INFRASTRUCTURE FORUM ATTRACTS INVESTORS AND

UNCLAS SECTION 01 OF 07 JAKARTA 013236

SIPDIS

DEPT FOR EAP/IET, EB/IFD/OIA
DEPT PASS OPIC, EXIM, TDA
DOE FOR TOM CUTLER/PI-32 AND COURTNEY GILLESPIE/PI-42
COMMERCE FOR USDOC 4430--GOLIKE
TREASURY FOR IA-ANDY BAUKOL

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EINV ECON ENRG EAIR ELTN ECPS PREL ID
SUBJECT: INFRASTRUCTURE FORUM ATTRACTS INVESTORS AND
HIGHLIGHTS MODEL PROJECTS

REF: A) JAKARTA 0336; B) JAKARTA 2984; C) 05 JAKARTA 975;


1. (SBU) Summary. The Government of Indonesia (GOI) renewed
its appeal for private investment under it's five-year, USD
150 billion infrastructure development program at a November
1-3 Infrastructure Forum in Jakarta. President Susilo
Bambang Yudhoyono (SBY) touted improvements in Indonesia's
investment climate, but also acknowledged investor concerns
over the need for a transparent and fair regulatory
framework. Minister of Finance Sri Mulyani assured
investors that the National Committee for the Acceleration
of Infrastructure Provision (KKPPI) would evaluate all
Public-Private Partnership (PPP) projects in the
infrastructure sector according to established, transparent
criteria. Coordinating Minister for the Economy Boediono
announced separate risk guarantee, infrastructure
investment, and revolving land acquisition funds to which
the GOI plans initial contributions of Rp 4.7 trillion (USD
503 million). Unlike the 2005 Infrastructure Summit (Ref
C),the GOI narrowed its focus to ten model projects across
five sectors worth USD 4.4 billion, although none are yet
ready for tender. Ministers from infrastructure-related
ministries were on hand to meet one-on-one with potential
investors in five separate break-out sessions. Energy
sector projects attracted the most interest. The World Bank
and the Asian Development Bank (ADB) announced at the
conference that they are expanding their support for the
KKPPI with program and project loans as well as possible
contributions to the proposed risk guarantee fund. A senior
official from the Japanese Bank of International Cooperation
(JBIC) unveiled an "umbrella agreement" his organization has
signed with the Ministry of Finace (MOF) that acts as an
indirect GOI guarantee for power projects. China and Japan
continued their thinly-veiled competition over Indonesian
infrastructure projects at the Forum, particularly in the
power sector. This report uses an exchange rate of Rp
9130/USD for all transactions. End Summary.


2. (U) Nearly two years after the January 2005
Infrastructure Summit, The Indonesian Chamber of Commerce
(KADIN) and the Coordinating Ministry for Economic Affairs
co-sponsored a follow-up "Infrastructure Forum" from
November 1-3 in Jakarta. Over 1000 delegates from 300
Indonesian companies and 100 foreign firms attended the
Forum. The Forum agenda underscored the GOI's more focused
efforts under President Susilo Bambang Yudhoyono (SBY) to
attract greater private investment into its USD 150 billion,
5-year infrastructure plan.

SBY Cites Positive Climate, Acknowledges Challenges
-------------- --------------


3. (U) In his opening address, SBY touted improvements in
Indonesia's investment climate and macroeconomic situation,
including a successful transition to democracy, increased
political stability, strengthened anti-corruption efforts,
rising GDP growth, and a rising per capita income of USD
1500 that now exceeds pre-crisis levels. He cited the
stable Rupiah, Jakarta's strong stock market, and reserves
of over USD 40 billion as concrete signs of Indonesia's
underlying economic health.


4. (U) The President candidly acknowledged significant
economic challenges facing Indonesia and said that
infrastructure development stands at the top of the list.
During the years following the financial crisis the GOI
virtually stopped funding infrastructure, a trend Yudhoyono
said the country must reverse. (Note: Pre-crisis
infrastructure spending stood at about 6% of GDP, almost
three times the level in 2005). He appealed to private
investors to participate as partners in the USD 22 billion
annual investments needed for the energy sector, roads,
ports, harbors, housing, water, and sanitation.


5. (SBU) SBY also addressed on-going investor concerns over
substandard project feasibility studies, lack of
transparency in the bidding process, and regulatory
uncertainties. He stressed that Presidential Regulation

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67/2005 provides a more robust legal and regulatory
framework for PPPs in infrastructure development, and said
the KKPPI would ensure all projects meet international
standards of transparency and fairness in the tender and
bidding process "from start to finish." Minister of Finance
Sri Mulyani echoed the President's remarks, saying that the
KKPPI is already working with sixteen line ministries and is
evaluating the quality of all proposed PPP projects
according to the standards of Presidential Regulation
67/2005. (Comment: "PPP Nodes", one of the key components
of the KKPPI process, are not yet up and running in all
infrastructure-related line ministries. End Comment.)

Funds for Guarantees, Projects, Land Acquisition
-------------- --------------


6. (SBU) Ministers Boediono and Mulyani provided detail on
three, separate infrastructure-related funds the GOI has set
up or proposed:

-- The GOI has established a "Risk Guarantee Fund" with an
initial, Rp 2.5 trillion (USD 274 million) contribution from
the 2006 and 2007 national budgets. In addition, the GOI
has asked the World Bank, ADB and other institutions to
support the Risk Guarantee Fund through partial credit
guarantee or other risk management products. In response to
questions about whether investors in non-KKPPI projects
would be able to take advantage of the Risk Guarantee Fund,
the GOI has stated clearly in the Letter of Development
Policy for its forthcoming, USD 400 million ADB
"Infrastructure Reform Sector Development Program" loan that
it only projects that fully comply with the KKPPI would be
eligible for support through the Risk Guarantee Fund.

--Mulyani announced the GOI would establish an
"Infrastructure Investment Fund" with an initial
contribution of Rp 1.5 trillion (USD 164 million, also from
the 2006 and 2007 budgets. This fund is intended to fund
direct GOI participation in infrastructure projects, likely
through Indonesian state-owned enterprises (SOEs).

--Boediono stated the GOI would ask Parliament for funds to
establish a Rp 600 billion (USD 66 million) revolving land
acquisition fund. The Ministry of Public Works will manage
the fund, under guidelines the National Land Agency (BPN)
will draft. According to Boediono, the guidelines will
ensure land acquisition is both "investor-friendly" and "not
at the expense of vulnerable groups."


7. (U) Once established, the land acquisition fund could
play an important role in breaking the current deadlock over
land acquisition for toll road and other infrastructure
projects. Presidential Regulation 65/2006 and other
regulations limit the legal options available to property
owners to challenge Government efforts to acquire land for
infrastructure projects, an important consideration for land-
intensive toll road development. However, the GOI has been
extremely reluctant to acquire land through eminent domain-
type legal proceedings, and most current toll road projects
have stalled as a result. Observers believe few, if any,
foreign investors will enter the toll road market in
Indonesia without very strong assurances from the GOI on
land acquisition. Potential investors have long sought such
a revolving fund to finance land acquisition to limit or
remove this risk for investors.

Clarification on Risk Sharing for Existing Projects
-------------- --------------


8. (U) Finance Minister Sri Mulyani provided some
clarification on the complex issue of the availability of
government guarantees or support for various types of PPP
projects, a threshold issue for most investors. Under
Finance Ministry Decree 38/2006 issued in May 2006, the
government may consider sharing political, project
performance, and demand risk. Mulyani stated that a Risk
Management Unit (RMU) within the MOF would review all
requests for government guarantees for projects awarded

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under Presidential Regulation 67/2005 based on the risk-
sharing principles in MOF Decree 38/2006. As in prior
infrastructure meetings, Mulyani cautioned investors not to
expect blanket guarantees. However, she pledged that the
GOI would evaluate guarantee proposals for high quality
projects based on "a reasonable rate of return." She added
that the GOI needs to issue another Presidential Regulation
to address guarantees for regional projects.


9. (SBU) The GOI also clarified how it would approach
requests for GOI financial or risk sharing support for
projects that fall outside Presidential Regulation 67/2005
and MOF Decree 38/2006. Some of these projects were awarded
during the Suharto era, but have been stalled since the 1997-
98 financial crisis. In Mulyani's remarks and its October
24 ADB Letter of Development Policy, the GOI has outlined
how it will treat infrastructure projects that fall outside
the KKPPI system:

--Projects to be Directly Executed by the Government or
Contracting Agencies: The GOI plans to design and execute
infrastructure projects using purely public sector
resources. The most noteworthy example of this type of
project is the 10,000 megawatt "crash program" for
electricity generation in which a number of Chinese
companies and banks have expressed keen interest.

--Projects Awarded Prior to Presidential Decree 67/2005 and
MOF Decree 38/2006: The MOF will review these pre-KKPPI
projects already in the pipeline on a case-by-case basis,
and if they do not meet the requirements of the two decrees,
will "apply the principles of transparency, accountability,
proper risk allocation and sharing, and fiscal prudence in
determining fiscal support for such projects through the
general budget allocation process." (Comment: In
conjunction with the pledge to use Risk Guarantee funds only
for projects fully in compliance with the two regulations,
this commitment appears to require investors in the large
number of stalled infrastructure projects tendered or
awarded by previous administrations to work through the
Parliamentary budget process to obtain GOI support, likely a
difficult endeavor. End Comment.)


10. (SBU) In a statement likely directed toward developers
of Jakarta's USD 650 million monorail project, Mulyani said
that "if projects are tendered without a guarantee, they
should not come back later" seeking one. Her comments
reflect a continuing dispute inside the GOI on whether to
offer a GOI guarantee to the Dubai Islamic Bank which is
financing the monorail. (Comment: The GOI may have
resolved this dispute. An infrastructure expert at the Forum
told us the MOF recently signed a "comfort letter" offering
a modest ridership guarantee capped at USD 25 million
annually to the stalled project. The GOI has kept this
comfort letter out of the media. End comment.)

Model Projects Span Sectors
--------------


11. (U) Unlike the 2005 Infrastructure Summit, this year the
GOI focused its pitch to investors on a short-list of ten
model projects worth USD 4.4 billion. Coordinating Minister
for Economic Affairs Boediono acknowledged the poor response
of investors to the 91 projects announced at the 2005 Summit
because "the projects were not properly and adequately
prepared". In contrast, the GOI considers the Forum's ten
model projects, crossing the energy, transportation, public
works, and telecommunications sectors, commercially viable
and "bankable," Boediono said. Each of the projects will go
through the KKPPI and RMU review processes from start to
finish. Although the GOI provided information memoranda on
several of the projects, no tender documents were ready at
the Forum. Participants noted that several of the model
projects are still in the feasibility assessment stage, and
encouraged the GOI to focus on moving an initial one or two
model projects through the KKPPI and RMU review process to
demonstrate to investors that the two institutions are fully
functioning.

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-------------- ---
Table 1: Infrastructure Forum: 10 Model Projects
-------------- ---
Estimated
Project Value(1)
-------------- --------------
Telecommunications:
Palapa Ring fiber optic network 1,500

Power plants:
2x600 MW coal-fired plant (Central Java) 1,200
500 MW coal-oil fired plant (East Java) 275

Toll roads:
165 km Solo-Kertosono (Central Java) 928
60 km Medan airport road (North Sumatra 142

Sea ports:
Surabaya Tanjung Perak expansion 280
Margagiri-Ketapang ferry terminal
(Java to Sumatra) 97

Water and sanitation projects:
Dumai (Riau Province) 44
Tangerang, Banten (greater Jakarta) 37
Bandung (Java) 26

(1) In USD millions.

Note: Information memoranda are available on the KKPPI
website (http://www.kkppi.go.id) for all projects except the
Surabaya Tanjung Perak expansion.

Ministers Pitch Projects in Break-Out Sessions
-------------- -


12. (U) Forum organizers delivered on their pledge of
offering full access to key infrastructure ministers.
Highlights from individual breakout sessions follow:

--Transportation: Minister of Transportation M. Hatta Rajasa
promised investors that the Transportation Law amendments
for air, land, sea, and rail, expected to pass Parliament by
early 2007, would "revoke the state-owned enterprise
monopoly" on transportation, permit longer concession
periods, and allow foreign investors "free rein" to build
and operate transportation infrastructure. Investors
representing existing port facility operators in Surabaya
pressed Rajasa on the need for the Lamong Bay container port
project in Surabaya, given the significant underutilization
of current facilities. Rajasa responded that Lamong Bay is
a "long-term" project and planning for anticipated growth in
2010 and beyond.

--Water Resources: Public Works Minister Djoko Kirmanto
highlighted the three model municipal water supply and
sanitation projects, noting that only 17% of all Indonesians
have piped water into their homes, and only 8% in rural
areas. The model projects offer 25 year concession
agreements to inject greater efficiency into the existing
system where 63% of municipal water companies are
essentially bankrupt. The proposed water project in the
Jakarta suburb of Tangerang would serve the most rapidly
growing area in greater Jakarta with a current population of
243,000. Many consumers currently purchase potable water
trucked into urban areas at much higher cost.

--Telecommunications: Communications Minister Sofyan Djalil
unveiled an ambitious agenda to transform Indonesia into a
fully connected information society by 2015. Indonesia has
one of the lowest rates of mobile and fixed line penetration
in South East-Asia according to Arwin Rasyid, director of
state-owned telecommunications company PT Telekom. Rasyid
added this low level of penetration represents a tremendous
(and lucrative) capacity for growth. Telecom Minister
Djalil presented GOI plans for an ambitious "Palapa Ring"
project that would create a self-contained fiber optic ring

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running through seven major Indonesian islands at a cost of
USD 1.5 billion. The Telecommunication Ministry estimates a
21% internal rate of return on the projects and a five-year
revenue stream of USD 2.9 billion. However, some investors
voiced doubts about the project's feasibility and questioned
the need for a new, privately funded fiber optic ring when
Telekom could use its existing networks and keep the project
for itself. Investors also commented on the fact that
interconnection rates in Indonesia are among the highest in
the world and a major cost barrier for new entrants in the
market. Minister Djalil assured investors that the GOI is
formulating regulations to reform lease line regulations.
Investors tell us that unclear regulatory authority and GOI
support for the Telekom/Indosat duopoly are major barriers
to potential investment.

--Toll Roads: Minister Djoko Kirmanto told investors that
from 2005-2009, Indonesia hopes to build 1,100 kilometers,
of toll roads at a cost of Rp 80 trillion (USD 8.7 billion).
More than 760 kilometers would be included in the "Trans
Java" system, the GOI's top toll road priority. According
to Kirmanto, Presidential Regulation 65/2006 has streamlined
the process of clearing land titles and increased the
certainty of land acquisition. The proposed revolving land
acquisition fund should also give the GOI greater
flexibility to acquire land before tendering projects.
However, land titling and acquisition remain the greatest
concerns for investors.

Interest level Highest on Energy Projects
--------------


13. (U) Interest among potential investors remains highest
in Energy Sector projects, particularly in the electric
power generation sub-sector. The GOI offered two model
projects in this sub-sector:

--Central Java Coal-Fired Power Plant: A 1,200 MW coal-fired
thermal plant developed on a build-own-operate basis at an
estimated cost of USD 1.2 billion

--Pasuruan Combined Cycle Power Plant, East Java: A 500 MW
double chambered coal-fired plant developed on a build-own-
operate basis at an estimated cost of USD 275 million.


14. (U) Minister of Energy and Mineral Resources Purnomo
Yusgiantoro said the GOI would strictly follow the KKPPI
process for the two model electricity projects. The GOI has
completed site studies and bidding documents for both
projects, but potential investors must complete feasibility,
environmental, and energy sourcing studies, according to
Purnomo. Although Purnomo set a goal of getting the projects
into KKPPI process by 2007, he was unable to give an exact
timeline, noting much of the institutional structure of the
KKPPI process is not yet fully functional.


15. (SBU) Investors also focused their interest and
questions on projects announced earlier in the year under
the so-called 10,000 MW "crash program." The program aims to
add 10,000 MW to the national grid by 2009. To date, the
GOI has identified 40 fast-track projects totaling more than
8,750 MW. The largest project will be on the island of Java
with planned operational dates of 2010. Purnomo said these
projects must be transparent. He also said GOI funding for
these projects should not take precedence over those
following the full KKPPI process. The two model electricity
projects are former "crash" projects previously offered
through direct bid. Purnomo offered no explanation as to
why the GOI had reclassified them as model projects.
(Comment: A source at the ADB told us the bank had required
the GOI to include two of the larger crash program power
projects on the KKPPI as a condition for granting its $400
million Infrastructure Reform Sector Development Program
loan. End Comment.)

Clarification on Public Service Obligations
--------------


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16. (U) State electricity company PLN will be the first
beneficiary of the 2003 GOI Public Service Obligation (PSO)
compensation policy. In the past, the GOI required State
Owned Enterprises (SOE) to subsidize unprofitable basic
services provided to the public through "hidden input
subsidies," according to Finance Minister Sri Mulyani. This
opaque process hindered accountability as well as
performance benchmarking of SOEs. The GOI will now directly
compensate the SOEs for the full cost of their PSOs. PLN
will receive direct compensation based on the difference
between prevailing tariffs and the cost of supply. PLN may
also seek reimbursement for costs such as electricity
purchases and debt service. The GOI included a Rp 35.5
trillion (USD 3.8 billion) line item in the revised 2006
budget to cover PLN's public service obligation.


17. (U) The PSO policy also forms the basis for an indirect
GOI guarantee for energy sector projects through an
"umbrella agreement" between the Japanese Bank of
International Cooperation (JBIC) and the GOI. The agreement
will allow JBIC financing of power projects without a GOI
"comfort letter" or other blanket guarantee. According to a
model project prospectus provided by the GOI, PSO subsidy
funds may be used to meet any payment defaults by PLN. The
agreement apparently reiterates the GOI commitment to honor
PSOs as provided for under Indonesian law. The GOI has also
stated its intent to use a similar, PSO-linked guarantee
mechanism for power projects not funded by JBIC as well as
projects in other sectors.


18. (U) Investors in the forum expressed their frustration
at the lack of deregulation in the electricity and mineral
resources sectors. Purnomo noted the GOI and Parliament are
reviewing key energy deregulation laws, but decisions are
not expected until 2007. The key stumbling block to energy
sector deregulation is the Indonesian Constitution which
requires state ownership of sensitive industries. The
Supreme Court struck down the 2002 electricity law as
unconstitutional for this reason, and Purnomo offered no
thoughts on how the GOI would craft a new law that meets the
constitutional strictures while creating meaningful
incentives for private investment.

Development Banks Support, Japan and China Compete
-------------- --------------


19. (U) Development lenders including the World Bank, the
ADB, and JBIC signaled their strong commitment to support
the GOI through program and project loans as well as
financial support for the risk guarantee fund. The ADB has
completed negotiations on its USD 400 million infrastructure
reform program loan and an associated USD 19 million project
loan to support the establishment of an infrastructure
"Project Development Facility." The ADB and World Bank have
signaled their willingness to contribute to the GOI's Risk
Guarantee Fund. Additionally, the World Bank has provided a
USD 425,000 grant to build capacity at the RMU.


20. (SBU) The Forum also highlighted continuing competition
between Japan and China for Indonesian infrastructure
projects, particularly in the power sector. During SBY's
late October trip to China, Energy and Mineral Resources
Minister Purnomo signed agreements with Chinese companies
for six coal-fired power projects worth USD 4.26 billion.
Chinese companies have become major oil producers in
Indonesia and are prominent on the list of firms competing
for contracts under the 10,000 MW crash electricity building
program. Each of the Chinese bidders is allied with one or
more Chinese banks offering export credits to finance the
projects. For its part, the Japanese government has
aggressively used JBIC financing to win tenders, and JBIC
financed the two large power plants in Java that came online
in 2006. Japan's Marubeni consortium recently won the
rights for a 600 MW power plant in Cirebon.


21. (SBU) If China has dominated in the electricity "crash
program," Japan was the clear winner in the Infrastructure
Forum. Unlike the Infrastructure Summit of 2005 where 38

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Chinese firms participated, the 2006 conference saw only
four Chinese firms register. In contrast the forum featured
a prominent role for Japanese presenters, including Fumio
Hoshi, executive director of JBIC, and large numbers of
attendees from Japanese companies.


22. (SBU) Comment. The Forum achieved one of its main goals
-- reigniting interest in the GOI's infrastructure plan.
Organizers presented a forum with significant access to top-
level officials, and attracted broad participation by
potential investors, suppliers, and service providers.
Ministers Boediono and Mulyani were also convincing in their
pledge to continue institutionalizing the KKPPI review
process to gain the long-term confidence of private and
international investors. However, the Forum provided no
major new announcements, and the paramount challenge over
the next 6-9 months will be to begin moving projects to
tender through the KKPPI process. For all the GOI's good
work, many investors remain skeptical, and overwhelmingly
say they need to see at least one model project completed to
convince them that infrastructure development in Indonesia
will be transparent, fair, and competitive.
End comment.

PASCOE