issued a new aviation law to
facilitate private-sector investment
in airport construction

Special Report

14 February 2011 21
that about IDR 7.5trn is needed to build these airports, which are targeted for
completion by 2014. They include Kertajati Airport in Majalengka and Banten Airport
(both in West Java), New Bali Airport, and New Samarinda Airport (East Kalimantan).

The government is also continuously building new airports. The MoT has allocated
IDR 236bn (USD 26.2mn) to build 14 new airports in 2011. Most of them are small-
scale domestic airports (Class IV and V) and are located in the less developed
eastern part of Indonesia.

The government also aims to upgrade Class I airports to Prime-class international
airports. In its medium-term plan, the MoT has designated 14 airports to become
international cargo airports by 2015. The execution of these projects is in the hands
of PT Angkasa Pura I and II and private investors.

Given slow progress in upgrading Sukarno-Hatta and its other international airports,
Indonesia is less prepared to implement the ASEAN open-skies agreement, which
will take effect by 2015. The MoT has stated that Indonesia will only open its five key
international airports to ASEAN member carriers in 2015, while keeping other airports
closed until they are ready to be opened up. The countrys five international airports
are Sukarno-Hatta, Juanda, Kuala Namu, Ngurah Rai and Hasanuddin.

Chart 29: Procedures to invest in the development of public airports

Investor
Location licence
(incl. master plan, DLKR, DLKP,
KKOP, and noise pollution)

Construction licence
Airport
operation certificate or
registered status


Chart 30: Procedures to invest in the development of special-purpose airports

Investor

Location licence
Special airport
construction
licence
Special airport
operation
certificate


Special Report

14 February 2011 22
Electricity
Rapid infrastructure development to support economic growth is also needed in the
electricity sector. Although Indonesias electricity production is the highest in South
East Asia, it is still relatively low compared to China and India. While Indonesias
population is almost of four times Thailands, Indonesias electricity production is only
slightly higher than Thailands (see Table 9). Moreover, according to the state-owned
electricity company PLN (Perusahaan Listrik Negara), the electrification ratio (the
ratio of the number of households that are PLN customers to the total number of
households in Indonesia) stood at only 63.8% in 2009. Since PLN is the only
company that sells electricity directly to end customers, this ratio is a good proxy for
the percentage of households with access to electricity.

Households are the biggest source of electricity demand in Indonesia. In 2009,
40.8% of electricity demand came from household consumers, 34.3% from industry,
and 18.5% from businesses (see Chart 31). As households are the biggest
consumers of electricity in Indonesia, electricity tariff hikes are politically sensitive, as
they reduce households purchasing power. In general, electricity tariff hikes have a
negative impact on the economy (both inflation and GDP growth) either via direct
transmission to household consumers or indirectly through higher production costs
for industries and businesses, which push up inflation. When the government hiked
basic electricity tariffs by 10% on average in July 2010, inflation spiked from 0.3%
m/m (4.2% y/y) in May to 1.0% m/m (5.1% y/y) in June and 1.6% m/m (6.2% y/y) in
July.

Table 9: Electricity production and consumption in 2008 (000 GWh)
Country Production (P) Consumption (C)
Domestic surplus or deficit
(= P C)
China 3,221 3,017 205
India 786 601 185
Indonesia 149 129 20
Thailand 139 132 7
Malaysia 92 89 3
Philippines 57 50 8
Singapore 39 37 2
Sources: US Energy Information Administration, PLN Annual Report 2009

Chart 31: Electricity demand by type of consumer (2009) Chart 32: Electricity demand by island (2009)
42%
34%
18%
6%
Households Industries Businesses General public

77%
12%
3%
4%
2%
1%
1%
Sulawesi Bali NTB and NTT
Maluku and Papua
Source: PLN Annual Report 2009

Source: PLN Annual Report 2009
Further investment in electricity
generation and distribution is
crucial to raising living standards
and attracting foreign investors to
set up manufacturing capacity

Special Report

14 February 2011 23
The countrys electricity market is concentrated in Java, which accounted for around
77.6% of national electricity demand (Chart 32) and 78.7% of national electricity
production in 2009. Electricity consumption is heavily concentrated around Jakarta.
Among the provinces in Java, West Java and Banten (excluding Tangerang), which
are adjacent to Jakarta, have the highest demand for electricity (25.3% of national
demand), followed by Jakarta and Tangerang (24.3%).

As Indonesias economy and population continue to grow, PLN estimates that
electricity demand will grow by 9.2% a year on average, almost doubling from
134,581GWh in 2009 to 334,400GWh in 2014. PLN also estimates that Indonesia
needs to raise electricity production by an average of 3,000MW per year to cope with
increasing demand. While Indonesia has a total electricity surplus of roughly
20,000GWh per year (see Chart 33), in reality, many areas of the country (including
Jakarta) suffer from electricity deficits that lead to blackouts and rationing of
electricity supply. Electricity infrastructure development, in particular new power
plants, is therefore badly needed to ensure sufficient and steady future electricity
supply.

Chart 33: Electricity production and consumption in Indonesia (GWh)

0
40,000
80,000
120,000
160,000
2002 2003 2004 2005 2006 2007 2008 2009
Production (P)
Consumption (C)
Domestic surplus ( = P - C)

Sources: PLN Annual Report 2009, Standard Chartered Research

Chart 34: Electricity production in Indonesia by supplier Chart 35: Energy sources of PLNs electricity production
0%
20%
40%
60%
80%
100%
2001 2002 2003 2004 2005 2006 2007 2008 2009
Produced by PLN from leased generators
Purchased by PLN
Produced by PLN's own generators

0%
20%
40%
60%
80%
100%
2005 2006 2007 2008 2009 H1-2010
Coal Oil fuel Natural gas Water Geothermal
Sources: PLN Annual Reports, 2005 and 2009

Sources: PLN Annual Report 2009, Standard Chartered Research
The electricity market is still
concentrated in J ava, especially in
J akarta and neighbouring provinces
Indonesia needs to build new power
plants to cope with increasing
demand

Special Report

14 February 2011 24
PLN alone cannot produce all of the electricity Indonesia needs. Using its own
generators as well as leased generators, PLN accounted for 76.9% of the countrys
total electricity production in 2009, while the rest had to be purchased from
independent power producers, or IPPs (see Chart 34). The role of IPPs has risen
steadily they accounted for 23.1% of national electricity production (sold through
PLN) in 2009, up from 20.5% in 2005 and 13.1% in 2001. As of 2009, there were
22 IPPs operating in Indonesia (10 of them in Java and Bali) with total generating
capacity of 3,997MW. Meanwhile, the share of electricity produced by PLN from
leased generators increased from 1% in 2001 to 3% in 2009.

PLN has tried to reduce its dependence on fuel oil as an energy resource by
diversifying into cheaper production inputs such as coal. In 2009, around 28% of the
electricity produced by PLN was generated by fuel oil, down from 38% in 2005. The
share of coal rose to 36% from 25% over the same period. Natural gas accounted for
24%, water 9% and geothermal 3%; these shares remained roughly unchanged over
the period (see Chart 35).

While the contribution of fuel oil has declined, PLNs operating costs are still sensitive
to changes in oil prices (see Chart 36). As the government still subsidises PLN, rising
oil prices imply increasing government subsidies for electricity, putting pressure on
budget spending. When the average oil price (WTI) surged from USD 74.9/barrel in
2007 to USD 98.6 in 2008, government subsidies for PLN surged from IDR 36.6trn
(USD 4.0bn) to IDR 78.6trn (USD 8.1bn) over the period. As average oil prices
returned to USD 63.8/barrel in 2009, government subsidies for PLN were cut to IDR
53.7bn (USD 5.2bn).

Although Indonesia has abundant coal and natural gas, it is often difficult for PLN to
obtain steady supplies of these resources for the following reasons: (1) not all power
plants are adjacent to natural gas or coal suppliers, and in some cases, the inputs
have to be sent from other provinces; (2) transport difficulties disrupt supply, as inter-
island coal and gas shipping is often affected by poor weather conditions and sea
currents; and (3) PLN must pay high prices for coal and gas purchased from
suppliers, some of which prioritise export sales and will only sell inputs at prices
above domestic market prices.
Chart 36: Fuel cost comparison for PLN and average crude oil price
WTI NYMEX

0
500
1,000
1,500
2,000
2,500
2004 2005 2006 2007 2008 2009 H1-2010
I
D
R

p
e
r

K
W
h
20
40
60
80
100
120
U
S
D

b
b
l
Coal Natural gas
Fuel oil Oil price (RHS)

Sources: PLN H1-2010 investor update, Bloomberg
Coal and natural gas supply
disruptions prevent PLNs power
plants from providing a steady
supply of electricity

Special Report

14 February 2011 25
PLNs electricity-generating capacity has continued to grow in recent years, but at a
slow pace of 2.4% a year from 2000-09 (Chart 37). The companys power-generating
capacity is concentrated in Java and Sumatra, while other islands still suffer from
under-electrification (Chart 38).

PLN plans IDR 66.6trn (USD 0.7bn) of capital expenditure in 2011. Of this, it has set
aside IDR 13.4trn (USD 1.5bn) for electricity infrastructure development (power
plants as well as transmission and distribution infrastructure) in Java and Bali, IDR
6.3trn (USD 0.7bn) for electricity infrastructure in western Indonesia, and IDR 3.7trn
(USD 0.4bn) for electricity infrastructure in eastern Indonesia.

To expedite electricity infrastructure development, the government launched the first
phase of its fast-track electricity development programme in 2006. The objective of
this program is to build 10 coal-fired power plants in Java with a total capacity of
7,520MW, and 26 coal-fired power plants outside Java (10 in Sumatra, five in
Kalimantan, four in Sulawesi, five in East and West Nusatenggara, two in Maluku,
and one in Papua) with total capacity of 2,391MW by 2012. These power plants are
entirely built by PLN and financed from the companys internal funding (15% of the
total funding required) and by the government (via guaranteed loans from state-
owned banks), private national banks, a consortium of foreign banks, and the
association of provincial development banks. PLN has opted to build coal-fired power
plants because coal is much cheaper than fuel oil and natural gas.

In January 2010, the government launched the second phase of the fast-track
programme, which aims to provide an additional 10,153MW of electricity generation
capacity by 2014. While all of the power plants in the first phase of the programme are
to be built by PLN, the second phase foresees a more active role for IPPs. In this
phase, PLN will build 5,118MW of capacity and buy the remaining 5,035MW from IPPs,
which are expected build new power plants to meet this demand.

The second phase of the fast-track programme is designed to be more environmentally
friendly and focuses on renewable energy, with the total construction cost estimated to
be double that of the first phase. Of the 10,153MW of capacity being added in the
second phase, about 39% (3,997MW) will be generated by geothermal plants, 33%
(3,312MW) by coal-fired plants, 15% (1,560MW) by gas-steam plants, 12% (1,204MW)
by hydro plants, and the remaining 1% (100MW) by gas.
Chart 37: Generating capacity of PLNs power plants Chart 38: Distribution of PLNs power-generating capacity
by island (2009)
0
7,000
14,000
21,000
28,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
M
e
g
a
w
a
t
t
Coal-fired Gas steam Hydro power Gas Diesel Geothermal

72%
17%
1%
4%
4%
1%
1%
Papua

The government has launched a
fast-track electricity programme to
expedite new power plant
construction across the country

Special Report

14 February 2011 26
The financing is expected to come from the state budget, bank loans, two-step loans,
the capital markets, and PLNs internal funding. However, we expect financing
requirements for second-phase projects to be more difficult to meet than for the first
phase, as they are more dependent on the participation of private investors than on
support from the government budget. As a result, completion may be delayed from
the initial 2014 deadline.

Due to financing problems, land clearance issues and administrative delays, the
execution of the first phase of the programme has been delayed from its original
timetable. Financing problems are the main factor slowing down the projects. While
the first phase was launched in 2006, financing requirements were only fully secured
at end-2009. In addition, PLN faced land clearance problems for its power plants in
Indramayu (West Java) and Rembang (Central Java). Also impeding progress were
the long timeframes needed for branch offices to receive letters of authority to invest
from the PLN head office.

As a result of these obstacles, only 930MW of the 4,135MW target for end-2010 had
been met as of mid-December. Progress has been much faster in Java than in other
regions (Charts 39 and 40), where none of the planned power plants have been
completed. As of H1-2010, of the 35 power plants targeted to be built, only one, the
Labuan plant in Banten province, had been completed.

The government now expects the first phase of the programme to be completed by
2013 instead of 2012 as initially planned. PLN expects seven new power plants in
Java targeted under the first phase to start operating in 2011. These plants will add
4,830MW of electricity supply in Java and Bali.

To support electricity-sector development, the government and parliament passed a
new electricity law in 2009 that allows private enterprises, co-operatives and non-
governmental enterprises to participate in the electricity supply business. As defined
by the law, this business includes generation, transmission, distribution and sale of
electricity to consumers.

Thus, under the new law, IPPs are allowed to sell electricity directly to end
consumers (which was not permitted under the old law). However, priority for
providing electricity to the public is still given to state-owned enterprises (PLN or local
Chart 39: Progress of fast-track electricity development
programme phase 1, in Java (H1-2010)
Chart 40: Progress of fast-track electricity development
programme, phase 1, outside Java (H1-2010)
0
1
2
3
Completed 90-99% 80-89% 70-79% 60-69% 50-59% Below
50%

0
5
10
15
20
Completed 90-99% 80-89% 70-79% 60-69% 50-59% Below
50%
Source: PLN H1-2010 investor update

Source: PLN H1-2010 investor update
The government and parliament
issued a new electricity law in 2009
to facilitate private-sector
participation in the sector

Special Report

14 February 2011 27
government-owned enterprises). In order to supply electricity to the public, IPPs must
obtain electricity supply business licences, known as IUPL. To supply electricity for
special purposes, IPPs must obtain operating licences, known as IO (see Chart 41).

The new law allows for the differentiation of electricity tariffs across regions. National
basic tariffs are set by the central government and the parliament, while provincial
tariffs are set by local governments and local parliaments. The law also prohibits
electricity suppliers from setting tariffs that are incompatible with the tariffs set by
governments and parliaments; details of this rule will be provided in lower-level
regulations implemented by provincial governments.

In 2010, the government issued Presidential Regulation (Perpres) No. 36/2010,
which encourages foreign investors participation in electricity-sector development.
The regulation allows foreign investors to have ownership stakes of up to 95% in
power plants with generating capacity above 10MW, or to form partnerships with
domestic companies for power plants with capacity up to 10MW. Foreign investors
are also allowed to participate in electricity distribution, maintenance and consulting
services (for further details, see Appendix 2).

Regulatory reform and liberalisation in the electricity sector have increased foreign
investor participation, especially in power plant construction. Investors from Japan,
China and South Korea are the most active groups seeking to build new power plants
under the second phase of the fast-track programme. In January 2011, for instance,
investors from these three countries competed for a coal-fired power plant project in
Rembang (Central Java).

Chart 41: Types of licences needed for electricity suppliers

Electricity
supplier
Public
Needs
(IUPL)
Special-
purpose
(IO)
Generator
Transmitter
Distributor
Sales

Source: UU No. 20/2009

A presidential regulation issued in
2010 encourages foreign
investment in the electricity
business

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14 February 2011 28
Government support
The government has taken several key steps to expedite infrastructure development
in Indonesia: (1) issuing new laws and regulations to facilitate investment in
infrastructure projects; (2) allocating more infrastructure funds in the state budget; (3)
assigning the Coordinating Board of Investment (BKPM) to provide a one-stop shop
licence system for real-sector investors; (4) establishing a government-owned
infrastructure project financing company and an investment project guarantor
company; and (5) assigning a special task force (the so-called UKP4) to alleviate
investment bottlenecks caused by government bureaucratic inefficiencies.

1) Laws and regulations
To allow and facilitate the participation of domestic and foreign investors in the
real sector, the government and the parliament have ratified new laws on
investment in recent years (see Table 10). These laws have been accompanied
by government and presidential regulations to allow their implementation.

The broad goal is to encourage the private sector, co-operatives and local
government-owned enterprises to invest in the real sector. Under these laws and
regulations, the central governments only role is to regulate these sectors,
allowing private entities, co-operatives, state-owned enterprises and local-
government-owned enterprises to compete freely.

The government and the parliament are also discussing a bill on land clearance
for infrastructure development, which is expected to receive parliamentary
approval by mid-2011. The bill requires the government to hold discussions with
and obtain approval from local communities living in designated areas for
infrastructure projects before starting the land clearance process. After approval
Table 10: New laws and regulations to facilitate real-sector investment
Sector State laws (UU)
Government regulations (PP) and presidential regulations
(Perpres)
Roads and toll
roads
UU No. 22/2009
on road traffic and
transport
PP No 44/2009 on toll roads
PP No. 56/2009 on railway implementation Railroads UU No. 23/2007
on railroads
PP No. 72/2009 on railway traffic and transport
PP No. 61/2009 on seaports
PP No. 5/2010 on navigation
Seaports UU No 17/2008
on sea transport
PP No. 21/2010 on maritime environment protection
Transport
Airports UU No. 1/2009
on aviation
PP draft on airports
PP draft on electricity supply business
PP draft on electricity supply supporting business
Power Electricity UU No. 20/2009
on electricity
PP draft on cross-border electricity trade
PP No. 45/2008 on guidance for providing incentives for investment in
regions
PP No. 62/2008 on income tax incentives for investment in certain
business areas and/or regions
Perpres No. 27/2009 on one-stop shop system for investment licence
process
Investment Real-sector
investment
UU No. 25/2007
on investment
Perpres No. 36/2010 on list of business areas closed to investment
and areas with conditions for investment
Source: Ministry of Transportation, BKPM, Ministry of Energy and Mineral Resources
The government has sought to
streamline regulations and reduce
bureaucracy in order to promote
investment in infrastructure

Special Report

14 February 2011 29
has been obtained from the community, an independent appraisal agency will
determine the appropriate price at which the land should be purchased from the
landowners. The involvement of an independent appraisal agency is expected to
minimise price distortions created by land speculators, thereby expediting the
price negotiation process.

2) Budget allocation
Although the government has repeatedly expressed its commitment to boosting
infrastructure development, it can only set aside limited funds for infrastructure in
the budget. While government infrastructure spending has continued to increase in
nominal terms in the past three years, its share of total government spending has
not exceeded 10% in the past five years (see Chart 42). During this period,
government infrastructure expenditure has been below 2% of GDP (see Chart 43).

According to the National Planning Agency (Bappenas), Indonesia will need IDR
1,429trn (USD 159bn, assuming a USD-IDR exchange rate of 9,000) for
infrastructure development in 2010-14 in order to achieve an annual economic
growth rate of 5-7% (see Chart 44). Most of these funds will be allocated to the
transport sector (airports and seaports) and the electricity sector (power plants
and transmission infrastructure). However, the government can only provide IDR
386trn (USD 43bn), or 27%, of this amount. It expects the remainder to come
from the private sector.

The government also faces ongoing problems with delayed infrastructure
spending because of land clearance issues, bureaucratic inefficiencies at the
central and local government levels, and a lack of skilled project managers. In
2010, for instance, the government only spent 79.4% of its targeted total capital
expenditure in the revised budget.

For 2011, the government has allocated IDR 126trn (USD 13.6bn), or 10% of total
government expenditure, to infrastructure development. Among the planned
projects are the maintenance and repair of 35,059km of national roads, the
preservation of 121,027km of central government-owned bridges, continued land
clearance for and construction of the Trans-Java toll road, the expansion of
Ngurah Rai Airport (Bali), and the construction of the Jakarta MRTs Lebak Bulus-
Hotel Indonesia section.
Chart 42: Government infrastructure spending versus
total government spending
Chart 43: Government infrastructure spending versus
nominal
0
50
100
150
2005 2006 2007 2008 2009E Revised
state
budget
2010
State
budget
2011
I
D
R

t
r
i
l
l
i
o
n
0
5
10
15
%
Amount
As %of total government spending

0
50
100
150
2005 2006 2007 2008 2009E Revised
state
budget
2010
State
budget
2011
I
D
R

t
r
i
l
l
i
o
n
0
1
2
3
%
Amount As % of nominal GDP
Sources: Ministry of Finance, Standard Chartered Research

Sources: Ministry of Finance, Standard Chartered Research
The government is constrained in
providing sufficient funds for
infrastructure development

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14 February 2011 30
3) One-stop shop system
Under Perpres No. 27/2009, President Yudhoyono assigned the Indonesia
Coordinating Board of Investment (BKPM) to implement a one-stop shop system
to expedite licence processing for direct (i.e., real-sector) investors and to reduce
bureaucratic red tape. Under this system, 16 ministries have delegated their
authority in granting licences and providing non-licensing services to the BKPM.
Investors only need to submit their business licence proposals to the agency. The
BKPM has also created the National Single Window for Investment to provide
online services for investors, including the granting of investment licences.

4) Financing company and project guarantor
To help provide financing for real-sector investment projects, the government
established PT Sarana Multi Infrastruktur (PT SMI) in 2009 to facilitate
infrastructure investment. The company, which is 100% owned by the
government through the Ministry of Finance (MoF), creates joint ventures with
multilateral agencies, foreign and local banks, state-owned enterprises, and other
business entities to invest in infrastructure projects. The government also
established the Indonesia Infrastructure Guarantee Funds (PT Penjaminan
Infrastruktur Indonesia or PT PPI) in 2010 to act as a guarantor for infrastructure
projects in Indonesia. PT PPI is also 100% owned by the government through the
MoF.

5) Special task force
In his second term in office, President Yudhoyono has established the
Presidential Work Unit on Monitoring and Controlling Development (known as
UKP4), headed by Kuntoro Mangkusubroto, a former energy minister and head of
post-tsunami reconstruction in Aceh. Mangkusubroto has the status of a minister
without portfolio and is charged with solving investment problems caused by
inefficiencies in government bureaucracy.

Chart 44: Total funding requirements for infrastructure development, 2010-14

0
100
200
300
400
Transportation Electricity Information &
communications
Roads (including
toll roads)
Housing Energy Water resources
I
D
R

t
r
i
l
l
i
o
n
Government Private sector

Sources: National Planning Agency (Bappenas), Data Consult
Procedures to obtain investment
licences have been streamlined
The president has set up a task
force to tackle bottlenecks in
infrastructure development
State-owned companies have been
set up to provide financing and
guarantee investment projects

Special Report

14 February 2011 31
Scenario analysis

1) Investment in the transport sector
The base scenario for this analysis assumes that the budget funds allocated for
transport infrastructure development increase by a constant 10% per annum from
2011, but that the government can only absorb 90% of the allocated funds (see
Table 11). The base scenario also assumes that private investors can only
provide 10% of the total funds needed from them. We assume a 100% budget
absorption rate for all scenarios except Scenario 1. We also use different
assumptions for nominal increases in infrastructure funds in the budget under
each scenario.

According to Bappenas, private-sector funds needed for transport development
from 2010-14 total IDR 258.3trn, or IDR 51.7trn a year on average. We use an
estimate of IDR 51.7trn as the optimum amount for private-sector participation
(100% participation). Although Bappenas has identified this as the amount
needed to support a 5-7% GDP growth rate, we believe it would have larger
multiplier impacts on GDP, allowing for even faster GDP growth.

Meanwhile, BKPM data shows that total direct investment (both foreign and local)
in the transport, storage, and communications sector reached IDR 5.0trn in 2009.
We estimate that private investment in the transport sector alone reached IDR
3.5bn, or about 7% of the amount needed. We then use a 7% private-sector
participation rate as the benchmark in Scenarios 1-5. We use a 50% rate for
Scenarios 6-10, and a 100% rate for Scenarios 11-15.

Among these 15 scenarios, we believe that those with a maximum increase of
20% in budget funds allocated for transport infrastructure and a maximum 50%
private investor participation rate are more realistic than the others. We believe it
would be difficult for the government to increase budgeted transport development
funds by more than 50% a year, as most budget funding will continue to be
allocated to subsidies and personnel expenditures.

It would also be difficult to increase private investors participation in the transport
sector to 100%, in our view. While funding problems (including difficulties in
obtaining bank loans) are commonly faced by domestic investors, foreign
investors are generally concerned about Indonesias poor investment climate,
including land clearance problems, legal uncertainties and labour-market
rigidities.

While it is hypothetically possible for the Indonesian economy to grow by 9.7% in
2014 (Scenario 15), we project that GDP growth will be between 6.5% and 7.6%
from 2011-14. Under the best of our plausible scenarios, the government will
increase spending on transport infrastructure development by 20% per year, and
private-sector participation in electricity development will reach 50% of the
required level, enabling the economy to grow by 7.1-7.6% in 2011-14. These
scenarios are under a ceteris paribus assumption, meaning that other
components of GDP (i.e., household consumption, exports and imports) are
assumed grow at the rates estimated in the base scenario.

Under the best of our most
plausible scenarios for the
transport sector, we project
Indonesian growth at 7.1-7.6% if the
government increases spending by
20% per year and private investors
participation reaches 50% of what is
required

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14 February 2011 32
Table 11: Impact of investment in transport sector on real GDP growth (ceteris paribus)
2010 2011F 2012F 2013F 2014F
Scenario 1 (base):
10% annual increase of nominal allocation in the budget from
2012 (90% rate of absorption)
+ 7% rate of private participation needed
6.1 6.5 7.0 7.0 7.0
Scenario 2:
10% increase of nominal allocation in the budget from 2012
(100% rate of absorption)
6.1 6.6 7.2 7.1 7.1
Scenario 3:
6.1 6.6 7.3 7.2 7.2
Scenario 4:
6.1 6.6 7.4 7.4 7.4
Scenario 5:
6.2 6.6 7.6 7.8 7.8
Scenario 6:
No increase of nominal allocation in the budget from 2012
6.2 6.6 7.2 7.1 7.0
Scenario 7:
6.2 7.1 7.5 7.3 7.2
Scenario 8:
6.2 7.1 7.6 7.4 7.3
Scenario 9:
6.2 7.1 7.8 7.9 7.9
Scenario 10:
6.2 7.1 8.2 8.7 8.8
Scenario 11:
No increase of nominal allocation in the budget from 2012
+ full private participation needed
6.7 7.4 7.5 7.2 7.2
Scenario 12:
6.7 7.4 7.6 7.4 7.4
Scenario 13:
6.7 7.4 7.8 7.7 7.7
Scenario 14:
6.7 7.4 8.2 8.3 8.4
Scenario 15:
6.7 7.4 8.8 9.5 9.7
Source: Standard Chartered Research

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14 February 2011 33
2) Investment in electricity sector
We use PLNs capital expenditure as a proxy for government spending on
infrastructure development in the electricity sector. According to media reports,
PLN is estimated to have spent IDR 74trn in 2010 and plans IDR 66.6trn in capital
expenditures in 2011.

Meanwhile, Bappenas estimates that IDR 205.8trn (USD 22.9trn) is needed for
investment in the electricity sector from 2010-14 to support 5-7% GDP growth.
Thus, private investors are expected to spend IDR 41.2trn per year on average.
As in our scenario analysis of investment in the transport sector, we believe that
investment in the electricity sector has a larger multiplier impact on the economy
than Bappenas estimates, allowing for faster GDP growth.

However, in 2009, investment (both foreign and domestic) in the electricity, water
and gas sectors reached only IDR 3.8trn, according to BKPM data. We estimate
that investment in the electricity sector alone totaled IDR 2.0trn, or about 5% of
the annual private investment needed for electricity infrastructure development.
We then develop scenarios by assuming different degrees of increase in PLNs
capex and private participation rate (Table 12).

In Scenario 1, our base scenario, we assume that PLN can only absorb 90% of its
planned capex. The remaining 14 scenarios assume that PLN can meet all of its
targeted capex. We also assume different rates of nominal increase in PLNs
capex under each scenario.

We believe that the scenarios with maximum PLN capex increases of 20% and
maximum participation rates of 50% (i.e., Scenarios 1, 2, 3, 6, 7 and 8) are more
likely than the others. We thus expect infrastructure development in the electricity
sector to boost GDP growth to a range of 6.5-7.5% from 2011-14. This is under a
ceteris paribus assumption for GDP growth, meaning that components of GDP
other than investment and government expenditure household consumption,
exports and imports are assumed to grow at the rates we estimate in our base
scenario. Under the best of our plausible scenarios, PLN will increases capex by
20% per annum and private-sector participation in electricity infrastructure
development will reach 50% what is needed, allowing Indonesias economy to
grow by 6.9-7.5% in 2011-14.
We believe it is plausible for
Indonesias economy to grow by
6.9-7.5% in 2011-14 if PLN
increases annual capex by 20% and
private-sector participation in
electricity infrastructure
development reaches 50% of what
is needed

Special Report

14 February 2011 34
Table 12: Impact of investment in electricity sector on real GDP growth (ceteris paribus)
2010 2011F 2012F 2013F 2014F
Scenario 1 (base):
10% annual increase in PLN capex from 2012
(90% absorption rate)
+ 5% private participation rate needed
6.1 6.5 7.0 7.0 7.0
Scenario 2:
6.1 6.5 7.1 7.0 7.0
Scenario 3:
6.1 6.6 7.2 7.1 7.1
Scenario 4:
6.1 6.6 7.4 7.3 7.4
Scenario 5:
6.2 6.6 7.6 7.8 8.5
Scenario 6:
No annual increase in PLN capex from 2012
6.2 6.9 7.3 7.1 7.1
Scenario 7:
6.2 6.9 7.4 7.2 7.2
Scenario 8:
6.2 6.9 7.5 7.4 7.4
Scenario 9:
6.2 7.9 6.8 7.8 7.8
Scenario 10:
6.2 6.9 7.8 8.7 8.6
Scenario 11:
No annual increase in PLN capex from 2012
6.5 7.0 7.3 7.1 7.1
Scenario 12:
6.5 7.0 7.4 7.3 7.3
Scenario 13:
6.5 7.0 7.5 7.5 7.5
Scenario 14:
6.5 7.0 7.8 7.9 8.0
Scenario 15:
6.5 7.0 8.2 8.7 8.9
Source: Standard Chartered Research

Special Report

14 February 2011 35
Financing through infrastructure bonds
Overview
Indonesia will introduce infrastructure bonds to help finance the governments
investment plans. One of the infrastructure bonds slated for issuance in 2011-12 is
the Islamic infrastructure bond, or sukuk, to be issued by the MoF to finance projects
in the approved national budget. We expect the structure of the infrastructure sukuk
to be similar to existing government sukuks it will be tradable and have similar
coupon levels. The introduction of a new instrument will help to deepen Indonesias
Islamic bond market and further diversify the MoFs budget funding sources.

Introduction
At the most generic level, infrastructure bonds are securities whose proceeds are
earmarked specifically for infrastructure projects. In contrast, government bonds are
issued for general fiscal purposes. Infrastructure bonds are typically long-dated (5Y
and above) due to the need to match the bonds maturity with the length of time
required to complete the infrastructure project.

There are many possible structures. The bonds can be conventional or Islamic, and
their principal and coupons can be secured by the assets and cash flow of the
infrastructure project. The bonds can be issued by government entities, an
infrastructure fund or private companies, and can be guaranteed by the government
or by multilateral organisations.

Types of infrastructure financing
Financing of infrastructure projects can be done via multiple channels. Typically,
governments are heavily involved given the public nature of most infrastructure
projects. Governments can raise funds through their annual budgets or borrow from
commercial banks. They can also secure loans from multilateral organisations such
as the World Bank or the Asian Development Bank.

Private participation in directed financing for infrastructure projects (i.e., financing not
from the general budget) has become popular due to the considerable resources
required for infrastructure development. To make infrastructure projects financially
viable for private investors, the government typically provides grants or concessions
to the investors undertaking the projects. Privately sourced funding routes include
equity financing (such as an allotment of equity to suppliers of raw materials for the
project) and loan financing (where the bank loan is secured against the assets and
cash flow from the projects). Project bonds are more popular given their more
tradable and longer-dated nature than private equity and bank loans.

The proceeds of project bonds are by nature for a specific use. This is in contrast to a
regular corporate bond, whose proceeds are for general usage. A project bond will
also typically channel cash flow from the project to service the debt, while a corporate
bonds credit status depends more on the general status of the issuer. Most
importantly, there is typically an off-taker in the project agreement; this party is the
original motivation for the project and can be the ultimate user of the infrastructure or
the institution providing the purchase agreement. Demand from the off-taker provides
certainty to investors regarding the cash flow required to service the debt.

Infrastructure bonds are the
preferred means to direct private
investment into the real economy

Special Report

14 February 2011 36
Case study: Malaysia
Infrastructure bonds are very common in Malaysia. They accounted for about 35% of
Malaysias corporate bond issuance during the 2006-10 period, assuming that bond
issuance from the construction, electricity, gas and water, and transport, storage and
communications sectors is for infrastructure projects (see Chart 45). This amounts to
an average of MYR 18.3bn (USD 6bn) per year over the last five years. The
governments spending on infrastructure had matched the investment made by the
private sector, averaging at MYR 22.5bn per year during the 2006-10 period (based
on fiscal expenditure figures, we have assumed that development expenditure on
economic services goes towards infrastructure). As Chart 46 shows, the amount
translates to about twice the infrastructure spending of the Indonesian government,
when expressed as a percentage of the GDP.

Typically, infrastructure bonds are structured similarly to project finance loans. There
are designated accounts to ring-fence the projects cash flow and assets so that they
can be used to meet debt-servicing requirements. Although government guarantees
are not involved, infrastructure projects are usually backed by concession
agreements (for example, for toll roads) or power purchase agreements (in the case
of IPPs). The ratings and pricing of the infrastructure bond take into account factors
including the concession/purchase agreement, the strength of the issuer and the
integrity of the financing structure.

The situation in Indonesia
Government infrastructure projects in Indonesia fall into one of the two categories:
central government projects (i.e., those approved in the annual national budget) or
projects undertaken by state-owned enterprises (SOEs) and local governments,
which do not need to be pre-approved in the budget. Central government projects are
usually smaller in scale and may include maintenance work on existing infrastructure,
whereas SOE and municipal projects are typically larger in scale.

Total infrastructure spending in the 2010 budget was IDR 108trn, and the
government plans to increase this amount to IDR 126trn in 2011. Meanwhile,
Bappenas estimates the countrys total infrastructure needs at IDR 1,429trn over the
2010-14 period. Assuming that this spending is spread equally over the five-year
period, the annual infrastructure spending requirement will be IDR 285.8trn. If the
Chart 45: Private infrastructure bond issuance as a share
of total corporate bond issuance in Malaysia
Chart 46: Comparison of infrastructure spending in
Malaysia and Indonesia (% of GDP)
0%
15%
30%
45%
60%
75%
90%
1988 1992 1996 2000 2004 2008

MY Govt
ID Govt
ID Govt + PPI
0
1
2
3
4
5
2005 2006 2007 2008 2009 2010f 2011f
MY Govt + PPI
Source: Bank Negara Malaysia

Note: PPI refers to public-private investment
Sources: Bloomberg, World Bank, MoF, Standard Chartered
Research
The government and private sector
are both instrumental to
infrastructure development in
Malaysia

Special Report

14 February 2011 37
government has to cover the full amount, this translates into IDR 126trn of central
government projects (the amount already approved in the 2011 budget) and IDR
160trn of SOE/municipal-level projects in 2011.

One of the first Indonesian infrastructure bond issues planned in 2011-12 is the
Islamic infrastructure bond, or sukuk, to be issued by the central government (via the
MoF in the case of a bond, or a special-purpose vehicle in the case of a sukuk) to
finance budget projects. The MoF is finalising plans to finance infrastructure projects
through the Islamic bond market, with the National Syariah Assembly having
approved and issued a fatwa in June 2010 (No. 76/DSN-MUI/VI/2010) to formalise
the Islamic concept that will form the basis for infrastructure sukuk issuance. Once
the issuance structure is finalised, the proposal will be submitted to the president and
the parliament for approval.

The concept, Ijarah asset to be leased, is essentially the same as the Ijarah - sale
and lease back concept that underpins current government sukuk issuance. The
main difference is that at the time of the asset sale (initiation), the underlying asset is
only partially existent or completed. This may include the project land, partially
developed buildings, or other fixed assets that are to be used or developed as part of
the infrastructure project. In contrast, the underlying asset under the Ijarah sale
and lease back concept is already complete and has a market value matching the
face value of the sukuk. Also, because the projects in the central government budget
are mostly smaller in scale, the proceeds of the infrastructure sukuk are likely to be
used to finance a pool of projects instead of a single project. It follows that the
underlying collateral used to back Ijarah asset to be leased will be a pool of
assets, instead of the single asset commonly used to back Ijarah sale and lease
back.

For these reasons, the sukuk holders are exposed to project risk (i.e., the risk that
the project is not completed and the market value of the underlying asset remains
lower than the face value of the sukuk at the time of default). To mitigate the risk, the
value of the underlying pool of projects must be set higher level than the face value
of the sukuk (for example, a sukuk issued with a face value of IDR 5trn will be
backed by a pool of projects valued at IDR 7trn). Moreover, if a project is dropped
during the lifetime of the bonds, the value of the underlying asset will have to be
maintained by adding new projects to the pool.

Table 11: Comparison of Indonesian government sukuks for general deficit financing and infrastructure projects
General budget Infrastructure projects under the general budget
Issuer MoF MoF
Purpose Financing of general budget deficit Financing of infrastructure projects in the budget
Issuance amount
IDR 25trn* (institutional and retail sukuk), out of
IDR 200.6trn gross debt issuance
Total infrastructure expenditure in 2011 budget is
IDR 126trn
Islamic concept Ijarah sale and lease back Ijarah asset to be leased
Underlying asset
Fixed asset of the government (of a value
matching the face value of sukuk)
A pool of fixed assets that will be used in the
infrastructure projects (total value of the pool of assets
pledged will exceed the face value of the sukuk)
Tenor 1-20Y Likely to be 5Y and above
Trading Allowed, from issuance date Allowed, from issuance date
Placement Auction, private placement Auction, private placement and book-building
Taxes 20% on capital gains and interest 20% on capital gains and interest
*Our estimates Sources: MoF, Standard Chartered Research
One of the first Islamic concepts
approved for infrastructure sukuk
issuance is Ijarah asset to be
leased

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14 February 2011 38
As under the Ijarah sale and lease back concept, the government will periodically
pay a coupon to lease the asset from the SPV and gains the right to use or develop
the asset for a period of time. At the contract expiry date, it buys back the asset at
the predetermined price. The infrastructure sukuk will have a similar risk/return profile
to the existing government sukuk, and under the Ijarah concept, the security is
marketable from the day of issuance, irrespective of the completion date of the
underlying project. We compare infrastructure sukuks with existing government
sukuks in Table 13.

Good diversification of debt financing
The introduction of infrastructure sukuk will open up a new investment opportunity for
investors seeking specific exposure to the infrastructure sector rather than the
countrys general economy. If the government is to finance the required IDR 285.8trn
annual infrastructure investment through debt issuance, gross debt issuance in 2011
will rise to IDR 360trn (consisting of IDR 201trn of general budget deficit financing
and IDR 160trn of infrastructure financing not included in the national budget).
Evidently, this will not be market-viable, and the issuance of infrastructure bonds,
where the proceeds are for targeted usage and cashflows are ring-fenced, will
present a more palatable option for the market.

We expect strong demand for infrastructure sukuks from syariah banks, syariah state
pension and insurance funds, and retail investors (should the bonds be made
available to retail investors, as they have in India and Malaysia). The total assets of
syariah banks in Indonesia are just above 3% of the total asset size of commercial
banks, but their growth rate far exceeds growth in commercial banks assets. The
assets of syariah banks have quadrupled in the last five years, while those of
commercial banks have less than doubled. Similarly, as Chart 48 shows, syariah
deposits have recorded stellar annual growth of more than 30% in the last five years,
while growth in commercial banks deposits slowed to 10% in 2010. While still small
(investment in securities accounted for 5.9% of syariah bank asset in 2010), the
demand for Islamic assets and issuance has the potential to continue growing faster
than the more mature conventional bond markets.

The introduction of a new sukuk instrument with longer tenors (above 5Y) will also
develop the yield curve further and improve the liquidity of the sukuk market. Trading
of government sukuks in the secondary market is still choppy, with annual turnover of
Chart 47: Total assets of syariah banks are small
compared to commercial banks (IDR trn)
Chart 48: Syariah deposit base is growing faster (y/y)
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10
Commercial Banks
20
40
60
80
100
Islamic Banks (RHS)

Syariah banks
10%
20%
30%
40%
50%
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Commercial Banks
3%
4%
5%
6%
Bonds as%of syariah bank asset (RHS)
Source: Bank Indonesia

Source: Bank Indonesia
The introduction of Islamic and
conventional infrastructure bonds
will deepen the local-currency debt
market and diversify the
governments funding sources

Special Report

14 February 2011 39
just 0.14x the total outstanding value (compared to 2x for conventional government
bonds). However, the yield spread between sukuk and conventional government
bond narrowed substantially in H2-2010, and we expect the governments
commitment to developing the syariah bond market to further reduce the liquidity
premium demanded by investors.

Considering the large amount of resources needed for infrastructure development,
the government is also preparing the regulatory framework for issuance of
conventional infrastructure bonds by the MoF, local governments and SOEs for
projects both within and outside the budget. If this materialises, we expect the new
instruments to generate strong demand from domestic investors. Domestic retail
investors in particular have shown a strong interest in the attractive yields offered by
government bonds and sukuks. Institutional players such as pension funds,
insurance funds, and corporations are likely to be the main investors, although the
instruments classification as quasi-government could result in holding restrictions
for some of these investors.

Chart 49: The government sukuk market is heavily front-
loaded, with an average maturity of 4 years
Chart 50: Sukuk trading is choppy, but premium over
conventional yields is falling
0
2
4
6
8
10
12
14
2010 2014 2018 2022 2026 2030
Maturity profile of outstanding government sukuk
I
D
R

t
r
n

ID sukuk 10Y
ID 10Y
6
7
8
9
10
11
12
13
Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11
I
D
R

t
r
n
Source: Bloomberg

Sources: Bloomberg, Standard Chartered Research

Special Report

14 February 2011 40
Appendix 1: Sectors closed to foreign investment in infrastructure, or open with conditions

Closed to foreign investors Open with conditions
Transport
Provision and implementation of land
terminals
Toll-road business
(max. 95% foreign capital ownership)

Implementation and operation of weighing
stations
Construction work for main roads (except flyovers),
railways, airplane runways
Implementation of motor vehicle type tests
Provision of port facilities
Implementation of motorcycle periodic tests
Airport services

Telecommunications/supporting facilities for
shipping navigation
Terminal support services
Vessel Traffic Information System (VTIS)
Integrated engineering services for transport infrastructure
Air traffic control services
Power
Power plants < 1MW
(reserved for micro-enterprises/SMEs, co-operatives)

Small-scale power plants, 1-10MW
(reserved for micro-enterprises/SMEs, co-operatives)

Geothermal power plants

Nuclear power plants

Power plant maintenance & operation installation service

Power plants > 10,000MW

Nuclear power plants

Power plant transmission

Electricity distribution

Construction & installation of electricity services

Electricity consultation services

Power plant maintenance & operation installation services
Source: Presidential Regulation (Perpres) No. 36/2010

Special Report

14 February 2011 41
Appendix 2: Procedures for direct investment in the transport sector

Investment
Coordinating
Board
(BKPM)
Ministry of
Justice,
Ministry of
Trade
Ministry of
Transportation
Local
government
Environmental
Agency
Investment
preparation

Location

Environmental

Construction

Operation

Safety and
operation
management

*Environmental Impact Assessment; Source: Ministry of Transportation

Initial
approval
Company
formation
Business
licence
Business
licence
Spatial
plan
Location
licence
EIA*
Building
permit
(IMB)
Location
licence
Operating
licence
Operation
schedule

Special Report

14 February 2011 42
Disclosures Appendix

Analyst Certification Disclosure:
The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the
research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or
other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific
recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance
appraisals of analysts.

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Special Report

14 February 2011 43
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Document approved by
Tai Hui
Regional Head of Research, South East Asia
Data available as of
06:00 GMT 14 February 2011

Document is released at
06:00 GMT 14 February 2011

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