Identifier
Created
Classification
Origin
06JAKARTA2984
2006-03-07 10:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Jakarta
Cable title:  

INDONESIA - GOVERNMENT OUTLINES INFRASTRUCTURE

Tags:  EINV ECON ENRG EAIR ELTN ECPS ID 
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RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2984/01 0661024
ZNR UUUUU ZZH
R 071024Z MAR 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0713
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9656
RUEHBY/AMEMBASSY CANBERRA 9155
RUEHBJ/AMEMBASSY BEIJING 3302
UNCLAS SECTION 01 OF 08 JAKARTA 002984 

SIPDIS

DEPT FOR EAP/IET, EB/IFD/OIA
DEPT PASS OPIC, EXIM, TDA
DOE FOR TOM CUTLER/PI-32 AND JANE NAKANO/PI-42
COMMERCE FOR USDOC 4430--GOLIKE
TREASURY FOR OASIA--ANNA JEWELL

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EINV ECON ENRG EAIR ELTN ECPS ID
SUBJECT: INDONESIA - GOVERNMENT OUTLINES INFRASTRUCTURE
PLANS

UNCLAS SECTION 01 OF 08 JAKARTA 002984

SIPDIS

DEPT FOR EAP/IET, EB/IFD/OIA
DEPT PASS OPIC, EXIM, TDA
DOE FOR TOM CUTLER/PI-32 AND JANE NAKANO/PI-42
COMMERCE FOR USDOC 4430--GOLIKE
TREASURY FOR OASIA--ANNA JEWELL

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: EINV ECON ENRG EAIR ELTN ECPS ID
SUBJECT: INDONESIA - GOVERNMENT OUTLINES INFRASTRUCTURE
PLANS


1. (SBU) Summary: Coordinating Minister for Economic
Affairs Boediono and other Government of Indonesia (GOI)
officials outlined a wide ranging infrastructure
development plan at a February 21 conference for
potential foreign investors in Jakarta. Boediono and
other GOI speakers described an ambitious regulatory
reform agenda through January 2007 that calls for the
preparation of seven draft laws and more than 30
regulations to create a predictable and transparent
framework for infrastructure investment. In parallel
with an improved regulatory framework, the GOI also plans
to create an integrated system for developing, tendering,
and providing GOI support for selected public-private
partnership (PPP) infrastructure projects. Ministry of
Finance (MOF) officials outlined an emerging GOI "risk
sharing" framework for infrastructure projects, that,
when completed, should enable ministries to tender more
"bankable" PPP infrastructure projects and provide a
mechanism for the MOF to assume limited risk in specific
projects. Despite some progress in 2005, Minister
Boediono admitted that land acquisition for
infrastructure projects remains a major problem, and said
the GOI would continue to improve regulations and
consider creating a revolving fund to finance land
purchases. Several GOI speakers stated the GOI will
"fast track" a few high-profile power plant and toll road
projects to show international investors that Indonesia
is back in business after the economic turbulence of the
late 1990s. Private sector conference participants told
their GOI interlocutors that they want to see continued
regulatory reform, a clear and transparent tender
process, a robust financial risk-sharing mechanism, and
certainty in land acquisition and titling. Among the
GOI's ten priority infrastructure sectors, natural gas
pipelines may be the most promising area for

international investors in the short-term, but the GOI
needs to clarify gas supply questions first. End
summary.


2. (U) The Coordinating Ministry for Economic Affairs,
Indonesian Chamber of Commerce and Industry (KADIN),and
World Bank co-hosted a February 21 conference in Jakarta
at which the GOI outlined its infrastructure development
agenda and solicited input from potential investors on
reforms needed to attract investment to Indonesia's
infrastructure sector. The conference featured breakout
sessions on the toll road, transportation, pipelines,
municipal water, and electricity sectors with potential
investors and GOI policymakers engaging in vigorous
dialogue. In his keynote speech opening the meeting,
Coordinating Minister for Economics Boediono conceded
that the GOI had so far failed to meet the goals of the
January 2005 "Infrastructure Summit", and that progress
in attracting foreign investors to viable infrastructure
projects "has been unsatisfactory." However, Boediono
said the GOI has "concentrated its efforts to sort out
the problems holding back infrastructure investment," and
promised progress by the second Infrastructure Summit
tentatively schedule for June 2006.

Ambitious Regulatory Reform Agenda
--------------


3. (U) Boediono described an ambitious regulatory reform
agenda intended to create a predictable and transparent
framework for infrastructure investment. He noted that
Presidential Regulation (Perpres) 67/2005 (issued in
November 2005) revised the principles governing public-
private partnerships (PPP),emphasizing a competitive and
open bidding process, clear risk allocation, and tariff
structures designed to attract private investment with a
reasonable return on investment. Under the umbrella of
Perpres 67, the inter-ministerial "National Committee for
the Acceleration of Infrastructure Provision" (KKPPI)
announced a policy matrix on February 17 listing 153
specific actions the GOI would take through January 2007
to boost infrastructure investment. These actions
include the submission of draft laws, the issuance of

JAKARTA 00002984 002 OF 008


regulations covering ten infrastructure sectors, and the
enactment of institutional reforms in GOI infrastructure
bodies. Key action items in the matrix include:

--The submission to Parliament of draft laws covering
traffic and land transportation (by January 2007),
railways (July 2006),shipping (July 2006),aviation
(January 2007),electricity (June 2006),postal services
(November 2006),solid waste (June 2006),mortgage
securitization (June 2006),and regional government-owned
enterprises (June 2006).

--The issuance of more than 30 new or revised ministerial
decrees or regulations covering a range of infrastructure
issues and sectors. These include regulations on foreign
loans and grants (by January 2006),tariff policy for PPP
projects for all modes of transportation (September
2006),and implementing regulations for Law 38/2004 on
Toll Roads (June 2006). The GOI will also issue
amendments to Presidential Regulation 36/2005 on Land
Acquisition (March 2006) as well as regulations on oil
and natural gas upstream and downstream activity by
December 2006.

--The adoption of a series of ministerial decrees
establishing new or reformed institutions to coordinate
the development and implementation of PPP infrastructure
projects, including the provision of GOI support. The
new institutions include a PPP Center in the KKPPI
Secretariat, PPP "nodes" in three key infrastructure

SIPDIS
ministries, and a "Risk Management Unit" (RMU) in the
Ministry of Finance (see para 6 below).

--The issue of two key KKPPI decrees scheduled for April
2005 that would establish criteria for the prioritization
of infrastructure projects and set up procedures and
mechanisms for PPP projects requiring GOI financial
support. The former decree would pave the way for a
KKPPI list of priority projects eligible for GOI support.

--The preparation of engineering designs, feasibility
studies, or tender documents for more than a dozen
specific infrastructure projects in the transportation
sector. For some projects, construction is scheduled to
begin in 2006.


4. (SBU) Forum participants praised the GOI for its
ambitious plans, but raised several concerns about the
regulatory reform goals during the question and answer
period. Some participants expressed concern that the
proposed reforms lack specificity and detail, and are
piece-meal in nature. They also worried that the
timetable for adopting specific laws and regulations in
the matrix often extends beyond the date of proposed
project tenders in those sectors, making the preparation
of high-quality tender documents difficult. Still others
expressed lingering uncertainty over the roles to be
played by central versus regional government regulatory
bodies for many infrastructure projects.


5. (SBU) Suyono Dikun, Deputy Minister for Infrastructure
Coordination and Area Development in the Coordinating
Ministry for the Economy, told participants that the
KKPPI understands the magnitude of the regulatory reform
task, and would sponsor monthly meetings with
stakeholders to monitor progress. However, several
participants questioned the lack of opportunity for
public comment or formal consultations before ministries
implement regulations, an important consideration given
recent regulatory mishaps and the large number of
regulations the GOI plans to enact during 2006. One
participant noted the lack of formal consultation
mechanisms with the private sector and among GOI
ministries creates the potential that forthcoming
regulations may fail to address key problems and barriers
to investment.

Equally Ambitious Institutional Reform Agenda

JAKARTA 00002984 003 OF 008


--------------


6. (SBU) Boedino, Dikun, and Dr. Anggito Abimanyu, Acting
Head of the Ministry of Finance's (MOF) Agency for
Economic Analysis and International Cooperation (Bapeki),
outlined an equally ambitious institutional reform agenda
that, when complete, would create an integrated system
for developing, tendering, and providing GOI support for
selected public-private partnership(PPP) infrastructure
projects. Key elements of the institutional reforms
include the establishment of the Risk Management
Unit(RMU) at the Ministry of Finance (MOF),a "PPP
Center" in the KKPPI Secretariat, and PPP "nodes" in the
public works, transportation, and energy and mineral
resources ministries by May 2006. The PPP Center will
work closely with the PPP nodes in various ministries to
standardize and raise the quality of PPP infrastructure
project documents so the projects are more "bankable" for
private investors and more suitable for GOI financial
support or risk sharing. The Ministry of Public Works'
(MPW) experience in recent toll road tenders has shown
that without high quality tender documents addressing
land acquisition and other risks, very few foreign
investors will participate.


7. (U) Dikun said the PPP Center would play an important
role as both coordinator and clearinghouse for review and
management of infrastructure projects, particularly PPPs.
It will also take the lead in managing the regulatory
reform process, establishing a national list of priority
infrastructure projects, and reviewing specific
infrastructure proposals. However, some participants
expressed frustration with a lack of clarity in obtaining
government review and approvals of projects under the
current KKPPI system, as well as the existing web of
requirements for multiple agency review and approval.
KKPPI officials responded that once the integrated PPP
system is up and running, investors will not need to go
through multiple agencies, i.e. there will be no need to
go "shopping around." Under the policy matrix, Minister
Boediono is scheduled to issue two key KKPPI decrees in
April 2005 establishing criteria for the prioritization
of infrastructure projects and setting up procedures and
mechanisms for PPP projects requiring GOI financial
support.

Risk Sharing Policy Takes a Big Step Forward
--------------


8. (U) In their presentations, Minister of Finance Sri
Mulyani Indrawati and Abimanyu described in detail the
emerging MOF approach to risk sharing or GOI financial
support for PPP infrastructure projects. Mulyani
cautioned that the GOI's "fiscal space for accepting new
contingent risks is limited," and that the GOI would not
provide any blanket guarantee because they are "less
efficient and tend to create moral hazard." However, she
confirmed that the GOI would consider support for high
priority projects with clear social benefits. Mulyani
said her ministry would issue a decree on a risk
management framework in March 2006 that will outline the
GOI risk sharing scheme, possible forms of GOI support,
and procedures for requesting GOI support.


9. (U) Abimanyu described two key approval processes for
obtaining GOI risk sharing or financial support for PPP
infrastructure projects the MOF plans to roll out through
June 2006. Once implemented, the two should enable
ministries to tender more bankable PPP infrastructure
projects and provide a mechanism for the MOF commit to
limited financial support or risk sharing with private
infrastructure investors in specific projects. The two
approval processes are:

--A process in which ministries seek "in principle"
approval by the Minister of Finance for GOI risk sharing
or financial support for individual projects prior to
their tendering. The Minister would decide whether to

JAKARTA 00002984 004 OF 008


offer GOI support based on an evaluation by the RMU. If
granted, ministries would include this "in principle"
approval in project tender documents, giving potential
investors more certainty about the types of risks they
must bear in a particular project.

--After the conclusion of the tender process and
announcement of a winning bidder, the MOF would grant
final approval for GOI financial support or risk sharing
for individual projects. This process would follow
evaluation by the RMU and the MOF-Chaired "Infrastructure
Provision Risk Management Committee", a body with thirty
members who serve on an ad-hoc basis. The process would
conclude with the signing of a contract with the
investor.


10. (U) Abimanyu stated that to guide its evaluation of
project risk, the MOF would develop a "risk matrix" that
would analyze the major risks faced by infrastructure
projects in each sector, and outline possible mitigating
strategies, including GOI support or partial guarantees.
He grouped risks facing investors into five general
categories:

--Sovereign Risk: The risk of expropriation or
confiscation of assets or changing composition of
ownership due to political pressure.

--Project Performance Risk: Unanticipated changes in
laws/regulations causing substantial cost consequences
for the private party. This includes site risk (land
acquisition, land price increase, environmental issues);
design, construction and commissioning risk; and
operational risk (tariff adjustment, maintenance,
technical obsolescence).

--Market Risk: The risk that investors may not be able to
convert local currency revenue into foreign currency, or
face restrictions on the amount they can transfer or
repatriate. Also includes risk from competition, general
economic downturn, demographic change, and inflation.

--Default Risk: A state-owned enterprise (SOE) fails to
meet its payment obligation. This is a key issue in the
electric power and gas sectors, where SOEs are monopoly
or near-monopoly buyers.

--Force Majeure: War and natural disaster, for example.


11. (SBU) Abimanyu noted that the GOI plans to begin
consultations with Parliament shortly on securing a
budget allocation to cover possible GOI financial
contributions to PPP infrastructure projects, as well as
the contingent liabilities posed by the GOI's acceptance
of certain risks in projects. This process will likely
move forward as part of the annual budget process, which
begins with the formulation of spending priorities by the
State Ministry of National Development Planning
(Bappenas) in March of each year, and concludes with the
President's annual budget speech in August. Depending on
the type of GOI support, the MOF would either hold funds
in a central contingency fund (similar to the current
budget contingency fund for natural disasters),or
include them in the budget of line ministries or other
institutions.

Critical Need for Certainty in Land Acquisition
-------------- --


12. (U) Boediono underscored that resolving land
acquisition bottlenecks remains a critical issue for
accelerating infrastructure development, and that ideally
land should be available before tenders open. If not,
investors will lack certainty needed in bidding on a
project because they "can never be certain how long
acquisition will take or how much the land will cost."
While noting that Perpres 36/2005 had mitigated the
problem, Boediono and other GOI speakers outlined several

JAKARTA 00002984 005 OF 008


measures the GOI plans to take to further speed land
acquisition:

--The GOI will revise Perpres 36 by March 2006 to
facilitate infrastructure development projects,
particularly those that require a right of way.

--The National Land Agency (BPN) will issue
implementation guidelines for land acquisition by April

2006.

--The GOI will consider establishing a revolving fund for
land acquisition so that the GOI could purchase land
needed for infrastructure projects before they go out to
tender. Under the revolving fund, winning bidders for
infrastructure projects would reimburse the GOI for land
acquisition costs related to the project. The GOI would
then use these funds to purchase land for subsequent
infrastructure projects.


13. (U) A number of participants raised concerns over the
lack of clarity of land acquisition regulations, an issue
of particular concern for toll road and pipeline
projects. Perpres 36/2005 provides a 90-day timeline for
acquisition and formation of a compensation committee.
However, the regulations lack specificity on composition
of the committee, what agencies will control the
appraisal process and award of compensation, and what
parties are entitled to comment on the compensation
process. As a result, lengthy delays in land acquisition
have been the norm.


14. (U) Several participants also strongly disagreed with
the idea that land acquisition risk should rest solely
with the investor. They recommended the GOI designate a
single entity to oversee the land acquisition process for
all infrastructure projects. To avoid delays,
participants suggested the GOI could provide initial
payments to landowners based on a preliminary appraisal,
allowing a project to move forward. Any appeal by the
landowner on the amount of compensation would then occur
after transfer of title. However, several participants
pointed out that the viability of this process assumes
courts would review valuations in a consistent and fair
manner, and that the government would bear the risk of a
court requiring a higher payment to a landowner.

Marquee Projects on Fast-Track
--------------


15. (U) In a step long urged by investors, Coordinating
Minister Boediono and Abimanyu made special mention of a
GOI decision to "fast track" several high profile
projects that could serve as model deals and raise
Indonesia's profile in the international investment
community. Boediono said the GOI recognizes the
difficulties it faces in bringing Indonesia's
infrastructure tender system up to world class standards.
By getting a small number of demonstration projects off
the ground quickly on terms attractive to international
capital markets, Boediono said the GOI hopes to create
model deals that it could replicate in the future. He
added that getting a few model deals would also show the
world that Indonesia "is back from the financial crisis
and ready to do business."


16. (SBU) Abimanyu stated that as part of the fast track
program, the GOI would begin the evaluation process (for
risk sharing purposes) of the 600 MW Cirebon steam power
plant project (tender launched in September 2005) and one
or more toll road projects. For these projects, Abimanyu
said the MOF would evaluate risk based on current GOI
procedures and seek to add contingency funds to the 2007
budget to cover any contingent liabilities.

Transportation Sector
--------------


JAKARTA 00002984 006 OF 008



17. (U) Seaport and airport development remain the GOI's
top priorities in the transportation sector. Ministry of
Communications Director General for Sea Transportation
Hariyogi focused his remarks on the proposed development
of a hub container port in Bojonegara, West Java.
However, several participants suggested that investment
in Bojonegara may be a misplaced priority. They
recommended the GOI instead focus on developing existing
basic infrastructure and operations, improving port
management and efficiency, and implementing a national
port policy, factors more critical to Indonesia's
attractiveness as a destination for international
shipping companies and port investors/operators. Noting
that the shipping industry itself is now the largest
investor in port development worldwide, industry
representatives encouraged the GOI to tackle several
additional priorities to draw in greater foreign
investment:

--Repeal restrictions on charges allowed by port
operators for terminal handling services, and instead
allow operators and shipping companies to negotiate these
fees commercially, the standard practice in the shipping
industry. A [November 2006] GOI restriction effectively
caused a 25 percent reduction in fees for port operators.

--Develop full capacity at Tanjung Priok port in Jakarta
before considering major expansion in Bojonegara.

--Improve efficiency in container loading and general
port operations.

--Focus on port development in locations closer to the
Malacca Straits (including Batam),since Jakarta is too
far from major international shipping lanes to serve as
an international container port hub.

--Revise regulations and improve outreach to attract
foreign investment to smaller ports in regional
locations.

--Establish better rail links to ports.


18. (U) The top priorities for airport development are
new terminal and cargo facilities at Soekarno Hatta
International Airport in Jakarta, and construction of new
airports in Medan, Makasar, and Lombok. The single
largest project is the new Medan airport, for which the
GOI is seeking USD 225 million in private investment.
Participants noted the greatest barrier to private
participation is the lack of GOI resolve to push forward
on airport projects with clear timelines, citing as an
example the Medan Airport project first proposed in the
mid-1990s. They also stressed the importance of
coordinated timing between the public and private
components, such as construction of road access, runways
and terminals--few companies want to invest in airports
without roads leading to them.

Toll Road Development
--------------


19. (U) GOI speakers repeatedly emphasized that toll road
construction remains a top priority. They described
progress in toll road regulation in 2005, including the
adoption of Government Regulation 15/2005 which ended
state-owned toll road company Jasa Marga's regulatory
functions and established the Indonesian Toll Road
Regulatory Board (BPJT) in the MPW. However, they
conceded that the MPW tendered only a small number of
projects from the list announced at the January 2005
Infrastructure Summit, and that these transactions were
not up to international standards. As a result, only one
of six toll road sections tendered in a first group of
projects in 2005 is in final negotiation. In addition,
only four out of 13 toll road sections tendered in a
second round have eligible bidders in the pre-
qualification stage.

JAKARTA 00002984 007 OF 008




20. (U) Participants emphasized that any viable toll road
tender must give an operator the right to increase
tariffs to account for inflation and currency rate
fluctuations, and receive approval for such increases
without delay. Under the Toll Road Law of 2004, the
Minister of Public Works determines toll road tariffs,
which may be adjusted only every two years pegged to the
increase in the Consumer Price Index, any without any
consideration of currency exchange rate fluctuation.
Several participants also commended the MPW for
developing a toll road master plan (which would help
estimate usage in planned toll road segments),but others
noted that completion of the plan by December 2006 may be
overly optimistic.

Gas Pipelines May Be Promising
--------------


21. (U) The natural gas sector may be the most promising
in the short-term for international investors, according
to several forum participants. One local energy sector
analyst noted that he sees tremendous potential for the
downstream gas sector, but cautioned that the overriding
incentive for inward foreign direct investment will be a
robust upstream oil and gas sector. He noted that
foreign investors would be eager to build pipelines if
exploration companies are finding hydrocarbons and are
able to sell their products at world market prices.


22. (SBU) The main practical concern for potential
pipeline investors remains the certainty of gas supply.
Few international banks will finance gas pipeline
projects without a rock-solid guarantee of a steady
supply of gas. During 2005, the downstream regulatory
body BPH Migas tendered two pipeline projects, the Grisik-
Semarang-Cirebon (East Java to West Java) pipeline and
the East Kalimantan - West Java pipeline. With the
question of gas supply unresolved due to unclear GOI
guidance on a domestic market obligation (DMO) for all
new natural gas projects, the two tenders have attracted
little international interest. The GOI will need to
clarify the DMO for future gas projects to attract
foreign investors to the pipeline sector, according to
many conference participants. One bright spot for the
sector is that unlike state electric monopoly PLN, state
gas company PGN has no credit quality issues that would
inhibit potential foreign investors.

Electricity: Great Need, Much Risk
--------------


23. (U) Potential investors in the electricity sector
told the GOI representatives that their top concerns
include achieving greater regulatory transparency and
predictability in tariff setting. They said a
predictable revenue stream and transparent mechanism to
gain GOI approval for rate increases are crucial for
making projects bankable. Participants quizzed GOI
panelists on the proposed risk-sharing scheme, which they
said would be crucial for attracting investment given
PLN's poor creditworthiness. They also expressed concern
about the reliability of feedstock supply for power
plants, given the uncertain nature of the natural gas
DMO.


24. (U) Director General of Electricity and Energy
Utilization at the Ministry of Energy and Mineral
Resources (MEMR) Yogo Pratomo told participants the GOI
will speed up the tender process for the construction of
eight new power plants so that they can begin commercial
operation between 2010 and 2011. He noted PLN estimates
that Indonesia will need to add 6,000 MW of power each
year through 2015 just to keep up with current demand.
With economic growth rates rising, electricity demand is
sure to rise with it.


25. (SBU) Pratomo said the tender for the 600 MW Cirebon

JAKARTA 00002984 008 OF 008


steam power plant, opened in September 2005, is the
highest priority, but that the MEMR should open tenders
for seven other power plants by the end of March. These
include a 500 MW combined cycle power plant in Pasuruan,
East Java, a 2 x 600 MW coal-fired power plant in Jepara,
Central Java, the Paiton 3 and 4 coal-fired power plants
(2 x 400 MW) in East Java, a 2 x 60 MW coal-fired power
plant in East Kalimantan, a 2 X 100 MW coal-fired power
plant in North Sumatra, a 2 X 100 MW coal-fired power
plant in Bali and a 2 X 25 MW coal-fired power plant in
South Sulawesi. The quality of the tender documents for
these projects is unclear--a Japanese participant in the
forum told us that Japanese companies have submitted only
pro forma non-conforming bids in the Cirebon tender
because of the absence of any GOI risk sharing and
questions about the project design.


26. (SBU) Comment: The GOI did an impressive amount of
homework for the February 21 forum, and in the eyes of
most participants, has made up a good deal of the
credibility it lost after the first Infrastructure Summit
produced virtually no tangible results. But the
Coordinating Ministry for Economic Affairs is proposing
changes on a very large scale, and few of our contacts
believe the GOI will be able to adhere to the deadlines
in its policy matrix. Even so, the GOI will likely be
able to keep investors' attention if it can get one or
two "fast track" projects off the ground before the next
infrastructure summit tentatively scheduled for June

2006. Even this task will be very difficult, however,
and require the GOI to confront tough issues like PLN's
creditworthiness, possible future electricity tariff
increases, and corruption in land acquisition. If the
GOI can cut through these knots and get a few deals
going, we expect at least a few potential investors will
take notice.

AMSELEM