Indonesia Report 2013 by Strategy Business Group

SBG

STRATEGY Power through Knowledge

indonesia

2013

A Foundation in Principle

Franky Oesman Widjaja Sinar Mas Agribusiness and Food

Harbouring Growth

Richard J. Lino Indonesia Por t Cor poration (IPC)

Middle Easter n Promise

PT Bank QNB Kesawan Tbk “Indonesia’s successful development offers rich lessons for other emerging markets.” The World Bank

STRATEGY

Indonesia 2013

CONTENTS PAGE

Industry

Country 7 ARTICLE:

28 ARTICLE:

Triumph Against the Odds – The Largest Economy in South-East Asia is Unstoppable

An Ambitious 2020 Target - Indonesia is Set to Experience a New Industrial Revolution

8 INTERVIEW: Putera Sampoerna, Putera Sampoerna Foundation

29 INTERVIEW: H.E. Mohamad S. Hidayat, Minister of Industry

Economy

30 INTERVIEW: Franky Oesman Widjaja, Sinar Mas Agribusiness and Food

9 ARTICLE:

The Fastest Growing Economy in South-East Asia: How Can Indonesia Manage the Transition to Global Heavyweight?

32 INTERVIEW: Ir. Mochammad Ali Suharsono, PT Rekayasa Industri Engineering and Construction

11 INTERVIEW: Dr. Stefan G. Koeberle, The World Bank, Indonesia

Transportation & Logistics

12 INTERVIEW: Sarvesh Suri, IFC

34 ARTICLE:

13 INTERVIEW: Jakob Friis Sorensen, EuroCham 14 ARTICLE:

36 INTERVIEW: Dr. Ketut Mardjana, PT Pos Indonesia (Persero)

The Path to Greatness: Indonesia’s Master Plan for Economic Advancement and Expansion (MP3EI)

38 INTERVIEW: Tommy Soetomo, PT Angkasa Pura I (Persero)

Finance & Banking 19 ARTICLE:

40 INTERVIEW: Richard J. Lino, Indonesia Port Corporation (IPC)

Once a Turbulent Market for International Funds, Indonesia’s Financial Services Sector is Fast Becoming a Go-To Destination

43 INTERVIEW: Abdul Rahim Tahir, PT DHL Exel Supply Chain Indonesia

21 INTERVIEW: David Fletcher, PermataBank

Infrastructure

22 INTERVIEW: Ibrahim Hassan, PT Bank Maybank Syariah Indonesia 23 ARTICLE:

44 ARTICLE: 3 Words to Modernise Indonesia’s Aging Infrastructure: Public Private Partnerships

Is Indonesia All Set to See a Premium Explosion, as it Becomes South-East Asia’s Next Insurance Hot Spot?

45 INTERVIEW: Kartika Wirjoatmodjo, PT Indonesia Infrastructure Finance (IIF)

25 INTERVIEW: Evelina F. Pietruschka, Fadent Consolidated Companies (FCC)

46 ARTICLE:

26 INTERVIEW: Hendrisman Rahim, PT Asuransi Jiwasraya (Persero)

A Bold Decision - This Key Reform Aims to Secure Indonesia’s Future

46 INTERVIEW: Anthony Setiawan, PT BAUER Pratama Indonesia

The ability to improve infrastructure quickly will be the major determinant of Indonesia’s future growth.

Kalibaru Port is a $4 billion USD project that is one of the most important infrastructure projects in Indonesia. STRATEGY

Indonesia’s Transportation - An Epic Challenge on Land, Air & Sea

Indonesia 2013

CONTENTS PAGE

53 ARTICLE:

Telecommunication & IT 48 ARTICLE:

54 INTERVIEW: Kris Wiluan, Citramas Group

Indonesia’s Wireless Network - Mobile Phones Have Never Mattered More

Company Profiles

Energy & Mineral Resources 49 ARTICLE:

Idyllic Investment

56 COMPANY PROFILES: QNB Kesawan

It Possesses a Wealth of Natural Resources, But For the Moment Indonesia Lacks the Power to Unlock Them.

57 COMPANY PROFILES: PT Bank Victoria International Tbk 58 COMPANY PROFILES: PT Waskita Karya (Persero) Tbk

50 INTERVIEW: Dr. Ing. Evita Herawati Legowo, Directorate General of Oil & Gas

59 COMPANY PROFILES: PT Alkindo Naratama Tbk

50 INTERVIEW: Elisabeth Proust, Indonesian Petroleum Association (IPA)

60 COMPANY PROFILES: Indopoly Swakarsa Industry Tbk

Special Feature

62 COMPANY PROFILES: PT Sulindafin

52 ARTICLE: Long Thought a Sleeping Giant, West Sumatra Has the Power to Become an Essential Component of Indonesia’s Economic Engine

Directory 64 DIRECTORY

Without sufficient readily available sustainable power, Indonesia’s economic ambitions will be thwarted.

The Palapa Ring project will bring broadband access to all of Indonesia’s major cities as early as 2015.

Editor-in-Chief: Maria Johnson Editorial Director: Marco Cabello Country Director: Mary Mnatsakanyan Senior Research Analyst: Bradford Miller Senior Writer: David Congreave Contributing Writers: Colin Pawsey, Ian Phillipson, Barry Rosenfeld, David M. Anthony, & Austin Osoroh Senior Production Designer: Karin Haggård (k.haggård design) Contributing Production Coordinator: Shruti Garg Contributing Production Designer: Manish D’Souza Web-Editor: Randy Fraser (k.haggård design)

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Indonesia 2013

Country Overview

Triumph Against the Odds – The Largest Economy in South-East Asia is Unstoppable Indonesia has a unique geography, a hidden wealth of resources, a young and vibrant population, and an explosive economy.The closer you look the more remarkable this country appears. In 1815, Indonesia witnessed the largest volcanic eruption in recorded history. Mount Tambora burst with such force that the explosion could be heard over a distance of 1,500 miles. So severe was the eruption it contributed to anomalies in weather systems throughout the Northern Hemisphere and the result was the worst global famine of the 19th century. Almost 200 years later, Mount Tambora is still active. One might presume that, as a result, the Indonesian people live in a state of anxiety, but this would be a failure to consider the complex geography and geology of the country and the resilience of the people in overcoming hardships and finding opportunity in adversity.

found strength as a result, the present day government has adapted with startling alacrity. President Susilo Bambang Yudhoyono has led the country’s development as a democratic nation since 2004 and has instituted significant reforms across the complete spectrum of politics, social care and cultural heritage that are moving the country forward at a rate that has seen many point to Indonesia as a definitive example of how developing nations can progress.

Stability and Growth

Indonesia is sometimes described as a bridge between the Asian and Australian continent. As an archipelago of over 17,500 islands, Indonesia is the largest of its kind in the world, not just in area but also in population (with 240 million people, it is the fourth largest country in the world). The archipelagic nature presents logistical challenges of its own but consider also that Indonesia sits Economically Flourishing near the edges of three different tectonic plates; the result is more Yet, without doubt, the most astonishing feature is found within earthquake activity than almost any other place on earth. And the economy. To call it growth would fail to capture just how reseismic activity of this kind also means increased volcanic activmarkable Indonesia’s progress ity. Mount Tambora is, in fact, just has been. one of over 150 active volcanoes Many point to Indonesia as a definitive all the countries affected by in the region. example of how developing nations can theOfAsian financial crisis, Indonesia With these kinds of upheavals progress. was the most severely affected. and complications it is nothing The economy shrunk by around short of astonishing to observe 13% and turning this calamity that Indonesia is currently one of around took time. However – helped in part by the fact that the the most stable political and economic regions in existence. It is economy grew by more than 7% for most of the previous ten almost as if the above challenges have created a stoicism within years – Indonesia has made a strong return to form; national ecothe people that has allowed them to prosper where other civilisanomic growth has averaged 6% for the last five years and, even tions might have crumbled. It may also have something to do with in 2009 when much of the world was languishing in recession, the benefits that have resulted from these environmental condieconomic growth still hit 4.5%. tions. Indonesia is rich with natural resources, including petroleum, Indonesia now has the largest economy in South-East Asia natural gas, coal and a variety of valuable metals. In addition, the and with growth expected to remain around 7% for many years, to geological conditions have created an abundance of geothermal some, Indonesia could well be the seventh largest economy in the energy that is largely untapped. world as early as 2025. Perhaps most significantly, the volcanic ash from historic eruptions has created land that is incredibly fruitful. It is the high proGarnering Attention duction levels, made possible by the fertile soil that has allowed Volcanic eruptions, earthquakes, unique and challenging geogthe largest of the Indonesian islands to sustain dense populations. raphy, political struggles and financial crises; Indonesia has overPolitical Stability come every difficulty, and even turned some of them to its advanThe natural elements are not the only storms that Indonesia tage. In the early 19th century, an Indonesian volcano shook the has had to weather; political upheaval and endemic corruption globe. Today, with its heady mix of economic growth, democratic are a feature of Indonesia’s modern history. But in the same way reforms and creative development, Indonesia is once again atin which Indonesia has withstood environmental difficulties and tracting the attention of the rest of the world. STRATEGY

Indonesia 2013

Country

Next Generation The promise seen in so many other parts of the country’s development has yet to ring true with Indonesia’s education system. Putera Sampoerna Foundation is calling for urgent investment and reform. Putera Sampoerna

Chairman & Founder, Putera Sampoerna Foundation (PSF)

One of the few commonalities that unites the world is that much of our motivation comes from the desire to create a better future for our children. Part of that endeavour - in addition to striving for better economic, health and environmental conditions - must include providing sufficient education to ensure the next generation has the capability to continue making progress. Indonesia is in need of advancement in the area of education, and this is the challenge that has been taken up by Putera Sampoerna, chairman and founder of the Putera Sampoerna Foundation (PSF). His vision is to help improve the education system but also to create leaders and entrepreneurs capable of transforming Indonesians into viable global citizens capable of contributing locally, regionally, and internationally. The belief held by Mr Sampoerna and PSF is that the more advanced the education quality, the more advanced the country will become. And there is much work to be done.

Education Interrupted

PSF is not deluded about the scale of the task before it. Neither do they have any intention of sugar-coating the current conditions facing Indonesian youth. As a result of poverty and other factors, each year more than 1.8 million children are unable to continue their education. More than half of Indonesian teachers are under-qualified and there are still many school buildings that are in need of improvement. These substantial issues provide a solid context for Indonesia’s lamentably low position in UNESCO’s “Education Development Index.” Of the 127

countries rated during 2011, Indonesia is in 69th place, languishing behind geographical neighbours Brunei (34), Malaysia (65) and Australia (15). This unfortunate situation is at odds with Indonesia’s current economic growth and social development but it is a problem that must be tackled if the country is going to maintain its significant momentum. Indonesia needs to create a new generation of skilled leaders with integrity and vision capable of designing a better future for the nation; PSF has a plan for this very purpose.

Everybody’s Business

PSF’s mission is to educate young people and also to imbue them with sound prin-

PSF is issuing an open invitation for businesses to invest in tomorrow’s leaders. ciples, a work ethic, and a social consciousness that will enable them to emerge as competent professionals in their individual fields. But responsibility for this undertaking is not seen to be solely the responsibility of the teachers, the parents, or even the government. PSF’s mantra is “Creating a Better Society is Everybody’s Business” and is insistent that everyone must pull together to achieve the radical overhaul that is so urgently required. PSF consists among others of Sahabat Wanita, Koperasi Siswa Bangsa, Bait AlKamil and MEKAR, is extremely grateful for the existing support from their strategic partners, however, to achieve the level of change that is needed, PSF would like to

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see a Public-Private Partnership set up to escalate the development work. Their invitation is to all levels of society, government and business to join the movement and invest in tomorrow’s business leaders, the future’s government officials and, yes, the next generation of teachers and educators.

Welcome Change

With PSF’s passionate attitude toward its work, there are many reasons to be confident that change can be effected and that the future will see ever more Indonesian children receiving a comprehensive and well-rounded education. Since its establishment in 2001, PSF has adopted 23 public schools and 5 Islamic schools, distributed more than 34,600 scholarships and provided training for more than 21,500 teachers. In addition, a number of higher education facilities have been established, most notably the Sampoerna School of Education, an institution designed to train a future generation of educators, and the Sampoerna School of Business, a training ground for a future generation of entrepreneurs. Although this article has focused exclusively on PSF’s drive to improve the Indonesian education system, this in fact represents just one of the four pillars upon which this social business was founded; the other three being job creation through entrepreneurship development, public enlightenment through empowerment of women, and a humanitarian aid program. While current Indonesian leaders tackle the social, economic and political issues of the day, Mr Sampoerna and PSF are concerned with the next generation of leaders who will be tasked with steering Indonesia towards an ever-brighter future.

Indonesia 2013

Economy Overview

The Fastest Growing Economy in South-East Asia: Can Indonesia Manage the Transition to Global Heavyweight? Largely misunderstood, Indonesia’s economy is not based solely on export of manufacturing and commodities; it is also thriving on continued growth in domestic consumption and services. The Indonesian economy has remained relatively stable throughout the recent global economic downturn, and this dynamic region of South-East Asia has the potential to rise rapidly from its current standing as the 16th largest economy in the world. If the economic transformation of Indonesia continues to be carefully managed over the period leading up to 2030, it could quite

also considerable scope for tax reform by improving the tax system and administration. Broadening the tax base and improving compliance would make the system fairer, while removing exemptions and raising the tax rate on economic rents in the resource sector would also generate increased revenues. The banking system is in good condition and banks are prof-

feasibly grow to become the 7th largest global economy. Indonesia has made significant strides in recent years in macroeconomic management; inflation has fallen into single figures, and government debt as a share of GDP is significantly lower than the majority of the more advanced economies. The Indonesian economy has experienced an average of 6% growth over the last five years, which has been driven in part by increased domestic consumption.

itable and well capitalised, but authorities have still taken steps to strengthen financial stability. A financial services authority has been established, which will be in full operation by the end of 2014; a high level forum has also been set up, which will be responsible for coordinating financial stability; and a memorandum of understanding has been finalised for all organisations responsible for financial stability.

Growth

Economic Initiatives

Indonesia’s growth despite global uncertainty has remained According to the World Economic Forum’s competitiveness resteady throughout 2012, with recent figures showing GDP rose port on Indonesia, the archipelago’s ranking on macroeconomic by 6.4% year-on-year in the second quarter of 2012, the seventh stability rose to 25th place in 2012, up from 89th place in 2007. consecutive quarter of over 6% growth. This was supported by The infrastructure of the economy is in need of reform and Indothe strong performance of investment in the economy, posting nesia is in a favourable position to a year-on-year growth of 12.3%. develop its economic framework. Construction accounts for apIndonesia is on the verge of a new era Inflation is expected to end 2012 of prosperity, which could see it grow to proximately 70% of total investat 5%, well within the government ment in the region, and grew by become one of the largest economies in target of 4.5% ± 1%. Monetary a reasonable 7.2%, but the main policy should continue to ensure driving force behind the substantial the world. that inflation remains on a downincrease was investment in foreign ward trend using interest rates, liquidity management and macromachinery and equipment and in foreign transportation. These prudential measures. Indonesia’s infrastructure and social spendsectors were up 23% and 60% year-on-year respectively; growth ing needs are substantial, and they will need to be managed and rates which are an indicator of strong investment lending. financed efficiently. In production, the major contributors to growth in the second Energy subsidies, which have failed to achieve social goals quarter of 2012 were the service sectors, with the input from the and are fiscally expensive, could be reduced to free up finance for manufacturing, mining and agricultural sectors slightly weakening. more pressing social and economic needs; while better targeted Services growth rose to 8.1% year-on-year in the second quarter, cash transfer schemes in their place could help to reduce poverty while wholesale and retail trade grew by 9.8% year on year in the and help to avoid resistance to energy price increases. There is same period. STRATEGY

Indonesia 2013

Economy Overview The international market remains volatile and global growth has still not fully recovered from the financial crisis, but the baseline scenario for Indonesia, as per recent IEQ’s, is one of continued steady growth. 2012 is projected to end with overall growth of 6.1%, up slightly from the 6.0% projected figure of the July 2012 IEQ; while 2013 is projected to see growth of 6.3%.

$1.1 trillion USD marketplace by 2030. If the economy meets the government’s GDP growth target of 7% annually, it would result in an additional 125 million consumers and increase the business opportunity to $1.5 trillion USD.

Challenges

If the Indonesian economy is to grow at such a rate over the coming decades, the infrastructure must be developed to support it. Policy frameworks and the regulatory environment must continue to be strengthened to build economic resilience, and current constraints on growth must be removed. There are four key areas within the economy where action can be taken to support continued growth. The consumer services sector will continue to grow as the consumer class in Indonesia continues to increase. This will lead rise to new markets in financial services and retail services. With an estimated 90 million extra consumers by 2030, there is a huge opportunity for domestic services to tap into the increased spending power of a younger, higher earning generation. With such a rapidly increasing consuming class, the pressure will mount on the agricultural and fisheries industries, and a boost in productivity will be required in these sectors. At a time when many Indonesians are abandoning farming to migrate to cities, and land resources are being stretched by the expansion of cities, it is essential that production is improved to meet the demand of a burgeoning population. There will also be a heavy demand on resources if growth is to be supported, and there is an opportunity for Indonesia to create a resource-smart economy. Demand for energy could triple by 2030, while the country must also endeavour to supply its population with water and sanitisation. By concentrating on new sustainable and renewable energies, Indonesia could reduce its dependence on raw materials and fossil fuels. Building a skilled workforce will also help to sustain growth in the future and Indonesia must invest heavily in this area to avoid a shortfall of skilled workers in the long term.

Business Opportunity

If these four key areas are developed to their full economic potential they could represent an opportunity for privatesector businesses of $1.8 trillion USD by 2030. As the population rises, consumer spending could increase at a rate of 7.7% per year, building up to a

Boosting productivity in agriculture and fisheries could see revenues rise by 6% per year, amounting to a market of $450 billion USD by 2030, while the overall energy market in Indonesia could reach $270 billion USD. The number of Indonesian students could double by 2030, and the private education market could rise to a value of $40 billion USD.

Supporting framework

The government’s 2013 proposed budget continues to support initiatives that were laid out in their medium and long-term development plans, and also includes a four-pillar development strategy to support growth in the future. The policies are pro-growth, pro-poor, pro-job, and pro-environment. The pro-growth strategy will accelerate infrastructure development to improve domestic connectivity with the aim of creating a more resilient and competitive economy. The pro-job policies target providing 450,000 job opportunities for every 1% of economic growth and include efforts to promote labour intensive industries. The pro-poor strategy involves continued support for social programs outlined in the Master Plan for Acceleration and Expansion of Indonesia’s Poverty Reduction (MP3KI). The pro-environment policies will promote the use of alternative and sustainable energy resources, and enhance the country’s adaptive capacity to respond to climate change. Everything is in place for Indonesia to take advantage of the opportunity for rapid growth in the face of global uncertainty, but there is much for the archipelago economy to develop before it can become a major world force. IN 2011, TRANSPORTATION & MINING SECTOR RECEIVED THE MOST IN FDI STRATEGY

Indonesia 2013

Economy

Growing Demands Dr. Koeberle believes that Indonesia is at a crossroads and that tough choices must be made to make the most of the country’s promising potential. Dr. Stefan G. Koeberle

Country Director, The World Bank, Indonesia

Is Indonesia’s continued growth assured? This seems likely but it would be a mistake to become complacent. Dr. Koeberle, sees many reasons for optimism but believes that continued progress will require significant reforms, identifying three key areas that are crucial for sustaining Indonesia’s success.

Focus on Infrastructure

Much has been made of Indonesia’s impressive economic growth but no less remarkable are the institutional reforms made since the “Reformasi” transition was initiated in the wake of the Asian crisis; the result has been greater checks and balances on the exercise of power through strong decentralisation, a vocal parliament, an anticorruption commission and freedom of the press. Unfortunately, infrastructure has not kept pace with the demands of a growing economy, creating the paradoxical situation of a country that is rapidly urbanising but is unable to provide ready access to water, electricity and transport. Although this is something the government is attempting to address, the percentage of GDP being invested in infrastructure is still lower than before the Asian crisis. While Indonesia is growing at a satisfactory rate, there is a risk that it may be coasting along on the strength of commodity exports and its domestic market. Structural changes are needed to benefit from a young and dynamic population. A full 20% of the national budget already goes to education but the on going challenge is to raise the quality of teaching to cater for a job market that is demanding increasing numbers of skilled employees.

Smarter Investment

Indonesia’s impressive economic prospects have been noted by investors, evidenced by foreign direct investment (FDI) reaching record levels. The economy has traditionally been very open to investors, from home and abroad, and many opportunities await those seeking long-term ventures that take advantage of the country’s abundant resource endowment and its steadily growing middle class. Nevertheless, more must be done to create a comfortable environment for investors; this means developing clear regulatory certainty, unambiguous enforcement of contracts, and overcoming the existing fragmentation and constraints in the decision-making

Indonesia’s successful development offers rich lessons for other emerging markets.

Great Potential

process for public policies. The government also faces difficult longterm decisions. A good case in point are proposals to limit government-funded fuel subsidies which are unpopular but would free up public funds that could be better spent on improvements in infrastructure and the social safety net.

Demand More

Despite the impressive reduction in poverty, millions of Indonesians still live below the poverty line. Many more have escaped poverty but remain vulnerable to economic shocks, which is compounded by the fact that Indonesia spends less on social protection than other countries of a comparable

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level of income. Indonesia’s growing middle class tends to live in the large urban centres that are struggling to improve the services they provide. It stands to reason that an increasingly urban population will be questioning why they live in highly-developed Jakarta with gleaming shopping malls but don’t have basic facilities such as clean, drinkable water, efficient public transport or sewerage. Demand for better services will hold elected officials accountable for delivering on their promises unless, of course, those who can afford to do so “opt out” of public services by attending Singapore hospitals, drinking bottled water and sending their children to Australian colleges.

Dr. Koeberle sums up the country’s continued growth in these words: “Indonesia has great prospects but it is still operating somewhat below its potential. If Indonesia wants to reach that potential and sustain growth over the medium term, it needs to implement structural reforms in infrastructure, education, invest in social protection, improve the quality of services in its urban centres and protect the environment.” The World Bank has been supporting Indonesia for six decades, both financially and through judicious advice on economic management and governmental reforms. Dr. Koeberle has expressed his wish that this partnership continue to evolve in line with Indonesia’s changing demands as an emerging and increasingly self-confident middle-income country, and he confirms that the World Bank stands ready to remain a valuable multilateral partner.

Indonesia 2013

Economy

Empowering Business If the private sector is the key to delivering Indonesia’s important development projects, then IFC is the organisation that helps open the door. Sarvesh Suri

Country Manager, International Finance Corporation (IFC) Indonesia

Infrastructure development in Indonesia requires financing of $150 billion USD and the public sector can only absorb a small part, leaving a sizeable gap for the private sector to fill. Micro, SMEs have always been the backbone of a country’s sustainable economic growth and Indonesia is no exception with these businesses accounting for more than 90% of employment.

Flourishing Future

IFC, a member of the World Bank Group, is the largest global development institution focused on private sector development. With an investment portfolio in excess of $45 billion USD, IFC operates in over 100 countries and helps developing countries achieve sustainable growth by financing private sector investment, mobilising capital in international financial markets and providing advisory services to businesses and governments. The East Asia and Pacific region has particularly benefited from IFC’s work in financing private-sector projects aimed at improving access to electricity, clean water and health care, and mitigating the impact of climate change. IFC also invests in less-developed countries and poorer regions of middle-income markets. IFC’s global expertise is also valuable in helping companies in China, Indonesia and other countries, expand outside of the East Asia Pacific.

Broad Support

IFC in Indonesia has three strategic objectives; reduce the impact of climate change, increase rural incomes and promote sustainable urbanisation. Key areas

include improving access to finance, infrastructure development and provision of clean energy. “Infrastructure development and greater access to financial services will create jobs and give opportunity for people to escape poverty, while clean energy will help tackle the world’s biggest issue that is climate change,” commented Suri. Financial services: IFC has invested about $150 million USD in the commercial bank, BTPN, helping the bank reach out to domestic businesses and female entrepreneurs. Equity investment in Bank Hana is also helping the bank serve SMEs.

As of June 2012, IFC’s portfolio reached close to $1.3 billion USD, of which over $900 million USD are from IFC’s own account. Cleaner Energy: In 2012 IFC acquired around 11% ownership of PT Medco Power Indonesia. This company aims to provide energy to more than 2 million Indonesians via hydropower and natural gas. IFC also supported Jakarta’s provincial government in issuing a “Green Building Code” that sets energy and water efficiency requirements for buildings. This effort will reduce energy consumption in residential and commercial buildings and cut carbon dioxide emissions. Infrastructure Development: IFC is supporting PLN, Indonesia’s state-owned electricity enterprise, in a PPP project by providing advice for a fair and transparent bidding process. To support the oil and gas sector, IFC has also made an equity investment of around $40 million USD to estab-

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lish PT Indonesia Infrastructure Finance (IIF), a non-bank financial institution that focuses on providing long-term funding for infrastructure projects in Indonesia. An additional $55 million USD of investment has been provided to PT Wintermar Offshore Marine Tbk to allow the company to operate in remote offshore Eastern Indonesia. Inviting Investment: IFC works with the Indonesian national and provincial government to help foster business growth by improving the coherence of business regulations. Support of the Jakarta provincial government in the launch of a Central Jakarta “One-Stop Shop” will help to simplify regulations including business registration, trade license requests, and building permit applications. Suri believes that “Indonesia plays an increasingly important role in the global economy. Against this backdrop, Indonesian companies have to compete against enterprises from other emerging economies not only for market share but also for capital. Conducive investment climate and good corporate governance become essential in increasing investor confidence in Indonesian companies and in the general business environment, and supports sustainable economic development.”

Fully Committed

During the 2012 fiscal year, IFC invested about $300 million USD in eight projects. These commitments are expected to improve access to finance for 1.6 million people and 5,000 SMEs, increase access to infrastructure for more than 8.5 million people, and improve the productivity of over 11,000 farmers, increasing their combined annual income by more than $9 million USD.

Indonesia 2013

Economy

European Endeavours Europe’s economic relationship with Indonesia has never been stronger. Jakob Friis Sorensen explains why there’s never been a better time to invest in Indonesia. Jakob Friis Sorensen

Chairman, European Business Chamber of Commerce in Indonesia (EuroCham)

Trade ties between Europe and Indonesia are nothing new; they can be traced back to the 14th century when Portuguese ships first sailed into Malacca. But the volume and range of business and investment flowing into Indonesia is reaching new heights and appears likely to play a major part in the continued economic development of the country. One of the keys to cementing ties between the EU and Indonesia is EuroCham, an organisation that represents European business interests and maintains an active dialogue with the Indonesian government. Jakob (also President Director of Maersk Indonesia), is keen to point out that although EU investment in Indonesia reached a stunning 3.8 billion USD in 2011 (almost triple the 2004 figure), and trade values reached 22.3 billion USD, these numbers haven’t peaked. What is significant about EU investment, is the industry sectors that are receiving attention. While other parts of the world are investing heavily in Indonesia’s resource sectors, EU investors are primarily focused on improving the facilities and output of the industrial sector; an area in which the Indonesian government is keen to encourage interest.

Blossoming Relations

Why are EU businesses so keen to seek involvement with the Indonesian economy? This can be partly attributed to the fact that Indonesia has the largest economy in the region, but also the relative stability of the region. While some parts of the world have recently witnessed fierce upheavals, Indonesia has made the difficult transition to democracy without violence.

Indonesia is increasingly being recognised as a country that is handling social and economic development with great composure and is a secure region in which to invest resources. To ensure that this blossoming relationship between the EU and Indonesia continues to thrive, the Europe Indonesia Business Development (EIBD) program has been created to act as a forum for companies from both parts of the world. Initially held in Brussels in 2009, it was also organised in Jakarta in 2010 in association with the Indonesian Chamber of Commerce and Industry (KADIN). Although full use of this dialogue has yet to be realised, new communication channels have been opened

EU investment in Indonesia reached 2.77 billion EUR in 2010. and efforts are being made to promote specific sectors of Indonesian industry that are primed for development, as well as encouraging projects relating to the improvement of local infrastructure. SMEs are also a key target for EuroCham. Europe already has a vast community of businesses of this size and Jakob believes this represents a tremendous opportunity to forge relationships with Indonesian counterparts. Many European SMEs own cutting-edge technologies that, if utilised by Indonesian businesses, could be a “game changer” in terms of allowing them to compete with larger firms. The Indonesian government also have a vested interest in building up the SME sector, as this will provide a more stable base for the economy

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than one that depends primarily on a limited number of major corporations. In July 2012, EuroCham introduced a SME-specific membership that will allow businesses with limited finances to benefit from the resources, advice and networking opportunities that all members enjoy.

Opportunities Beckon

Clearly there are many factors behind the surge in European and Indonesian business relations, but EuroCham also praises the Indonesian government for playing their part. Jakob believes that, in the past, co-ordination between the government and the private sector was somewhat limited, but that the last six years have seen many positive changes. Dialogue and consultation processes have greatly improved and the way has been opened to accelerate local growth and International business relationships. Jakob’s advice to businesses considering investment or trade opportunities in Indonesia is to balance recognition of the sound financial prospects with a realistic attitude towards the natural levels of uncertainty that can exist within a country that has seen high levels of change and growth in a very short period of time. The companies entering into Indonesia that have had the most success are those that have been prepared to engage in longterm projects and that have been prepared to adapt when necessary. Be creative, be persistent, enjoy what you do, and you could join the large group of people and businesses that are enjoying highly profitable relations with Indonesia.

Indonesia 2013

MP3EI

The Path to Greatness: Indonesia’s Master Plan for Economic Advancement and Expansion Indonesia’s quest to become one of the world’s top ten economies by 2025 aims beyond any categorization of mere national projection, as her detailed blueprint reveals. Although nations are always habitually planning for their future, Guided by a leadership with a purpose and vision to transthe coming fifteen years for Indonesia are poised to chronicle one late the country’s potentials into a reality of global economic adof its most defining eras. The South East Asia’s economic powervancement and competitive relevance, its people can trust in the house has been steadily vaulting over countless economic indices presidency of His Excellency, Dr. H. Susilo Bambang Yudhoyono, in amazing strides of growth and development. The entire world, whose determination is expressed in the national theme of “Indoalready mindful of Indonesia’s enviable progress, has officially nesia Can” launched in 2008. The current government’s dispobeen put on notice as to its ultimate ambitions by the year 2025. sition towards consistency in planning and management can be Here is a country that offers breath-taking prospects from any directly discerned in the economic Masterplan’s aims to catalyse perspective of theoretical and practical economic analysis. If poputhe objectives of the already existing Long Term Development lation counts for anything, as is evident in China’s case, then IndoPlan of 2005 to 2025, which in turn complement the Mid Term nesia’s 240 million is by no measure a mean figure. Such figures, Development Plan of 2011 to 2015. A self sufficient, advanced, in today’s world of consumerism and economic dominance, are just and prosperous Indonesia by the year 2025 may appear as hardly neglected in most spheres of critical decision making bea target that all of the country’s past and present performances cause of their real or perceived weight of influence. Then there is optimistically attests to as a distinct reality, but as can be expected the incontrovertible advantage that abundance in natural resourcIndonesia’s Masterplan is conceived to be robust and thorough to es does introduce, if a country is so fortunate. Indonesia, with the literally guarantee its success of implementation. foregoing factors amongst its many advantages, has boldly traced Assets, Potentials & Challenges out a path to attain its national goal of an advanced economy by The MP3EI is essentially a directive by which Indonesia intends a Masterplan for Acceleration and Expansion of Indonesia’s Ecoto shuttle its Human Development Index into that of a top ten nomic Development (MP3EI) from 2011 to 2025. And it refuses to economy equivalent by an implementation strategy that relies on be taken lightly. three main elements: the increase of value adding and value exIndonesia’s current ranking as the world’s 17th largest econpansion capabilities to Indonesia’s industrial production processomy was furrowed on modest beginnings as an agro-based es, achieving high competitiveeconomy, imaginably distant from ness for Indonesia’s production technological and industrial conIndonesia’s fifteen year transformation output by encouraging efficiency tributions. By the year 1980, its and effective marketing strategies Human Development Index (HDI) into an advanced economy is enshrined in order to gain more global maronly pushed the needle to about in a concise and achievable blueprint. ket share, and a concerted push 0.39. Myopic experts perceived for innovation and breakthroughs its countless assets, including its across the industrial production spectrum to realise and sustain a growing population, as hindrances erroneously underestimatcompetitive, innovation-driven economy. But the government has ing its developmental potential. However, by the year 2010, it also been very candid about the magnitude of challenges that inshowed a healthy HDI reading of over .60 and a per capita inevitably lie in the paths to success. President Yudhoyono’s inputs come of more than $3,000 USD. Indonesia proved its economic and expertise were extensive and exhaustive. The results of that mettle by astutely navigating the financial economic crisis of the effort are evident in the Masterplan which has extremely defined 1980’s to emerge with a significantly improved debt rating, which goals and milestones easily interpreted to determine necessary consequently set international economic agencies off in unison of individual contributions. praise. In the face of stiff challenges, the South East Asian nation In figures, the MP3EI sets a GDP target of at least $4 – $4.5 trilhas excelled with its Gross Domestic Product reaching a current lion USD and a minimum per capita income of $14,250 – $15,500 value of over $700 billion USD. Glaringly, it is a consistency to recUSD by the year 2025. The economic growth rate of 6.4% - 7.5% ognise and transform economic and developmental potentials into will have to be maintained in the period from the year 2011 to 2014 envisioned realities that Indonesians have demonstrated over the as inflation rate is throttled down below 6.5%. These goals take stretch of the past sixty years. And the will to achieve, as a national into account Indonesia’s position in the dynamics of regional and attribute, is profoundly evident in their prevailing sense of disciglobal economics, especially as a hub for the expanding East Asia pline and competitive spirit. Furthermore, they already harbour a market dominated by China, India and the ASEAN bloc, a region conviction born from the antecedents of accomplishing set goals, that has witnessed unparalleled economic growth for the past an attribute every ambitious nation ought to possess, and should twenty years. generously assure Indonesia of the ‘certainty’ of achievement for Indonesia’s human asset (a population that is the fourth largest the commendable MP3EI. STRATEGY

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MP3EI tion, is projected to affect 65% of the populace by the year 2025. A direct redress for its current and envisaged inconveniences are embedded into the Masterplan, since urbanisation affects migration, employment and other social and economic provisions. Add to the foregoing concerns from climatic conditions and effects of global warming, temperature changes and high variations in rainfall to sum up the challenges which must be navigated by Indonesia in pushing into reality all that is promised by the Masterplan in 2025. But the readiness and zest which the country has mustered to overcome these challenges is reflected in its adoption of a new mentality that advocates a sense of operating with new mind set; in plain-speak Indonesia has decided that it would no longer function in the ‘business as usual’ mode. So regulatory and administrative functions at all levels of government must interrelate and collaborate to maximally serve public and private organisations, businesses, investors and facilitators towards meeting the goals of advancing and expanding economic development as contained in the MP3EI. This thinking, riding on the pervading perception for advancement, will augment and harmonise the various roles necessary for the implementation of the MP3EI directives.

Figure1: 8/22, 22 main Economic Activities

in the world) is also considered to contribute a significant role because of favourable projections showing its increasing productive workforce to reach its highest mark for all of East Asia between 2020 and 2030. This particular probability, in tandem with an improved education among Indonesia’s population, will deliver exponential increase in economic productivity. The wealth of natural resources in Indonesia will play a vital role in meeting the objectives of the MP3EI. Its position amongst world’s largest producers of natural resources such as palm oil, cocoa, tin, nickel, oil and gas and marine produce present a formidable launchpad for the Masterplan. Moreover, there are the advantages of Indonesia’s geographical location, one of which is its prime access to the world’s largest market through the Malacca Straits; among the world’s busiest Sea Lane of Communication (SLOC). Notably, the Masterplan is also diligent in recognising the challenges to its success. For example it stresses a thrust into economic industrialisation that is pivoted on value addition and value creation-- a feature that is currently lacking. Another challenge is the substantial gap in economic development between the western and eastern parts of the country, a disparity the Masterplan aims to redress. Infrastructural development in itself is a major issue, considering Indonesia’s archipelago geography, stretching over 5,200 km and spans a width of about 1,870 km. Indeed it is a multi-faceted challenge encompassing most of its transportation, logistics and connectivity needs, and commands a commensurate priority as the challenge to grow the percentage of the Indonesia workforce with an educational diploma from its current 8% to well beyond 50%. The rapid urbanisation of Indonesia, which already poses its own challenges for 53% of the country’s populaSTRATEGY

The Masterplan

For Indonesia presently, 8/22 is more than a mere mathematical representation, and that is because it also serves as an apt embodiment of the basis of the Master Plan for the Advancement and Expansion of Economic Development. In this case, the numerator in the fraction correlates with the number of sectors in focus for development, and the denominator represents in number the main economic activities to be engaged. These 8 sectors are classified into agriculture, mining, energy, industrial, marine, tourism, telecommunications, and strategic areas of development. Within them, the 22 economic activities are to be developed as well. Devised as direct components for servicing the 8/22 core of the Masterplan are three key elements of Economic Corridors Development, National Connectivity Development, and the development of both Human Resources and Science and Technology Capabilities. These components, in turn, are to be propelled by three vibrant initiatives. These initiatives will focus on: encouraging large scale investment in the twenty-two economic activities, synchronising of the various national action plans to ensure optimum performance that delivers the projected results and developing centres of excellence in all of the economic corridors. Most of Indonesia’s goals towards becoming one of the ten leading economies by 2025 are surmised in the foregoing approach. But it is in the 15

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MP3EI elaboration of the various segments that the whole concept converges into clarity. With defined principles and prerequisites as drivers, Indonesia’s Masterplan specifies six regional economic corridors for development, with each of the corridors serving as focus for different industry sectors. Investors and businesses with interests in natural resources can readily converge on the Sumatra Economic Corridor as the designated Centre for Production and Processing of Natural Resources and Energy Reserves. Consisting of 11 economic centres namely Banda Aceh, Medan, Pekanbaru, Jambi, Palembang, Tanjungpinang, Pangkai Pinang, Padang, Bandar Lampung, Bengkulu and Serang its main ecoFigure 2: Theme of The Six Economic Corridors in Indonesia nomic development thrust focuses on palm oil, rubber, coal, shipping, steel and the Sunda Straits Naprove to be direct consequences. It is their combination within the tional Strategic Area. supervision of the MP3EI implementation that will harmonise their The Java Economic Corridor is at the forefront in efforts for developments to engender the realisation of a seamless interplay Industry and Services provision with its five economic centres of among the three elements of physical connectivity, institutional Jakarta, Bandung, Semarang, Yogyakarta and Surabaya. Its main connectivity and people-to-people connectivity. All aspects of ineconomic activities are food and beverages, textile, transportation frastructural development pertaining to intra-economic corridor equipment, shipping, ICT, defence equipment and Greater Jakarta connectivity, inter-economic corridor connectivity and international Area. Finally, the Papua – Kepulauan Maluku Economic Corridor trade and communications logistics will fall under the aegis of the is the pivot for economic activities pertaining to the development national connectivity development. Its scope is broad and wideof Food, Fisheries, Energy and National Mining. It has seven ecoranging to include building and improvement of roads (new as nomic centres namely Sofifi, Amwell as existing), rail transport inbon, Sorong, Manokwari, Timika, frastructures and radio frequency Indonesia’s economic Master Plan is Jayapura and Merauke with ecospectrum allocation. Even the nomic activities concentrating on utilisation of green technologies concise and specific in outlining its food agriculture, copper, nickel, oil to support electricity provision in implementation criteria. and gas, and fishery. non-commercial areas, acquisiThe development of these ecotion of robust telecommunications nomic corridors is to be achieved through the agencies of Special backbone, and the opening of new international gateways to forEconomic Zones (SEZ) and Industrial Clusters, as complementaeign nations are all included. Its summation into a theme of ‘Lory developmental vehicles that support regional economic growth. cally Connected, Globally Integrated’ acutely defines its aims to all To develop these economic growth centres into sectors that aspiring stakeholders. ably contribute to Indonesia’s projected $4 – 4.5 trillion USD GDP The third essential requirement for Indonesia’s advancement by 2025, requires a supporting infrastructural framework to caand expansion in economic development is the impact of huter transportation, logistics and communications needs that will man resource input through knowledge and technological values. necessarily arise. That is what the National Connectivity Policies, Quality education is singled as the main route to developing the under the MP3EI, are drawn to accommodate. Segmented into optimal human capital that is necessary for the actualisation of the four elements, the national connectivity strengthening regimes are MP3EI ideals. The competitive edge and innovative advantages designated as National Logistic System, National Transportation to be ingrained in Indonesia’s goods and services will be cultured System, Regional Development System, and Information and through educational programs tailored to maximise the productivCommunication Technology (ICT). Each of these will be develity input of the workforce. Thus, for instance, vocational learning oped to meet the national connectivity strengthening objectives of programs are structured to teach specific skill sets at high standconnecting the centres of economic growth. The foregoing is to be ards that also accommodate flexibility in application in order to fully achieved based on inter-modal supply chain systems, improving serve the economic corridors. The traditional academic system is accessibility to Indonesia’s hinterland, and provision quality condevised to focus fields of specialisation on direct economic develnectivity to underdeveloped and isolated areas; equitable ecoopment potentials of the economic corridors. University research nomic development and quickened rate of development should centres are to serve as founts of innovations and function on the STRATEGY

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MP3EI principles of integration, resource sharing and maximal information technology utilisation. Polytechnics and universities form the bridges between the upper tier research centres and lower level high schools and vocational colleges that precede community colleges. Advancement in science and technology, which is a direct consequence of quality education, is also stipulated by the Masterplan as a necessity to transform Indonesia from a natural resources-based economy into an industry and innovation driven one by 2025. It advocates increased productivity and competitive advantages by a credible transition in human resource capacity from a labour intensive state into human capital-intensive state. This is a principle enshrined in the presidential innovation initiative known as the 1-747 initiative, which states that Research & Development fund amounting to 1% of annual GDP supports a 7-step innovation system and 4 modes of economic growth acceleration in a process that outputs the 7 objectives of Indonesia’s vision 2025.

ate the development of long-term infrastructure projects, empower innovation and competitiveness of the main economic activities, ingrain economic governance and foster industrial development with value creation emphasis. Essentially, this second phase is designed to solidify investments and overall economic development. Finally, Phase 3, which stretches from 2021 to 2025, is chiefly to oversee the fine-tuning of Indonesia’s industrial capabilities for global competitiveness and high technology adaptation towards sustainable future growth. A detailed implementation profile for these phases designates tasks and responsibilities, and assigns them to individuals, authorities or stakeholders for execution under specified schedules and delivery timetables. As a necessity, there is an evaluation and monitoring system to ensure overall effectiveness and flexibility in response and decision-making. This recognition for meticulous management of the implementation regime instigated a proviso for structuring the implementation committee into three bodies known as the Implementation Team, the Working Team and the Secretariat. Essentially, the Implementation Team wields among its responsibilities the approval of strategic decisions, resolution of strategic issues and general guidance provision. Its membership will be constituted by ministers, chairpersons of non-ministerial institutions and representatives from agencies concerned with MP3EI implementation. As for the Working Team, its roles consist primarily of coordinating the implementation of investment and infrastructural projects. Key officials from relevant official departments will form its membership. The Secretariat will function to develop monitoring and coordinating systems that gauge the progress of MP3EI implementation. Staffed by experts it supports the Implementation and Working teams with clear analysis and technical proposals for overcoming hitches occurring from daily monitoring. As the definitive ambition of a motivated nation, the Masterplan’s embodiment of visionary perception, methodical planning and sure-footed execution is befitting tribute to Indonesia’s recognition of its true place in global relevance.

Implementation and Governance

A plan or strategy depends critically on conducive implementation for success, and Indonesia will accordingly erect a robust set up, to be established under a Presidential Decree, for governing MP3EI’s execution. Although a national initiative, the MP3EI will assign functional roles to regional and local authorities in order to ensure maximal coordination economic development at various levels. A three-phase implementation that is both gradual and continuous, will be supervised by the MP3EI implementation committee to be chaired by the president. The first phase of implementation, also known as Phase 1, commences from 2011 to 2015 with a primary focus on entrenching the composition and operations of the implementation committee, preparing action plans for bureaucratic realignment, attracting investment commitments, establishing international hubs for logistics and transportation, strengthening R&D in the economic corridors and developing human resources. After the ‘Quick-wins’ runs of phase 1, the span from 2016 to 2020 is the dominance of Phase 2. It aims to acceler-

Figure 3: Quantum of Estimated Investments in Each Corridor STRATEGY

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FINANCE & BANKING Overview

Once a Turbulent Market for International Funds, Indonesia’s Financial Services Sector is Fast Becoming a Go-To Destination. Indonesia’s financial services industry has shrugged off the challenges of the late 1990s, and now has the potential to develop into the region’s leading banking and capital sector. Indonesia’s financial services has experienced more than its fair share of difficulties over the years, particularly during Asian market turbulence of the late 1990s. However, today the sector is truly bouncing back and proving to be one of the most dynamic of markets, with something to offer domestic and international investors alike. With only around 20% of adults in what is the world’s fourth most populous nation having any kind of relationship with a financial services provider there are opportunities aplenty for companies willing to seek them out, something that prescient organisations, such as Citigroup and HSBC, have long recognised.

just who exactly will take up the shares that must be released to comply with the new directive. Despite such uncertainties, the untapped nature of the Indonesian marketplace spells profit, although this is unlikely to be accompanied by the type of Wild West feeding frenzy experienced in some parts of the world. This is largely because of the conservative approach the banking sector has adopted in the wake of the financial problems of 1997 and 1998. However, that conservative approach, while helping bring a degree of stability to the marketplace, has to some extent hampered growth and activity. This has meant that most of Indonesia’s banks are focused on short-and medium-term lending that provides them with a fast return generates confidence. But while this may limit their exposure to risk, it is of little use when it comes to funding large projects that require longer-term finance. It is this lack of availability of long-term funds that has been one of the stumbling blocks to improving Indonesia’s far from efficient infrastructure, something that continues to constrain its economic development. In an attempt to encourage additional lending, in September 2010 the government modified loan-to-deposit ratios, setting a lower level of 78% LDR, though establishing a 100% upper limit to prevent banks taking unnecessary lending risks.

Core Stability

For those corporate organisations that do enter the Indonesian marketplace, they will find a sector that has proven remarkably resilient to events in the wider economic world. So while in recent years banks in Europe and North America were seeking bailouts from their respective governments, in contrast Indonesia’s lenders were posting record profits. With the market becoming ever wider and deeper, and with interest rates continuing to fall, the financial environment market could yet get more exciting. In August 2011, the central bank, Bank Indonesia (BI) reported that there were 120 commercial banks in Indonesia possessing assets totalling more than $390.3 billion USD, with some 15 of Continuing Consolidation them responsible for about 70% of the nation’s credit. Most of The numerous mergers and acquisitions that took place afthese are privately-run local enterprises, along with a number of ter the financial crisis saw considerable consolidation within the regional development banks, and more major banking organisasector. This is something that is tions, four of which are, at least in likely to continue as land better part, state-owned – with three of Indonesia’s banking sector delivered capitalised banks buy up specialthese ranking among the top four consistently strong profits for investors ist operators to access specific In the country. However, the future even during the global economic down- market segments, and is certainly of banking ownership is currently something that BI is keen should the subject of much discussion. turn. continue. For the moment though, Thanks to the government’s decirural banks and micro-finance initiatives are still the significant sion in 1999 to open up the financial sector to foreign financial mechanism for lending, particularly to the many small entrepreinstitutions, saw an influx of international interest, which meant neurs who are looking to do business in what is one of the most that by the middle of 2011 of all the banks operating in Indonesia, commercially-minded regions of the world. Indeed, credit for small nearly one third were either partly or entirely foreign-owned. In all, businesses is an important element of the Indonesian banking this meant that foreign lenders were responsible for 27% of all outsystem and accounts for over 50% of total lending in the system, standing loans. with lending to this sector experiencing significant growth. HowevConcerned that banking power might become too concentrated er, there has been some weakening of credit quality, with the ratio in just a few hands BI, which also has the authority to issue policy of non-performing loans slightly higher for small business lending rules and regulations, is considering capping ownership of any than for the sector as a whole. one bank’s shares at 50% rather than the current 99%. It is not Consumer lending is also on the rise, with individual loan values yet clear what this might mean in practice, or whether it would be on the increase, an indicator that is giving some cause for conapplied just to privately run banks or state-owned banks as well. cern. As a result, BI has been giving a steer to banks by suggestShould this new regulation come into force, the sector might find ing that they should be aiming their lending at productive investitself thrown into turbulence and confusion as investors worry ments rather than towards encouraging consumer spending. The about the prospect of massive dumping at discounted prices and STRATEGY

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FINANCE & BANKING Overview demand for credit amongst individuals and businesses shows no real signs of slackening, even though interest rate margins in Indonesia are the highest in South-East Asia. Attempts by BI to introduce greater transparency into the marketplace seem to have done relatively little to drive down the cost of borrowing as, with few alternatives to bank lending, those wanting credit are forced to pay the price that is asked. However, given the historic volatility of the markets, banks to some extent may be forgiven for building an extra comfort factor into the price of money.

Development Bank to help it reform and boost capacity. However, along with a lack of corporate variety, there is also one other thing missing from the IDX and that is any real activity from institutional investors. Though Indonesia does, of course, have pension funds, asset managers and insurance companies,

Sharia Take-Off

Indonesia may be the world’s largest Muslim country, but it has not taken the lead when it comes to Islamic finance, ostensibly happy to leave that role to Malaysia, which has imposed sharia banking as the norm. But with that market reaching saturation point and political unrest in a number of Middle East countries, this has given Indonesia the opportunity to catch up at a natural growth point for sharia compliant banking. Consequently, this has already seen some banks spinning off their sharia lending components to create stand-alone companies that conform to the special requirements regarding interest and excessive risk that the Islamic marketplace demands. With just 5 dedicated Islamic banks and 27 conventional banks with a separate sharia platform to handle Islamic transactions, there is much scope for growth, though this will require mass market education to improve the limited knowledge of the largely financially unsophisticated Muslim market as to how the financial community can best meet its needs. Though coming from a low starting point, the last five years have seen sharia banks achieving asset growth of nearly 40% compared to the 15% of conventional banks. Consumer lending to the sector has been strong, with auto financing in particular proving to be quite literally a driving force for growth, given that the vast majority of car purchases in Indonesia are made using loans. This trend is more than likely to continue as demand among the middle classes pushes the market forward. Interest has also grown in Islamic or sukuk bonds, which are now being used to fund both state infrastructure projects as well as private company investment. However, sharia banking regulations are still relatively complex, making transactions awkward and time-consuming, something that will need to be addressed if the market is to achieve its full potential.

these are less energetic in the market than they are in other parts of the world, focused as they are more on capital preservation than capital gain. This means that once they have bought into large blocks of stock, typically blue-chip companies, they prefer to hold on to them, trading infrequently. The positive impact of this is that they create a ‘sheet anchor’ that stabilises the market, but the flipside is that it leaves capital illiquid, and trapped rather than flowing to where it is needed. The Asian financial crisis did have a significant impact on Indonesia’s capital markets, though this has been largely shaken off as Indonesia’s financial sector has developed further. Now banks are moving from their previous status as primarily small rural lenders and turning instead into national and international players with an active role in developing a real credit and capital structure for the country. For the financial services sector, Indonesia is an increasingly open market, with huge potential for growth in both conventional and Islamic banking. And with the establishment of a new financial service regulator (OJK), there is growing confidence that Indonesia’s markets are growing in stature and maturity. A strong sector will be essential as the middle class grows in numbers, and more and more Indonesians look to build ongoing relationships with financial providers. Inevitably, this growth will generate greater competition between banks, with the financial services market becoming ever more innovative as investment in new IT and systems leads to improved services and differentiated banking products. Similarly, the capital markets are responding, again demonstrating that they have the capacity to grow, and to resist the economic waves coming from elsewhere. With Indonesia’s growth rate standing at 6.5% in 2012, and forecasts suggesting similar figures for 2013 and beyond, the country is once again presenting to the world an appealing economic landscape, something that has not gone unnoticed. This has seen the country’s credit rating lift to investment grade, helping ensure Indonesia will become an increasingly attractive proposition for outside funds and all at cheaper rates. What’s more, as planned infrastructure building moves forward apace, this will stimulate further economic activity, with consequent beneficial ripples for the banking sector as more investors are attracted to the country, all helping position Indonesia as the largest and most important developing economy in South-East Asia.

Maturing Markets

Though considered small for a country of its size, the Indonesian Stock Exchange (IDX) is being considered an increasingly attractive new destination by investors looking to move funds to more buoyant pastures and away from the uncertainties found in their traditional markets. This, along with a growing domestic appetite for shares, has bolstered the Jakarta Composite Index (JCI), helping it to become the best performing market in the AsiaPacific region, and one that despite its previous reputation for volatility, has remained remarkably tranquil, even during the height of the recent Euro debt crisis. With that said, Indonesia’s capital markets remain relatively thin, with only a limited number of rather non-representative companies listed on the exchange. So while finance, commodities and consumer goods dominate the listings, they actually make up less than one third of GDP. Mindful of the situation, the IDX is looking to reinvent itself, turning to the Asian STRATEGY

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Finance & Banking

Indices of Economic Forecasting

The Indonesian economy parades impressive indicators that signpost a direct path to future prosperity. David Fletcher

President Director, PermataBank

Even basic economic omens strongly favour Indonesia, specifically for a robust short-term growth that is founded on its current encouraging economic climate. Consider its favourable demographics, a major force for propelling the present economic boom through its direct effect on low cost manufacturing, that is not expected to peak until at the earliest 2025. Add to that a Gross Domestic Product per capita of over US $3,000 for a soaring middle class that is beyond the 50 million mark, and the conclusion is irrefutably, a vibrant demand in consumer demand and spending.

Performance Galore

The measure of Indonesia’s attractiveness as a prime business and manufacturing haven is underpinned by its recent Foreign Direct Investment (FDI) figures, which has grown from US $4.9 billion to US $20 billion in just four years. A consequence, amongst many others, of its lower manufacturing cost in comparison to southern China and the commercial abundance of commodity resources such as coal and palm oil. So evident is Indonesia’s vantage economic position that financial experts such as David Fletcher, president-director of PermataBank, are bullish in their projections for ASEAN’s most powerful economy to become the sixth largest economy in the world by the year 2030. According to him, the evidence is clear, such as the current 6% growth rate in GDP, the doubling of its foreign reserves from their 2008 values and the control so far on inflation. Apparently, Fitch and Moody, in upgrading Indonesia’s sovereign rating to investment grade, also toe the same line. There is the reality of the Euro debt crisis and the hovering trepidation over its impact

on Asian economies. Indonesia particularly will not be totally insulated from the reverberations of Europe’s financial meltdown, but its impact absorbers appear to be more resilient than many of its Asian neighbours. Fletcher ably concurs with such evaluation when he states, “…Indonesia is one of the least vulnerable Asian economies to the crisis in the West. This is because it is a domestically driven economy, with domestic consumption accounting for around 60% of GDP and net exports accounting for about 10% of GDP. Thus Indonesia is more insulated to downturns in international trade and robust household consumption and fixed investment provide additional insulation.”

Economic growth is influenced by a vibrant SME sector. Yet he is also not unmindful of the knock-on effects from any slowdown in China, which may directly harm Indonesian exports since it provides a major market. Thankfully though, many of Indonesia’s exports to China are basic commodities necessary for infrastructural development, so any cutbacks in demand should relatively be tempered.

Reinforced Sectors

The Indonesian banking sector is reaping the gains of robust regulation as evidenced by a capital adequacy ratio of about 16.5%, average loan deposit ratio of about 82% and decreasing Non Performing Loans (NPL) ratio of 2.7%. It is a sign that Bank Indonesia (BI), the sector’s regulator, learnt valuable lessons from the continent’s past financial crises. Another source of strength for the sector has been the macro environ-

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ment, which opened business opportunities to the banks as a result of the impressive economic growth. Issues still remain though, such as the sector’s dependence on a few large banks (10 of the top banks account for about 63% of assets), weak deposit mobilisation and reinforcement of the legal system to improve collateral enforcement. Indonesia’s growth has benefited from direct contributions of its Small and Medium Enterprise (SME’s) sector, as it has provided employment and propelled the low cost manufacturing sector. There are ample opportunities for more growth in the sector, but its reliance on internal funding is a major limitation; a problem that the redress of Indonesia’s weak credit penetration (about 30% of GDP) should eliminate.

Open Economy

Since the 1998 financial crisis Indonesia has increasingly reaped the rewards of an open economy, and its investment agency, BKPM, deserves credit for the influx of foreign investors. Sectors of its economy, such as education and health care however, require quicker investment attention to cater for its growing population. There is every reason for optimism, as Indonesia’s impressive economic chronology continues to unfurl. The many misconceptions are reducing as it purposefully tackles issues of corruption, entrenches democratic values and promotes international trade. Come 2030, and its apparent trajectory into the top ten of world economies should be an achieved reality.

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Finance & Banking

The Sleeping Giant Awakes

With an explosive growth rate and an estimated USD 4 trillion potential, is Sharia Banking immune to the effects of the global financial crisis? Ibrahim Hassan

President Director, PT. Bank Maybank Syariah Indonesia

US-based international credit-rating agency Standard & Poor’s estimates that the global potential for Islamic financial services could be close to USD 4 trillion, and Ibrahim sees Indonesia as especially situated for the economic expansion of Sharia banking. “Indonesia has the largest Muslim population in the world, which is approximately 240 million,” says Ibrahim “So with a huge Muslim population in Indonesia, there is a great potential demand for Islamic finance.” Citing the World Economic Forum Report 2011, Ibrahim notes that with regard to competitiveness, Indonesia has moved up in rank to no. 44, which represents an improvement of 10 places. This he says makes the country an attractive destination for Foreign Direct Investments (FDI). Added to this is strong government encouragement of FDI into such economic sectors as mining, oil and gas, shipping and telecommunications. “This commitment is reflected in The Master Plan for The Acceleration and Expansion of Indonesia’s Economic Development 2011-2025,” notes Ibrahim, adding that out of a total investment figure of IDR 4.012 trillion in six economic corridors over the period from 2011 until 2025, IDR 1.786 trillion is targeted towards infrastructure investments.

Effect of Global Crisis

Since Sharia banking in Indonesia is dominated by domestic consumption and real economic activities and has very limited exposure to financing of international trade and investment activities, the global financial crisis has had no negative impact, says Ibrahim. Two thirds of Sharia banking

activities is linked to the consumer market. “Businesses are mainly concentrated on the retail sector such as mortgage financing, micro financing, auto financing, and pawning services (ar-rahn). With a truly impressive average growth of banking assets during the last few years reaching 40% per annum, total Sharia banking in December of last year amounted to IDR 145.5 trillion. Financing growth in 2011 stood at 50.6% amounting to IDR 102.7 trillion with remarkable Third Party Funds growth of 51.8% in 2011 amounting to IDR 115.4 trillion, and a Financing to Deposit Ratio of 89%. “In terms of sukuk development, 48 sukuks have been issued to support real sector development initiatives of government and

With the world’s largest Muslim population, and strong economic growth Indonesia offers huge potential for Islamic financial services!

5-Year Growth

Government Linked Companies (GLC) with the total sukuk issuances of IDR 7.92 trillion,” says Ibrahim.

A Smart Investment

At the same time, it should be noted that overall economic growth in the country has slowed marginally due to the financial crises in the EU. This has led to slower consumption growth on the part of Indonesia’s major export trading partners, the US and Japan. But, Ibrahim believes that strong domestic consumption growth, which forms 60% of Indonesian GDP, still remains robust. A stable inflation rate coupled with low inter-

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est rates make Indonesia a good place to invest. Sharia banking in Indonesia also benefits from a sound regulatory framework that Ibrahim says, “is very conducive to promote Islamic finance industry because the development of Islamic finance industry is part of government’s agenda.” In addition to government legislation, including the Central Bank Act of 2004, Banking Act of 1998, Islamic Banking Act of 2008, Sukuk Act of 2008, and Deposit Insurance Act of 2004, Islamic banks are under the regulation of Bank Indonesia with the supervision of Departemen Perbankan Syariah (DPbS), and guided by the issuance of fatwa by the National Syariah Council. Currently there are 10 foreign banks operating in Indonesia, which are allowed to offer Islamic financial services through Islamic window bank operations.

While Islamic financing in Indonesia presently amounts to 4% of total banking, the number of providers is continually growing through the use of Islamic windows in parent banks and the establishment of stand-alone banks. “I am optimistic in regards to growth of Islamic finance in Indonesia. The Indonesian Islamic banking industry will continue to record strong growth of over 40% in the next 5 years” says Ibrahim, adding, “There will be a new face of Islamic finance regulation in Indonesia’s market as in the next 3 years a Financial Services Authority will be formed by Central Bank of Indonesia and Ministry of Finance to supervise the banking industry in a more holistic manner.” With its ability to meet the special needs of a growing population, Islamic banking looks forward to an expanding market.

Indonesia 2013

Finance & Banking (INSURANCE)

Is Indonesia All Set to See a Premium Explosion, as it Becomes South-East Asia’s Next Insurance Hot Spot? Growing affluence and the arrival of foreign companies means that Indonesia’s insurance market is poised to soar to new heights. Like other elements of its financial services industry, Indonesia’s markets for sharia financial products. insurance sector is reaching a new phase in development. With Though Indonesia is prone to natural disasters, given the limited premiums showing year-on-year growth of 15.5% in the first half capitalisation of many re-insurers, catastrophe cover is not widely of 2012, it’s clear there is already significant upward momentum available or taken up. This means that there is often relatively little that’s likely to continue with growing affluence. protection if disaster does strike. For instance, in September 2009 With insurance penetration at just 1.7% of GDP in 2011–the a single earthquake caused 1200 deaths and $2.3 billion USD of lowest in Asia –the market is still in its infancy when set against the damage, of which only $15 million USD was insured. 8.1% of the US or 11.8% in the UK. However, for a truer picture of Microproduct Opportunities Indonesia’s insurance potential, a better comparison might be with With over half of Indonesians living on less than $2 USD a day, nearer neighbours Singapore, Malaysia and Thailand where the there is a growing interest in microproducts with limited cover but markets are more mature and populations lower, but the penetralow premiums. However, with little credit information about many tion over 4%. This can only mean that as risk awareness grows, borrowers, managing high levels of defaults is a challenge. Whatdemand for insurance cover is set to take-off. ever the product, the channel to market is traditionally insurance Given the natural disasters to which Indonesia is prone, there agents, who in 2010 generated over half of the premiums. Howhas always been an insurance need, but it is only now, with growever, low professional standards led the government to bring in ing prosperity, that more have the means to pay for protection. legislation that required all agents to This has meant interest in a growForeign companies are increasingly be certified as of the middle of 2011. ing range of products, including life likely to see the Indonesian insurance This saw a reduction in the number insurance, which has seen premiof agents, many of whom were ums grow faster than for non-life market as an attractive opportunity, only part-time and reluctant products in the last 10 years. Howgiven its under-penetration, and slowing working to spend the $40 USD needed for ever, there is room for expansion, growth and maturing markets elsecertification. as only 16.75 million have life covBoth life and non-life products er, though this is substantially up where. are offered by a wide range of inon the 11.32 million policyholders surance companies, and though there has not been wholesale of 2009. Despite fears that the prevalence of unit-linked products consolidation in the marketplace, an increase in minimum capital might cause instability in the sector, given the current strength of requirements is likely to trigger a wave, as weaker or smaller insurthe stock market they remain first choice with the public. ers are forced to get out of the market or merge to survive. It also Driving force makes them vulnerable to foreign insurance companies like British In the non-life sector, motor insurance dominates, with premiinsurers Prudential, who are viewing the South-East Asian market ums growing hand-in-hand with affluence. However, since motor with a much interest. They are not alone. With foreign ownership insurance is not mandatory and therefore not taken out by lower of Indonesian insurance companies running at 80%, significantly income earners, market potential is not too great. higher than in other developing Asian countries like India and ThaiProperty insurance is increasingly popular, driven by new conland, outside investment is sure to play a major role in the longstruction in urban areas, and a growing awareness of risk from fire term. and natural disasters. The introduction of a new regulation authority and tightening The development of an insurance-based health care model for of controls should lead to growing confidence in a sector where the country has seen the emergence of health cover, which now transparency and public disclosure have not always been as good. provides cover for around two thirds of Indonesians. However, With Indonesia potentially a new battleground for some of the though the aim is to provide a universal scheme, implementation world’s largest insurers, this should see the development of more has been patchy. The limited nature of the cover provided has led products, particularly the development of an increasing number of private companies entering the market to offer policies to middle micro-insurance products targeted at the lower income consumer and upper market segments. market. The development of alternative sales networks will further Despite having the largest Muslim population in the world, sharenergise the market. And of course, the market will be driven foria insurance premiums make up just 5% of the total market, which ward by growth generally, which will enable more of Indonesia’s means Indonesia is ready to become one of the fastest-growing 240 million population to protect themselves from risk. STRATEGY

Indonesia 2013

STRATEGY

Indonesia 2013

Finance & Banking

Insuring Indonesia For over 40 years, FCC has been investing in and adding value to the Indonesian business and economy. It now stands poised to improve the financial security of families across the entire country. Evelina F. Pietruschka

CEO, Fadent Consolidated Companies (FCC) Chairwoman, WanaArtha Life Former Chairperson, Life Insurance Association of Indonesia (AAJI) Secretary General, Asean Insurance Council (AIC)

From the outside, Fadent Consolidated Companies (FCC) is just another holding company, albeit one with a surprisingly diverse portfolio. Dig a little deeper, however, and what you’ll find is a business with a strong sense of family, a philanthropic spirit and a genuine desire to improve the lives of the Indonesian people that it has served for over four decades. In 1971, the late Mr Mohammad Fadil Abdullah, owner of the oldest and most reputable timber and logging business in the country, founded Fadent Consolidated Companies , his entrepreneurial aspirations only matched by his ardent desire to advance Indonesia’s economic growth by investing in financial institutions, infrastructure and related industry sectors. Step forward 40 years, and Mr Abdullah’s legacy resides in the safe hands of his eldest daughter, Mrs Evelina Fadil Pietruschka (CEO), and Mr Manfred Armin Pietruschka (Chairman). Mr Abdullah’s original vision for the business remains at the forefront of FCC’s objectives and is made possible through WanaArtha Life Insurance, the flagship of FCC and head of its non-banking finance division. WanaArtha Life’s hugely popular range of personal and commercial products has seen it claim the coveted “Best Life Insurance Company - 2012” awards from both “Business Review” magazine and “Investor Magazine”. The latter publication has also awarded WanaArtha Life a “Special Recognition” award for five consecutive years. Over the years, WanaArtha Life has invested in a series of successful companies, in industries as varied as banking, mining, exports, agricultural biotechnology, health care, property management, textile product

development and, expected in the near future, infrastructure development. What this eclectic mix of businesses has in common is a focus on contributing to the development of Indonesia and serving the people’s needs, while still maintaining a sharp eye on environmental responsibilities.

Insurance Assurance

If WanaArtha Life is a crucial part of FCC’s business, it appears to be equally important to improving the financial security of the Indonesian people. FCC has a keen sense of social responsibility and it is in this

A philanthropic spirit and a genuine desire to improve the lives of the Indonesian people. spirit that WanaArtha Life has undertaken, not just to increase the uptake of life insurance policies, but also to educate the Indonesian public on the critical importance of family financial planning. This drive most likely stems from Evelina Pietruschka’s previous station as chairman of the Indonesia Life Insurance Association (known locally as Asosiasi Asuransi Jiwa Indonesia or AAJI). The AAJI is a member of the ASEAN Insurance Council (AIC), an NGO conglomeration of 10 member countries whose goal is, in part, to “promote the development of insurance and reinsurance”. Currently, every life insurance company is required to register with the AAJI, and the organisation has a formal mandate from the Ministry of Finance to regulate the industry, conduct education and training, and establish standardised operating procedures and

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a code of ethics. This is a vital measure for the Indonesian people. Despite the recent rapid uptake of insurance products by the public, at 1.7% the overall penetration is among, if not the, lowest in Southeast Asia. The AAJI is tasked with changing public perceptions of life insurance - and insurance providers in general - as well as improving the overall quality and reputation of the industry. Although families carrying insurance policies make up the minority, because interest is growing it is evident that there is still a huge untapped profit-potential for providers of life insurance and related products. WanaArtha Life, in association with the AAJI, are proud to be playing their part in promoting awareness of the benefits of insurance and in creating innovative, high quality products.

On a Mission

FCC have published a vision and mission statement that summarises their immediate and long-term goals: “To advance Indonesia’s growth, and help provide optimum social and economic welfare for all its citizens, as well as optimum returns to investors,” and “To advance Indonesia’s growth by creating value and investing in leading enterprises that develop the country’s financial institutions, infrastructure and related industry sectors.” It’s not unusual for holding companies to follow the money above all else. But FCC walks along a different path. Placing the welfare of Indonesia and its people first and foremost in its designs is no accident. It’s why FCC was founded in the first place.

Indonesia 2013

Finance & Banking

Securing Lives Evidence suggests that insurance uptake in Indonesia is about to explode. Hendrisman Rahim explains why and reveals the product that aims to make life insurance accessible to every corner of Indonesian society. Hendrisman Rahim

President Director and CEO, PT Asuransi Jiwasraya (Persero)

For decades insurance companies have struggled to be taken seriously. Even today, in countries where insurance uptake is saturated, insurance firms use self-deprecating humour to promote their products, giving a nod to the general perception that the industry is dull or even irritating. These attitudes trouble me because they are at least part of the reason why the Indonesian people hold fewer insurance policies than virtually any other country in South-East Asia. This lamentable situation is no joke and is a subject that needs to be considered with the upmost gravity. I’m sure you don’t need me to tell you that insurance is a way to transfer risk. But for much of Indonesian society, particularly those on low income, this understanding of the financial security that insurance provides is unknown; the irony is that it is the people with limited means that most stand to benefit. This is what drives me. PT Asuransi Jiwasraya (Persero) has the resources, infrastructure and product range to effect real change, and create a greater security for all Indonesian people, regardless of their financial worth. There are any number of reasons why I have confidence in our ability to meet our ambitious targets, but chief among them are… Award-Winning: During the last three years, Jiwasraya has won more awards than there is room to list in this article. I say this, not to boast, but to demonstrate the distance that news has travelled of the fine work that Jiwasraya has already completed, and to show that our high opinion of our

company and products is shared by many other institutions. Complete Product Range: Our ethos is “whatever you need, we have it.” Our product offering covers a wide range, from personal insurance, to corporate policies, to pension planning. But the product of which we’re most proud is something we’ve termed “Micro Insurance.” Designed specifically for the 30 million Indonesian people who live in poverty, this policy has a low rate that is affordable to virtually everyone, and features a simple underwriting process and a straightforward claim procedure. This

Where others see problems, I see solutions. product is going to be instrumental in providing insurance options to a large group of people who have, until now, been neglected by the industry. Robust Network: Jiwasraya has a highly effective network of 4,000 agents, and almost 500 offices. This enables us to make our services accessible to everyone, even those who live in remote areas. Our online facilities reinforce the efficacy of our system by speeding up the claim process and allowing us to provide a comprehensive aftersales service. Positive Trends: Insurance uptake in Indonesia is about to make the transition from untapped potential to explosive growth. The “Association of Indonesian Life Insurance Companies” (AAJI) reports a number of increases during the first quarter of 2012, when compared with the same period in 2011; the number of new life insurance

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policies taken out reached 52.76 million (a 15.1% increase), total premium income rose by 14.8%, and assets of AAJI member companies increased by 28.7%. You would be hard pressed to find any other industry that can boast these kinds of short-term gains. It is my firm belief that the priority for insurance providers is to provide their customers with a world-class service that generates a positive opinion of the industry and allows them to witness, first-hand, the financial benefits and peace of mind that comes with holding a comprehensive insurance policy. Education is important, but any benefits will be undone if people are provided a poor and overpriced service. In the years to come, many people will be purchasing insurance policies for the first time; it is imperative that their first impression be overwhelmingly positive. My message is simple. To the government I say that insurance is a way to improve the standard of living for all Indonesian people and, consequently, regulation concerning insurance should be fair both for industries and society in general. To institutions I say that you have a duty to the well being and security of your employees and that providing insurance as a benefit is a means to live up to that responsibility. And to Indonesian insurance providers I say let’s work together to build confidence and positive feeling towards our products. Where others see problems, I see solutions. Where others see limits, I see opportunity. I take great pride in leading Jiwasraya, a company that is not only profitable, but is in a position to provide positive, longterm benefits and security to the lives of the Indonesian people.

Indonesia 2013

STRATEGY

Indonesia 2013

Industry Overview

An Ambitious 2020 Target - Indonesia is Set to Experience a New Industrial Revolution Is this the programme to help Indonesia’s industrial heart beat faster and turn the country into an international economic powerhouse? For any economy with ambitions to grow, the development of a core industrial policy that takes account of a fast-changing international economic environment is fundamental. So, though materials and exported commodities have long been essential components of Indonesia’s economic heritage, that’s all set to change. Instead, today’s Indonesia is looking to reinvent itself as a ’New Industrial Developed Country’ by 2020 recognised on the world stage for possessing a strong and vibrant modern economy. To turn this goal into reality, the government, led by the Ministry of Industry (MOI), has set out a detailed industrial strategy for reshaping the nation’s economy, building upon Indonesia’s inherent assets–its large land area, the size of its population and wealth of natural resources–while developing the country’s human capital through training and education.

development of skills and resources for particular industries are brought together. It will also invite companies to participate in PPP schemes. After an initial process of industrial intensification that will last until 2014, the MOI will concentrate on six priority areas: labour-intensive industries, the capital goods sector, industries based on natural resources, high-growth industries, and those that are identified as special priorities.

SMI Vitality

It will also seek to develop small to medium-sized industry, something the government hopes will help immunise the country against future global and regional economic instability. This it has done in the past, when the sector proved remarkably resilient during the Asian financial crisis of the late 1990s. Then, while larger enterprises suffered given their Accelerate growth quickly then keep Fast-Start Growth dependence on external funding, the momentum going is at the centre of This ‘accelerated industrialisawith little borrowing exposure small tion’ will focus initially on achieving businesses were largely insulated Indonesia’s industrial strategy. economic momentum in mining, from a troubled financial services agriculture and human resource based industries and domestic sector. In 2010 SMEs contributed less than 20% of the country’s markets, such as textiles, furniture and electronic components. manufactured exports, which meant they were touched less by From these fast-start sectors, focus will turn to ‘future’ industries, the global market slowdown. with transportation and information technology and telecommuniBut while keen to protect itself from the vagaries of the internacations equipment being among the first to be explored. tional economy, Indonesia is nevertheless eager to participate on To meet its self-imposed target growth rates of 8% and 9% the world economic stage. This has seen it entering into a variety annually between 2015 and 2025, the government has chosen of Trade Agreements (FTA) and Economic Partnership Agreefive main strategies. These include encouraging the business ments (EPA), such as bilateral arrangements with neighbours sector to help in the revitalisation of country’s existing out-of-date Australia and South Korea, as well as others further afield, includinfrastructure and removing the bureaucratic barriers that haming the European Union. But while the government is encouraging per decision-making and limit entrepreneurial activity. It will also exports, there are concerns that as the population becomes more aim to refocus export priorities so higher value products make a affluent, a flood of imports might be sucked in which could serilarger contribution to international trade; foster greater productivity ously damage domestic industries. Having an effective industrial and competitiveness among companies; and finally, improve the policy will provide Indonesia with an all-important backbone for its integration of domestic markets so doing business in Indonesia future economic growth, giving a new coherence to the country’s becomes more efficient and effective. economic activity over the next 10 to 12 years. With growth rates To stimulate private company involvement, the government will climbing, there are signs that it is already having an impact, and employ a range of tools at both state and national level. These will along with the long awaited improvements in infrastructure, this cover fiscal and budgetary measures and the creation of an infrashould stimulate even further growth in what is one of the most structure of industrial estates, and adopting a cluster approach to commercially focused populations in the world.

STRATEGY

Indonesia 2013

INDUSTRY

Foundry for Industrial Development

Indonesia’s Ministry of Industry is a central hub for activities driving the country’s transformation into a global industrial giant, guided by a formidable blueprint and credible resources for result oriented implementation. H.E Mohamad S. Hidayat

Minister of Industry

Indonesia’s impressive march towards economic advancement is almost impossible to ignore, just as its propelling forces of national will and ambition are remarkable. Make no mistake, Indonesia is a nation that sets its goals by numbers and year 2025 is a benchmark; designated for the attainment of advanced economy status. Lofty ambitions? Yet only very few would be willing to bet against the reality of that goal. As for Indonesia’s Ministry of Industry, the building of a robust and competitive industrial juggernaut on the current economic successes within a decade is the present preoccupation. And it is encouraged in particular, by the impact of increasing competition within the industrial sector, which is driven by the openness of Indonesia’s market to foreign competitors. It recognises the importance of building Indonesia’s economic future on a strong industrial sector with highly developed infrastructure and is thus seizing every opportunity, which facilitates that.

A Phenomenal Growth

Indeed, H.E. Mohamad S. Hidayat is the foremost advocate of Presidential Regulation No. 28/2008 cementing the preference for industrial clusters and regional core competencies to meet the targets of the National Industrial Policy. In the second quarter of 2011 alone, the non-oil industry sector of Indonesia’s economy pumped up in growth to considerably higher figures exceeding 6.61%. Iron, steel, and metal related industry groups recorded an accelerated growth of 15.48% while textile and leather products industries contributed encouraging figures of above 8%. In fact, the targeted 8% annual GDP growth by year 2025 already seems modest as the non-oil industry sector inches ever closer to its 30% contribution to national GDP. The Ministry’s

determination to ensure that every National Industrial Policy target is met shines through; consider its focus on leveraging six essential strategies that should strengthen sustainable competitiveness of the nation’s manufacturing industrial base spanning a five year period from 2010.

Crucial Strategising

These six strategies aim chiefly to: increase overall added value within the industrial value chain; increase the capabilities of personnel resources, domestic research and development and overall entrepreneurship; expand domestic and international markets opportunities; build and strengthen the industrial structure; redistribute indus-

Industrial sector as the backbone of Indonesia’s economic future. trial concentration from Java region; and encourage an increase in the contribution of SMEs to national GDP. Fittingly, the government has chosen to erect these strategic objectives on three vital pillars of industrial development-the establishment of industrial growth centres based on comparative advantage, the development of integrated industrial estates and core competency development in key industrial sectors. The reason Indonesia favours this approach is obvious; it hopes to combine the elements of sectorial and regional industrial development for optimum results as outlined in the Master Plan on Acceleration and Expansion of Indonesian Economic Development (MP3EI) through which it conceives to fully develop its existing as well as the new economic growth centres to maximise the benefits of agglomeration and regional superiority within specific sectors. These eco-

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nomic centres are envisioned to burgeon from industrial estates and Special Economic Zones (KEK), and would be strengthened by interconnectivity and world class infrastructure thus forming Indonesia’s Economic Corridors. The MP3EI also embeds the offshoots of new housing, educational institutions, shopping centres and modern infrastructural facilities as consequences of its direct implementation. So expectedly, the government of Indonesia and key ministries such as that of Industry are offering direct support and incentives to investors and businesses aligning with the MP3EI goals. Tax breaks, customs policies waivers, special licensing agreements-are all components of the bouquets of incentives reserved for investors willing to finance the construction efforts of the supporting industrial infrastructure.

Striking a Balance

Primarily, the de-concentration of Java as the main industrial region, which currently boasts about 75% of Indonesia’s industries to facilitate a balanced, regional industrial spread by 2025 has spurred the Ministry of Industry to earmark important industry clusters within six Economic Corridors. The country is effectively implementing its industrial development plans, and its pragmatic approach is bringing envisaged results. As all the vital sectors of the economy, from agriculture to trade, continue to outpace annual projections, the Ministry of Industry is steadfast in its role of guardian and facilitator, thwarting circumstances that may prevent Indonesia from achieving its objectives for 2025.

Indonesia 2013

INDUSTRY

A Foundation in Principle That business is booming is good news for Sinar Mas’ shareholders, but the bounty extends to the whole of Indonesian society and that is clearly central to the company’s strategy. Franky Oesman Widjaja

Chairman and CEO, Sinar Mas Agribusiness and Food Vice Chairman, Agribusiness, Food and Livestock, Indonesian Chamber of Commerce and Industry (KADIN Indonesia)

Boasting abundant resources, proactive management, and a range of successful business units, Sinar Mas has positioned itself for significant growth and looks to leverage its principal industries in the agribusiness field to be part of the solution to an ever-increasing demand for food and agricultural products worldwide. What began as a coconut oil trading firm in 1962 has become a multi-billion dollar entity under the direction of Franky Oesman Widjaja. In a year of economic turmoil, when many companies around the world suffered significant losses, 2010 saw Sinar Mas record more than US $7.2 billion in exports, garnering a reputation both for the high quality of its products, and the integrity of its business practices. By any standard, Sinar Mas’ accomplishments are staggering in scope, but it is the company’s values, methods and sense of social responsibility that are perhaps of greatest interest.

A Mission with Purpose

The future is one of significant portent for Sinar Mas, as opportunities abound, particularly in the area of food production. This is a result of both market conditions and management’s forward-looking agenda. Sinar Mas, together with Indonesia as a whole, stands ready to leverage the vast natural resources of the country to help meet the challenge of answering the world’s critical need in food production, characterised since 2007 by the United Nations’ Food and Agricultural Organisation as an international “food crisis.” The commitment to this crucial, broadreaching endeavour is manifested in the

work of Widjaja with KADIN; it is a compact he regards as more than a business stratagem, it is an obligation to humanity. Indeed, KADIN has launched an ambitious agenda, seeking a 70% increase in crop production with a goal of reaching food self-sufficiency by 2020. Indonesia has the resources to produce food well in excess of its own needs, and Widjaja seeks to foster an environment where the country can assume a significant role in solving the world’s food shortage, a policy that’s good for the world’s hungry and Indonesia at the same time. Widjaja’s strategies have found a worldwide audience; recently he addressed the World Economic Forum on East Asia, held in Jakarta in June of 2011, where his views on halting deforestation by adopting sustainable practices were well received by some of the world’s leading authorities on economics, as well as international business leaders and heads of state. Widjaja also introduced to international audiences the “New Vision for Agriculture” through the “Partnership for Indonesia Sustainable Agriculture,” of which he is the co-chairman, at the World Economic Forum 2012 in Davos, Switzerland. Widjaja’s philosophy is brought to bear in managing PT. SMART Tbk or Sinar Mas Agro Resources and Technology, the largest supplier of palm oil in Indonesia, and one of the largest in the world. As palm oil is the most popular cooking oil in the world, garnering approximately 30% of the world market, the prospects for Sinar Mas’ expansion of exports seem certain. While much of Sinar Mas’ success can be attributed to production and practices that stress high quality at a low price, the larger view is that Sinar Mas earnestly seeks to do the right thing by all concerned.

STRATEGY

That business is booming is good news for Sinar Mas’ shareholders, but the reward extends to the whole of Indonesian society and that is clearly central to the company’s strategy. Sinar Mas’ success is in no small part a reflection of management’s values, where integrity, innovation and commitment are evident in its day-to-day operations. This is exemplified in Sinar Mas’ approach to land management where Golden Agri Resources, (GAR) forgoes development of forests with “HCV,” High Conservation Value, or those with “HCS,” High Carbon Stock; lands many less socially-conscious firms would consider exploitable for easy, short-term gains. GAR has partnered with The Forest Trust to ensure that its forest-management program and products’ supply chain adhere to international standards of excellence for sustainable growth. The words of Sinar Mas’ founder, Eka Tjipta Widjaja, serve as a mantra for the company, its workers, and broader endeavours: “Be a man of integrity, be responsible to your family, job, and society.” Clearly, with its record-setting income levels for successive years, and record of environmental stewardship, it is a philosophy the company and its units have taken to heart. Sinar Mas’ approach to long-term sustainability is manifest in its contribution to the social well being of Indonesia. Not only has Sinar Mas brought much-needed economic development to the country and its rural population, in particular, it has also been responsible for the creation of educational facilities throughout the country, establishing 146 new schools, employing more than 1,100 teachers and enabling the educational aspirations of over 23,000 students. It has further established and endowed scholarship programs to broaden educational op-

Indonesia 2013

INDUSTRY portunities throughout the country, pouring billions in Indonesian currency into the effort. This willingness to go beyond standard corporate governance, to seek creative solutions to guarantee its future by addressing the needs of society, is the benchmark of Sinar Mas’ forward-thinking strategy, and marks the company as truly exceptional in vital respects. Sinar Mas’ economic performance is centred on its core business units and relies on both the natural and human resources of Indonesia for its success; they are, in fact, inextricably linked. Agribusiness is the company’s principal concern. The palm oil industry in Indonesia employs approximately 4.5 million people, and Sinar Mas has over 440,000 hectares under cultivation, which produced 1.85 million tons of palm oil in 2010. As impressive as these production numbers are, it is even more significant that Sinar Mas clearly has the capacity and strategy for greater production results, and the plan to effect sustainable growth.

Sinar Mas produces more palm oil per year than Brazil, Nigeria and India combined! Expanding Markets

One of Sinar Mas’ stated goals is to become Indonesia’s largest and most sustainable integrated company. Toward this end, Sinar Mas has broadened its mercantile reach, expanding its markets in China, Asia’s powerhouse marketplace. The company supplies the Chinese market with an array of agricultural products and recently acquired the China-based, food products company Florentina International Holdings to give it a manufacturing base within the People’s Republic of China, and a marketing platform to further its Chinese market share. Given that projections place nearly half the world’s population in Asia by the year 2045, Sinar Mas’ management has implemented the measures needed to ensure its continued success in the expanding agribusiness sector. As strong an economic presence as the agribusiness units are within Sinar Mas, it would be incorrect to construe the company’s business interests as one-dimensional. Sinar Mas’ real estate interests include significant push into residential markets, commercial office complexes and retail shopping centres, as well as the development

of hotels and resorts. Combined, the real estate assets under Sinar Mas Land are worth over US $2.3 billion. The same philosophy guiding the sustainable expansion of the agribusiness model applies to the real estate sector, where the focus has been on incorporating environmentally friendly materials such as strata tiles in the construction process. Additionally, Sinar Mas has implemented holistic planning principals into its developments, where residents have easy access to retail outlets, office locations and a range of facilities for business, health and pleasure activities. The company’s management recognised that the energy needs of a growing population and economy would put a strain on available resources. Thus, it began development of a mining concern that could not only supplement Indonesia’s energy supply, but could also export fuel to other Asian countries. In 2010, coal-mining production rose to 5 million tons, with a known reserve of 1 billion tons. The company has further channelled its production capacity for other agribusiness products with significant results. Its Pulp and Paper unit posted considerable gains, effectively balancing increases in production while maintaining HCV areas, to become the second-largest paper supplier in the world. Its growing reputation for excellence, coupled with recent rebounds in pulp prices, place Sinar Mas in a prime position to make even further gains. Financial services, offered under PT Sinar Mas Multiartha Tbk, include banking, insurance, asset management, and financing among others. The unit enjoyed tremendous success in 2009, with an increase in assets from the previous year of more than 128% and achieved a similarly strong performance for 2010. Additionally, the company was awarded the Best Life Insurance category award in 2011, participating in a joint venture with Mitsui Sumitomo Insurance. PT Sinar Mas Multiartha Tbk’s interest in serving its banking customers is based on the belief that standards of service found at international banking institutions should also be available to Indonesian society from local entities; that responsible banking practices should include transparency and responsibility. Sinar Mas’ telecommunications unit, Smartfren, offers exciting possibilities for building upon its 6.9 million-customer base

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(as of September 2011) to make substantial gains in market share. The reason for the enthusiasm is the increased service package offered which establishes the unit at the technological forefront of the industry in Indonesia. Services are offered across multiple platforms at attractive prices, and utilise the potential of the CDMA channel access. Reliable, affordable communications are a basic need to further social advancement, and entire segments of society find that they now have access to inexpensive telephone service through this unit of Sinar Mas.

Looking Forward

Each of the business units of Sinar Mas operate independently, yet they all act in concert to achieve the goals set forth by the shareholders, those of sustainable growth and positive contribution to the society. The benefits accrued by Indonesian society and the remote communities within the archipelago through association with Sinar Mas are multifold. Advancement in the overall economy, quality of education, and meaningful environmental programs have come to fruition through the auspices of Sinar Mas’ management team. Acting alongside with the Indonesian government, Sinar Mas is putting forth a concerted and determined effort to realise its goal of food security through self-sufficiency. Ultimately, the beneficiary of this effort will be Indonesian society, with the quality of life improving exponentially for the grass-roots elements, like farmers and labourers. To Sinar Mas, the value of this advancement is inherent in the company’s core principles. Sinar Mas welcomes cooperative ventures with like-minded foreign investors, who see the value in sustainable growth, conservation, and the unique role that Indonesia can play in providing solutions to the world’s growing food crisis. It is an endeavour that Sinar Mas is dedicated to fulfilling. Sinar Mas has taken the long view on profitability, by stewarding the community and environment that supports its endeavours, fostering social and educational initiatives to improve the quality of life for all Indonesians, and by extension, all those who support sustainable production through their purchases. It is this holistic approach together with considerable business acumen and implementation of best practices that has positioned Sinar Mas for the success it has enjoyed to date.

Indonesia 2013

Industry

Attributes of an Emerging Global Giant

Rekind is arguably the foremost contender from South East Asia to dominate the global industrial landscape of engineering, procurement, construction and commissioning in the near future. IR. Mochammad Ali Suharsono

President Director, PT Rekayasa Industri Engineering and Construction

When a company sets out to become a global power in the extremely competitive arena of integrated industrial engineering spanning the fields of procurement, construction and commissioning (EPCC), it is expected to be highly competitive in expertise, service delivery and professionalism. Track record and vision of the future are paramount to corporate success, and in Indonesia it would be near impossible to ignore the name and brand, Rekind. The reasons for this are impressive and numerous. Take for a cue, the fact of its bold and promising blueprints of over $500 million USD investments in Indonesia’s industrial sector- geothermal and coal fired power plants; strategic acquisitions of mechanical and pipeline construction companies are its markers for a prosperous future.

Assessment Series from Lloyd’s Register Quality Assurance Limited 18001:1999 and the Safety Award from PT Kaltim Nitrate Indonesia for clocking up 11 million man hours without Lost Time Injury and 6.5 million man hours without Medical Time Injury, strongly underline its credibility as a prospective leader in the area of industrial engineering and business development. Expectedly, these leadership attributes are enshrined in its vision and mission statements, which focus on the five elements of consistently implementing high quality expertise and leading innovations in the provision of competitive EPCC service globally, improving its competency and expertise towards its recognition as a leading and responsive organisation worldwide, practising the virtues of excellent corporate governance, increasing long term value through astute investment management and providing true added value as a priority for customers, shareholders, employees and the general public.

Accolades and Applause

In 2005, Rekind was bestowed with the ASIA Engineering Award by the Federation of Engineering Institutions of Southeast Asia and Pacific as a recognition of its excellent performance in the development of NPK Fertilizer Plant located in Kedah, Malaysia. The remarkable feat of combining two technology processes, owned by INCRO (Spain) and Snamprogetti (Italy), for implementation in 3D Plant Design System in the Fertilizer Plant won it the Adhikara Engineering Award. A year later, the Indonesian government honoured Rekind with the Upakarti Award for Pioneering Industry Technology Development, specifically for its groundbreaking work for production of unleaded gasoline under Project Blue Sky Balongan. Several recognitions, including the Certified Occupational Health and Safety

Indonesia accounts for 40% of geothermal power in the world. Meteoric Success

Established as recently as 1981, Rekind came into being through the enactment of Regulation of the Government of Indonesia Number 7. Designated officially as PT Rekayasa Industri, its initial operational forays were into the field of construction requirements associated with fertilizer plants. With considerable proficiency it soon mastered the expertise of cement plantertise for oil and gas engineering projects. These advancements, built on successful experiences in the execution and management of complex industrial projects, forged the basis of Rekind’s pioneering venture into the

STRATEGY

development of geothermal opportunities in Indonesia, which it has been leading since then. As South East Asia’s economies performed spectacularly, Rekind’s management carefully executed its pertinent strategic plans, resulting in its diversification into four market segments. The move to branch into the areas of Refinery and Petrochemical, Oil and Gas, Geothermal and Power and Minerals and Infrastructure, has proven to be very rewarding; some having expanded by even more than 460% since. Consequently, the enterprise has grown in capability and profitability, in the successful delivery of projects such as Kupang Cement Plant, the ROPP Project, Ferronickel Smelting Plant, Subang’s CO2 Removal Project, Gas Booster Station Project, PLTU Suralaya 1x600 MW Project and the 168 km long underwater gas pipeline project, connecting Sumatra and West Java marking Rekind’s entry into the offshore construction business.

The Efficiency Benchmark

Rekind operates four Strategic Business Units (SBUs) along with a central Business Unit portfolio to oversee the end-to-end value delivery process including business development, marketing, project conception, development, execution and finally project completion. It has developed a seamless system that provides conducive business environment. Being predominantly an EPC project contractor, Rekind’s contract template specifies that it designs, procures, constructs and guarantees project performance within a fixed price. In essence, the project owners enjoy the benefits of putting in minimum efforts for maximum project delivery returns, giving a single point contact for optimal monitoring and coordination purposes, assuring fixed project cost, determining investment outlay at project outset, specifying project scope and requirement, determining

Indonesia 2013

Industry

Ammonia-Urea Project, Petrochemical

project quality and finally setting project duration and cost. Challenging as these might appear, they have guaranteed Rekind’s rapid evolution as an innovative and leading EPC contender in the South East Asia region.

A Path Breaker

Rekind has continued to break new grounds in promoting global competitiveness by favouring low costs, expeditious delivery schedules and defined solutions. Its ‘turnkey’ solutions are noteworthy for assuring clients of a ‘single point’ responsibility of setting up industrial production and processing facilities. Few competitors within the region can boast of a capacity of more than 250,000 engineering man-hours a year and employing over 1000 experi-

enced professionals. State-of-the-art is engrained into Rekind’s operational DNA in terms of resources and support infrastructure. Its wide ranging procurement network is founded on strategic alliances and long term relationship with renowned suppliers and vendors. Over 100 million man-hours of project construction experience is a seal of trustworthy service for any corporate concern with a project track record as extensive as Rekind’s. Indonesia’s vast geothermal power potential is of high importance to Rekind as it accounts for about 40% of the world’s total capacity. With less than 2.73% of that potential currently tapped for geothermal power plant purposes, Rekind, already bolstered with expertise and experience from building 19 geothermal plants in Indonesia, is actively seeking opportunities to provide lasting solutions to Indonesia’s electricity crisis through this alternative renewable energy source. Being a state owned enterprise with an express mandate to contribute technologically and economically to Indonesia’s overall development, Rekind has formed partnerships with leading EPC companies like Mitsubishi Heavy Industries, Sumitomo, Toyo, Chiyoda, JGC, SK Engi-

STRATEGY

neering, Stone & Webster for domestic and overseas projects. Last year the enterprise pulled over $341.02 million USD in revenues and posted a Return on Equity of 13.52%. Each year since 2006, the financial audit report on Rekind has consistently averaged an AA rating from 75 points in 2010 to 82.5

Lahendong Project, Geothermal

points in 2011, indicating a healthy sustainable growth of about 10%. Its competitive advantages of ready access to the three forms of capital, direct channels to the latest technologies and industry processes combined with a reputation and history of trusted partners as well as reliable supply networks are the pillars which shall ensure its profitability and growth into the future and validate its quest to fulfil its corporate social responsibilities.

Indonesia 2013

TRANSPORTATION & logistics overview

Indonesia’s Transportation: An Epic Challenge on Land, Air & Sea As infrastructure improvements race to keep track with economic growth, the developments in transportation and logistics are providing an exceptional investment opportunity all of their own. There are many different factors that will ultimately decide if Indonesia is capable of maintaining its robust economic growth and ambitious targets. A holistic approach would seem to be the most prudent approach and the Indonesian government certainly appears to be working along this line of reasoning. However, transportation and logistics may yet hold the largest piece of the puzzle. If infrastructure is a recurring theme in Indonesia’s present day story it’s with good reason. It is closely tied into everything that surrounds the country’s development and represents all that is simultaneously frustrating, challenging and hopeful about its immediate future. A comprehensive understanding of the obstacles that must be overcome, as well as the potential that is locked inside this fascinating country, isn’t possible without a closer look at the traffic and logistics sector of Indonesia.

Averting Gridlock

transport is dropping despite efforts to reverse this trend. In 2011, Vice President Boediono announced a 17-point plan designed to reduce traffic in Jakarta, combining a mixture of short-term, intermediate and long-term initiatives that include a crackdown on illegal buses, a master plan for revising the public transportation system and the creation of six inner-city toll roads. In the same year a new Transport Authority was set up, exclusively designed to implement the necessary changes in the capital city. This move has been welcomed by the private sector who perhaps most of all feel the pain of the congestion. As with much of Indonesia’s plans, the proposed solutions are multi-faceted and attack the problem from a number of different angles. If proven to be successful in the capital, this could prove to be an effective template for tackling the road transportation probThe proposed solutions are multilem across the rest of the country.

faceted and attack the problem from a

Much of Indonesia’s road netnumber of different angles. Making Tracks work needs replacement or renoIndonesia’s rail network is, advation but this is a minor problem mittedly, somewhat limited, with less than 7000km of fragmented compared with the more pressing concern over congestion. Aptrack – of which only around 4800km is currently useable. Howpreciation of the scale of the problem is best served by considerever, the pressing need to improve transportation options has ing Jakarta, which serves as a microcosm for the dilemma and stimulated huge levels of investment in this sector. provides a glimpse of what other parts of the country could soon In 2009 the rail monopoly enjoyed by Kereta Api Indonesia be facing. (KAI) came to an end. Perhaps motivated by the need to embrace A report in 2010 indicated that there were over 11 million vehia more commercial strategy, KAI has since established plans for cles in the Greater Jakarta area with around 1.5 million of those a Bali Ring Railway that will run a full circuit of the island. This $2 within the capital city. The problem is exacerbated by the relatively billion USD project is targeted for completion in 2016. No less siglow number of roads; compared to other similar-sized cities, at nificant is the Ministry of Transport’s plans for a high-speed railway least in terms of percentage; Tokyo and New York have almost system connecting Jakarta with Surabaya with a travel time of three times as many roads. How serious is the problem? Jakarta, as little as four hours. Planned in conjunction with the Japanese despite being one of the largest cities in the world, is predicted to Chamber of Commerce and Industry, development is expected experience total gridlock sometime during 2014. to begin in 2014. The cause of the problem is fairly straightforward – the rate at But even more intriguing is the interest from private investors in which Indonesians are reaching income levels sufficient to purdeveloping rail travel in other more remote areas of the country. chase a private vehicle is outstripping road network growth by a Aimed at supporting mining development, especially in coal, netfactor of ten – the solution less so. Private vehicles account for works of ports and railways are receiving significant investment around three-quarters of the traffic in Jakarta and use of public and a variety of projects are expected to begin during the next five years with a combined price tag running into billions of dollars. Railway travel may seem like an unlikely candidate for contributing towards Indonesia’s transportation development but its potential for reducing road congestion and linking crucial ports is making it a key area of development for both the government and private investors.

Open Waters

In the world’s largest archipelago it comes as no surprise to learn that water transportation is as crucial to domestic business STRATEGY

Indonesia 2013

TRANSPORTATION & logistics overview as it is to international trade. What may seem curious is the fact that many of the existing ports are insufficient to cater for the rapidly growing requirements of the country. In 2011 the Ministry of Transport set up a port authority that could act independently of the four existing state-owned port operators. The aim is to allow local governments and private sector businesses to enter the port management sector but the underlying purpose appears to be to create a more competitive environment that will bring down the unnaturally high cost of domestic marine transportation. There are more than a few political hurdles to overcome to make this venture a success but it underlines the government’s commitment to the long-term growth of the sector. Perhaps the most fascinating development in this area in recent times is the 2011 introduction of cabotage rules requiring all sea vessels in Indonesian waters to be owned by domestic companies (with some exceptions for shipping related to oil and gas production). This has provided a significant boost to Indonesia’s shipping companies, which have seen an increased demand for boat purchases and hire. And in an interesting twist, many global shipping businesses who purchased new vessels prior to the economic downturn have since found the need to sell, driving down the costs. This development has proved to be a welcome one for Indonesian shippers who have suddenly found themselves in need of purchasing new vessels to cope with the increased demand for their business. The unpredictable global economy notwithstanding, water transportation in Indonesia looks to have a bright future, particularly as the oil, coal and gas sectors continues to grow. There is still much work to be done in bringing the major ports up to international standards but there appears to be every reason to believe that development will soon catch up with demand.

take full effect by 2015. Services and standards among private airlines still needs to improve and, while other ASEAN countries each have only one airport that will be affected by the Open Skies agreement, Indonesia has five airports (Jakarta, Bali, Medan,

Sepinggan International Airport, East Borneo, Indonesia

Surabaya and Makassar) that will need to adapt. In the current economic climate many industries would be only too happy to be in a situation where demand is massively outstripping supply. Air travel, as with all of Indonesia’s current transportation sectors, may be overcrowded but once the expansive plans have been completed it would seem that the opportunities for further growth know no limits.

Logistics

One of the strongest indications that the infrastructure challenges Indonesia faces will not be able to hinder economic growth is the scale of the logistics market; there are currently more than 300 courier and logistic providers, including a number of significant multinational corporations. Although some consolidation is expected there can be doubt that some of the largest players in this sector are banking on the long-term growth of this market. Aside from working on the aforementioned transportation challenges the government is also seeking to tackle some of the constraints in the Indonesian supply chain. Asosiasi Logistik Indonesia (ALI), a non-profit organisation for the supply chain and logistics industry in Indonesia, is working with the Coordinating Ministry for the Economy on a plan that looks as far ahead as 2020. Targets include streamlining cargo handling and speeding up the transfer of goods out of Customs. An indication of the progress that has been made can be found in the movement towards outsourcing supply chain management to third-party service providers; a positive indication of a maturing market that is confident of continued expansion.

Flying High

The air transportation industry has, in many ways, been an unexpected success. You’d be forgiven for assuming that the cost of air travel would dissuade domestic passengers in a developing country and yet many Indonesian airports are desperately overcapacity and crying out for development and expansion. There are two reasons for the popularity of this mode of transportation, the first of which is linked to overcrowded roads and ports; air travel is currently the fastest way to travel domestically. The second cause relates to the deregulation of the air transportation industry over ten years ago. With more airline operators in competition, free to set their own rates, prices have been driven down and overlapped nicely with recent increases in disposable income. Domestic passengers in 2011 numbered around 60 million, making up almost 90% of the total and representing a 15% increase over the previous year. This number is expected to increase by a further 50% by 2015 with a projected 90 million domestic passengers and 30 million international flyers. Little wonder then that the government is scrambling to build new international airports and expand the existing ones. Development of 20 new airports is planned over the next 15 years and almost half a billion USD has already been pledged to improve the current facilities. Additional challenges are also still to be faced with the implementation of the ASEAN Open Skies agreement which is due to STRATEGY

Conclusion

If transportation congestion and facility inadequacies are a cloud on the horizon of economic growth, then the silver lining is the level of interest from investors recognising the potential for profit in the developments. The infrastructure requirements of Indonesia’s blossoming economy offer a vast array of investment prospects in themselves and it is little wonder that domestic and international firms are queuing up to involve themselves in projects on land, air and sea. As long as the government continues to provide the required investment framework and private funding continues to flow, the transportation sectors of this country will be virtually unrecognisable in just a few short years. 35

Indonesia 2013

TRANSPORTATION & LOGISTICS

Local Services…Global Ambition While other national postal services are nervously eyeing the future, Pos Indonesia have established plans that will lift them to new heights. Dr. Ketut Mardjana

President Director, PT Pos Indonesia (Persero)

The digital revolution is changing the world in ways that no one could previously have imagined. Postal services around the globe are seeing their market and profit margins squeezed like never before. But Dr Ketut Mardjana, President Director and beating heart of Pos Indonesia, has a drive and ambition that is poised to propel Indonesia’s national postal service into new markets and unparalleled profitability. His determination is that Pos Indonesia is not merely going to compete with rival delivery services, it’s going to set a pace that competitors will struggle to match, and generate new business in a variety of new sectors. Dr Mardjana’s overwhelming optimism is certainly warranted given that, since his appointment to President Director in August 2009, the business has halted previous declines and posted a series of significant annual profits for each of the last three years, most recently recording a 2011 revenue of USD 320 million, an increase of 14% over the previous year. This reversal of fortunes is no accident; in August 2009 the management board implemented a quick turnaround strategy to improve existing services and also to create a long-term strategy that will see Pos Indonesia aggressively expand into new markets.

Logistical Genius

The reasons for Pos Indonesia’s determined venture into new areas of business become clear when you consider that postal services around the world, both private and national, are facing the same challenge: the increasing domination of digital communication, leading to a reduced demand for the

distribution of written communication; on a global level, the overall volume of regular postal mail is steadily declining. Surprisingly, Indonesian mail and parcel markets are still growing, but the fundamental shift in the way in which people connect is a clear indicator that this trend will not continue for long. Wisely, Pos Indonesia are not limiting their focus to increasing their market share of the postal service, but are also widening the range of products available at their post offices and service points, and diversifying into new complimentary areas of business. But Pos Indonesia has an additional, and perhaps greater, challenge, created by Indonesia’s unique geography. It’s all too easy to take for granted the epic logistical challenge of providing a national postal service to the over 240 million people of Indonesia, situated across more than 17,000 islands. Through its 11 regional offices, Pos Indonesia has established a network that enables it to deliver mail throughout the Indonesian archipelago. In addition to managing this comprehensive delivery network, it also operates more than 3,800 post offices, over 24,000 service points, and plans to create many more additional outlets over the next few years. Considering this spectacularly complex series of challenges, it would be entirely understandable if decisions were made to scale back or even close down operations. And yet, the reality is that Pos Indonesia has never been more single-minded in their progressive push. Although sights are clearly set on the future, Dr Mardjana, along with the rest of Pos Indonesia’s almost 28,000 workers, is mindful of the proud history of the company he’s inherited. This is, after all, an organisation that can trace its

STRATEGY

roots back to 26th August 1746 when the Dutch East India Company established a government-owned postal service. During the last 200 years, the nature of its functions have constantly expanded and evolved to meet the needs of the market, and it is, perhaps, the desire to continue this honourable tradition that is motivating this progressive drive move forward, and on a scale that will eclipse everything that has gone before.

Outside The Box

The key to Pos Indonesia’s success is a diversification strategy based on the ancient axiom of not putting all of ones eggs into a single basket. Its expansive plans, many of which are already in operation, demonstrate a highly creative approach. The three existing lines of mail and parcel, logistics and financial services, will soon be expanded into a total of six lines - through the creation of subsidiary companies - consisting of courier, logistics, financial services, property, pos mart and information technology. Some additional highlights include…

Capital Post Building

Postal Agency Services: The creation of additional post offices and service points are planned with the goal of making available a wider range of consumer products and services, such as hybrid mail, instant

Indonesia 2013

TRANSPORTATION & LOGISTICS money orders, e-commerce, remittance and pos pay. Financial services are also accessible, including money transfers, online payments, bank channelling, giro and funds distribution. Online Services: The www.posindonesia.co.id website has been improved so that, in addition to providing visitors with access to detailed information on the products and services available, interactive features can be used to look up postcodes and track parcel deliveries. Close attention to digital solutions is particularly important because the Indonesian population has a reputa-

Rp 200 billion (IDR). It’s almost impossible to overstate the grand scale of the plans that Pos Indonesia are undertaking. The six lines of business that will form the new foundations of the company, individually, have the potential to be overwhelming profitable. When combined, the possibilities are almost endless. This is, without a doubt, the reason why many savvy investors are keeping a close eye on an Initial Public Offering (IPO) that is expected to take place in 2013-2014; a significant event that will be a celebrated and momentous occasion in Pos Indonesia’s history. And as if these aspirational goals weren’t enough, Pos Indonesia’s sights go well beyond Indonesia’s borders. Earlier in 2012, a Co-operation Agreement with United Parcel Service (UPS) came into effect and

Pos & UPS cooperation

tion for quickly and eagerly embracing new technology. Smartphone uptake is high, Indonesia is 5th in the Twitter account rankings and about one in six of the population own a Facebook account. Government Services: In association with the Ministry of Communications and Information, Pos Indonesia’s post offices also operate as community access points, called Warung Masyarakat Informatika (known colloquially as Warmasif). Pos AdMail: This corporate service, available to both governmental and private organisations, provides bulk mail delivery. Through strategic partnerships, Pos AdMail is able to offer a complete end-to-end service, from preparation and printing of literature, to enveloping, packaging and distribution. The above examples focus on just a few products and services related to the postal industry, but given the nature of the divisions that are being developed, it’s plain to see that Pos Indonesia is broadening its horizons in every possible direction. A prime example is the recent announcement that Pos Indonesia is investing Rp 70 Billion (IDR) in the construction of two new hotels in Bandung, West Java, adding still further to its existing real estate portfolio, valued at around

Savvy investors are keeping a close eye on Pos Indonesia’s expected IPO (2013-2014) and what could prove to be a lucrative opportunity.

Vision 2025

was announced through a much-publicised signing ceremony. Considering all of the above, this occasion was undeniably more than just a nominal joint venture or public relations exercise. This event was, in fact, a sizeable step forward on Pos Indonesia’s roadmap to success. The agreement - a follow-up on an earlier “memorandum of understanding” - includes the utilisation of UPS for international express delivery, cooperation in logistics services and a synchronization of other business. Specifically included is the creation of a new product called “EMS Priority”, a day-definite package delivery service with a money-back guarantee.

Environmentally Friendly

In view of this rapid and comprehensive business diversification it is laudable that Pos Indonesia has still found the time to

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consider its social responsibilities. Dr Ketut Mardjana admits to enjoying spending his leisure time by taking his family on rural trips, especially in Bali, his hometown; his bucolic interests could be the reason why Pos Indonesia recently opted to participate in in the creation of City Park, as well as reforestation and cultivation of endangered trees. This contribution is just one part of Pos Indonesia’s commitment to helping create a healthier living environment. E-office applications have also been introduced internally, which is expected to reduce the company’s overall reliance on paper and ink.

The culmination of the aspirations described above are illuminated in what has been dubbed “Vision 2025: Locally Integrated, Globally Connected”. The clearly stated purpose is for Pos Indonesia, by 2025, to become the market leader in Indonesia, delivering the most reliable mail, parcel & logistics network, the most trusted financial services, and to connect to major global economies with the purpose of succeeding in the world era of supply chain competition. Are Dr Mardjana and Pos Indonesia capable of delivering on their long-term plans? Well, take a moment to consider and fully appreciate the complexity of a business that can deliver mail from every one of Indonesia’s 17,000+ islands, to any other island. In network terms this requires the creation of over 144 million connections! That Pos Indonesia accomplishes this feat, on a daily basis, deserves nothing less than our highest respect and acknowledgement that this company is fully capable of achieving every last one of its ambitions.

Indonesia 2013

TRANSPORTATION & LOGISTICS

Top Flight Indonesian airports are being stretched to their limits as demand continues to escalate. PT. Angkasa Pura I reveals its master plan to keep pace and meet expectations. Tommy Soetomo

President Director, PT. Angkasa Pura I (Persero)

PT. Angkasa Pura I, an organisation responsible for 13 airports in the eastern region of Indonesia is thriving. Passenger numbers are up 13.6% and are expected to total 56 million by the end of 2012. Total revenues are up by an astonishing 20%, customer satisfaction is up and 6.4 trillion IDR worth of development is expected to be completed before the end of 2013. But despite his company’s satisfactory progress, Tommy Soetomo is not happy. To understand his reaction, we must first understand why airports are so important to local and national economies, and why they’re particularly crucial to Indonesia’s continuing development.

Jet-Fuelled Economy

Although we tend to associate airports with tourism, the truth is, airports are also a fundamental part of the infrastructure that supports trade and investment. The very presence of an airport in a city attracts businesses and residents, creates a surge in the local economy and provides greater business opportunities for the country. This

Ngurah Rai Int’l Airport

is as true in Indonesia as anywhere else, but all the more so because of the urgent need to improve and expand existing infrastructure. Lack of capacity in land, sea and air infrastructure is hampering business development and, by extension, economic growth; Indonesian business and government are scrambling to improve all aspects of local, national and international transport. With this in mind it is less surprising to learn that Tommy Soetomo won’t be able to express satisfaction until the airports’ capacity are outstripping demand. Mindful of his obligations, not just to his customers but also to the development of Indonesia, Tommy Soetomo is taking nothing for granted. Every element of his organisation is receiving heavy investment, and every aspect of service is being scrutinised and improved. Although by no means an exhaustive list, Tommy Soetomo has identified three specific areas, which are seen as fundamental to the future growth of Angkasa Pura I.

Customer Consideration

The customer satisfaction index is high on the agenda and is easily the most challenging hurdle given that most of the airports are overcrowded. Sepinggan Airport in Balikpapan, East Kalimantan, for example, has a yearly capacity of 1.7 million passengers, yet in 2011 it served 5.1 million. There isn’t a business in the world that can handle three times its maximum capacity without experiencing a serious handicap to their ability to provide the kind of service that 21st century customers expect. It is somewhat staggering to observe that, despite this challenge, the customer satisfac-

STRATEGY

tion index is actually improving year on year. The construction of new airports and expansion of existing facilities is seen to be fundamental to continuing this performance, but Tommy Soetomo has also overseen a number of other creative ventures to improve the performance of his employees and the organisation as a whole. Bureaucratic levels, for instance, have been reduced, and some rules and regulations have been changed, all with the goal of allowing people to work more easily and with greater efficiency. In view of the increase in international visitors, employees

Airport development in Indonesia is proceeding at a pace unlike anything previously seen in this part of the world. are encouraged to take overseas trips to become more familiar and knowledgeable about other cultures. And last, but not least, many employees are also learning to speak and understand English to at least a moderate level.

The Airport City

The overriding objective of Angkasa Pura I is to increase its economic contribution by producing profits for the stakeholders, creating jobs for Indonesians, and generating tax revenue for the government. Accomplishing this requires an increase in overall profits, not just by increasing airport capacities, but also by developing new streams of income. Tommy Soetomo believes the “airport city” concept is the way forward in this endeavour. The “airport city” (described by Time magazine as an idea “that will change the world”) is the concept of creating a city around an airport, rather than the other way around. Airports are commonly surrounded by large

Indonesia 2013

TRANSPORTATION & LOGISTICS

Sepinggan Int’l Airport, East Borneo

swathes of undeveloped land that are serving no purpose other than to provide a courteous distance between the noisy runway and peoples’ homes. An “airport city” utilises this land to build hotels, shopping centres, hospitals, golf courses and any number of other profitable constructions that can be enjoyed by local residents, as well as the millions of people that pass through on their way to or from an airport terminal. Will this idea result in more profits, more job opportunities and more tax revenue? There are already many examples of successful airport cities around the world that indicate this to be highly probable.

the outset, 6.4 trillion IDR worth of development projects at three major airports are already underway and are expected to be finished before the end of 2013. The aforementioned Sepinggan Airport is receiving a new terminal, built on 110,000 square metres of land that will increase annual capacity from 1.7 million to 11 million. Juanda International Airport in Surabaya, East Java is expanding its Terminal 2, increasing capacity to 12 million, although still short of the 14 million passengers expected to pass through the airport during 2012. The most significant expansion, however, is taking place at Ngurah Rai International Airport in Denpasar, Bali.

Reaching the Summit

With its 9 million passenger capacity, Ngurah Rai International Airport in Bali is already one of the largest airports in the country, yet by mid-2013 this facility will have increased five times in size and increased its capacity to 25 million passengers per year. In addition to expanding the international terminal, a new apron is being constructed

Pura I is determined that the arrival of these delegates will be a relaxed and pleasant experience and are committed to completing the development by May 2013, well in advance of the Summit, and allowing plenty of time to make adequate preparations. Also due for completion before the start of the APEC Summit are the development of special terminals at Ngurah Rai Int’l Airport and Sepinggan Airport. Requiring 80 billion IDR in investment and constructed in co-operation with ExecuJet Aviation Group - an aviation company based in Zurich, Switzerland - these terminals are designed for non-commercial or general aviation and will serve non-regular flights such as VVIPs and private jets.

Keeping Pace

Indonesia is in a race that features an ever-receding finish line. As fast as infrastructure development is taking place, the growing demand from businesses and consumers keeps threatening to overtake it. Angkasa Pura I is shrewdly taking the long-term view by, not just expanding airport

World-Class Ambitions

Third on Tommy Soetomo’s list of concerns - although the order in this article doesn’t necessarily indicate the order of his priorities - are international standards of safety, security and equipment. New installations and expansions in existing facilities are being developed but not at the expense of strict safety and security standards. In this regard, he said… “We gauge our operations and facilities according to international standards in terms of safety, security and equipment. Based on what we obtained in the survey, we are not happy. All the international standards are above 4, and we have set our target above 4 for a new airport. We want to have a world-class airport. We want to accelerate international practices. We want our new terminal to be world-class.”

Extraordinary Expansion

Airport development in Indonesia is proceeding at a pace unlike anything previously seen in this part of the world. PPP projects are being discussed with Indian investors with a view to creating “greenfield airports” (a new airport built on previously undeveloped land) in Jakarta but, as mentioned at

that will be able to accommodate up to 20 wide-bodied aircraft such as the Boeing B747. Bali is one of the world’s most popular tourist destinations, but this is not the sole motivation for increasing the capacity and functionality of the Ngurah Rai Int’l Airport. In November 2013, Bali will be hosting the Asia Pacific Economic Cooperation (APEC) Summit and is expecting tens of thousands of visitors from around the globe. Angkasa

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capacity beyond current demand, but also giving careful consideration to improving profitability, standards of care and the customer experience. Perhaps when Angkasa Pura I exceeds its targets in every area, Tommy Soetomo will admit to being happy with his progress. Or maybe he’ll just raise the bar again.

Indonesia 2013

transportation & Logistics

Harbouring Growth Indonesia’s archaic seaports are groaning under the strain of an explosion in international trade. President Director of the Indonesia Port Corporation II, Richard Joost Lino, offers a first-hand account of why this is all about to change. Richard J. Lino

President Director, Indonesia Port Corporation (IPC)

On February 4th, 2012 a vast cargo ship called the “Diadema” entered Tanjung Priok port in North Jakarta, the busiest harbour in Indonesia. This Maersk Line mega ship, carrying 4,500 standard-size containers, brought with it a bold new era in Indonesia’s maritime development. This was an especially proud moment for me because it marked the successful completion of many years of hard work and development and gave me a satisfying glimpse into the tremendous expansion and progress that Indonesian ports are going to undergo over the next decade and beyond. My name is R. J. Lino and, as the President Director of the Indonesia Port Corporation II (IPC), a state-owned company responsible for 12 seaports across 10 provinces, please allow me to share my vision of why Indonesian ports are key to the efficacy of this country’s logistics chain. The aforementioned event is merely the beginning of what IPC intends to achieve in supporting Indonesia and its trading partners’ ambitions to grow and improve their business interests

Advanced Shipping

When your country is an archipelago of over 17,000 islands, seaports become a lifeline to local and international trade. And yet if you were to rate the importance of ports to Indonesia by the quality of the facilities and logistics, you would be forgiven for assuming that they’re a particularly low priority. The unfortunate reality is that, at least for the moment, Indonesia’s operational harbours are inadequate and simply unable to keep pace with the country’s ambitions.

This is an issue we must resolve without delay. Indonesia’s logistics costs are currently among the highest of all South-East Asian countries and, as a state-owned enterprise, IPC is duty-bound to help to reduce this expenditure and, as a result, further boost Indonesia’s growing economy. The strategy is simple - if ports are cheaper and faster to use, then increasing levels of goods transportation will be transferred by sea rather than land which, in turn, will help to reduce the current high levels of road congestion. The arrival of the “Diadema” was a momentous occasion because it was the first time that a 4,500 TEUs container vessel was capable of docking into the port of

Kalibaru Port is a $4 billion USD project that has been described as one of the most important infrastructure projects that Indonesia had ever seen. Tanjung Priok (TEU stands for “Twentyfoot Equivalent Unit”), something that was only made possible because of significant investment in the harbour’s facilities and continuous optimisation and development. This was highly symbolic of what IPC fully intends to achieve. More advanced shipping solutions will open the gates to greater international trade, something that everyone in the industry agrees is an essential development for Indonesian commerce. February 2012 was also the month in which IPC launched its brand new corporate identity, adopting the motto: “Energising Trade, Energising Indonesia”. The spirit

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and energy we’re committing to becoming a world-class port is going to be crucial in driving Indonesia’s economic growth not just in the short-term but well into this country’s future.

$4 Billion Expansion

As the largest port in Indonesia, Tanjung Priok Port serves more than 50% of Indonesia’s import and export activities. Our forecasts indicate that the Port’s cargo traffic will rise significantly during the next few years and will soon reach its maximum capacity. In order to meet this expected cargo demand, IPC is now developing a $4 billion USD project in the north side of Tanjung Priok Port, Kalibaru, known as New Priok. The New Priok development project consists of seven container terminals and two product terminals. A toll road will connect those terminals to a logistic park enabling the Terminal to provide an integrated service. IPC has been awarded a concession to operate this port for 70 years, with an option of a further 25 years; the Coordinating Minister of Economic Affairs, Hatta Rajasa, who attended the signing ceremony of the concession, said that New Priok, in terms of helping the country to accelerate economic growth, is one of the most important infrastructure projects that Indonesia had ever seen. This is a responsibility we are privileged to shoulder and we have every intention of using this opportunity to boost the volume and quality of trade that this new port will attract. Although this is certainly a long-term project, the first container terminal of New Priok is expected to become operational as early as the third quarter of 2014. A further

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transportation & Logistics six container terminals will be added, year on year, with the final development expected to be ready by the end of 2022. We also intend to provide each terminal with a 20 meters Mean Low Water Spring (MLWS) depth to allow access for even the largest mega ship. Unless you work within the maritime or logistics industry it may be difficult to grasp the scale of what I’m describing so perhaps the most helpful explanation I can make in this regard is to tell you that New Priok’s development covers approximately the same area as the existing Tanjung Priok Port, and while Tanjung Priok Port has a current capacity of up to 9 million TEU containers, New Priok will have a capacity of 13 million TEUs. This means that, once it is completed, the combined capacity of New Priok will be an incredible 22 million TEUs. It’s hard to overstate the immense nature of the project that is already well underway but we are confident of our ability to complete this project, not just because of the experience and resources to which we have access, but also because of the investment and support from the major shipping lines.

Grooming Talents

Improving and expanding port facilities are important but there are two additional elements that also require careful consideration and significant investment. The first of these is the logistical underpinning of the harbour management. The level of speed and efficiency that is required to make our

ports effective can only be achieved by utilising the very best in logistics technology to ensure proper organisation of container traffic, documentation handling and electronic payments. To this end we are in the process of installing an online platform, developed by IPC’s subsidiary company SOGET, called the Indonesian Logistics Community System (ILCS). We expect this system to go live in Tanjung Priok in early 2013 with eventual implementation taking place across all 12 ports for which we’re responsible. The second and, perhaps, most important element is the human component. The best facilities and software will be wasted if we don’t also have highly able and qualified personnel operating and managing our ports. Despite the archipelagic nature of our country, it is surprising to note that at this point in time we simply do not have enough qualified people in the sea-transportation sector. A further $50 million of investment will be made over the next three years to develop these essential personnel. We’re already sending our employees to study overseas, as well as bringing over professors from Kuehne Logistics University in Germany. The next step is to open an IPC Academy

IPC Academy

in Ciawi, West Java where we will train and educate our employees, along with anyone else who is interested in developing a career in this industry. We intend to provide everything from vocational training to a master’s degree in port and logistics. The sole purpose of this facility will be to have qualified people in this sector so the maritime logistic industry and its associated businesses will run smoothly and Indonesia’s ability to develop people and commerce in this industry will be enhanced.

Mission Possible

Since I began IPC’s revitalisation drive in 2008, revenue and profits have doubled. As pleasing as this achievement is, what gives me the most satisfaction is that every day we take another step to realising our objective of providing and operating a reliable and first-class quality port service that will help to cement Indonesia’s value in international trade. And although national economic development remains our overriding purpose there are many more residual benefits to these projects. Local communities, for instance, are enhanced as a result of the increase in trade and employment opportunities. Not to mention the fact that our current employees are enjoying the greater job satisfaction that comes with working for a company in which they can take great pride. At IPC we have a saying: “Good Ship, Good Port. Bad Ship, Bad Port”. The meaning is clear - by developing world-class ports we attract world-class ships and world-class trade. In February 2012, as Tanjung Priok received the largest cargo ship in its history, the “Diadema,” I was left in no doubt that we are now within touching distance of accomplishing our mission.

New Priok Port Development Project

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TRANSPORTATION & LOGISTICS

Logistical Development Abdul Rahim Tahir, Managing Director of PT. DHL Exel Supply Chain Indonesia, explains why improvement to Indonesia’s infrastructure is so important and why his humble beginnings have proved to be the perfect training for his current role. Managing the Indonesian arm of DHL, the world’s largest courier and logistics company, is no small task, but I’ve never been afraid of hard work. After completing my military service in Singapore, I began my career as a courier at Air Express International with operation located at the Changi airport in Singapore and on my very first day my manager said to me “You will be like an ambassador for the company.” That was almost 30 years ago, but I never forgot those words. Despite the fact that I was performing an “entry-level job,” my manager’s comment really motivated me and heightened my determination to succeed. Today, the challenges I’m facing have never been greater. The logistical demands of Indonesian Abdul Rahim Tahir customers are maturing and there is a growing need for the sophisticated services provided by Managing Director DHL. And yet Indonesia’s physical infrastructure is currently considered substandard and the ar- PT. DHL Exel Supply Chain Indonesia chipelagic nature of the country makes it difficult to weave national infrastructure together. Improvements are essential if the growing demands of the Indonesian market are going to be met. The government is of course, playing a crucial role through their infrastructure revitalisation plan, which includes on-going airport and seaport redevelopment. The forthcoming completion of the Jakarta Outer Ringroad 2 will ease the traffic going into the CBD area and is an excellent example of the kind of on going developments that are required. But DHL is also investing their own resources into improving supply chains. In June 2012 we opened a new multiuser warehouse in Cililitan, Jakarta; this facility will provide a technical services solution program to support customer needs throughout the pre-sales and after sales business segment. My time in the military provided me with first hand experience of the importance of everyone working together as a unit. People entering the military come from all different walks of life, but I discovered that at their core everyone is the same and is capable of great things. This is the attitude and work ethos that drives me and my colleagues. If we support each other and work hard, then there is nothing that we cannot achieve.

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INFRASTRUCTURE OVERVIEW

3 Words to Modernise Indonesia’s Aging Infrastructure: Public Private Partnerships If Indonesia’s to become the ‘New Industrial Developed Country’ it aspires to be, it needs to attract foreign investors to finance its structural development. Here’s where that money will go. If there is one thing that’s almost certain to prevent Indonesia achieving its ambitious plans to become one of the world’s top 10 economies by 2025, it is the inadequacy of its infrastructure. To understand how these structural inefficiencies could be a major impediment to future growth, there’s no need to look further than the inordinately congested and gridlocked road network of Indonesia’s capital (something that is single-handedly estimated to cost the economy $1.5 billion USD annually). The fact that it is cheaper to import oranges from China than transport them from Borneo to Jakarta is an indicator of just how uncoordinated Indonesia’s transport links are.

population of air passengers are to be properly met. Thirdly, resolving environmental issues is seen as increasingly important. Economic growth inevitably produces environmental problems that necessitate the upgrading of infrastructure to deal with them. For instance, the obligation to provide safe and adequate water supplies for drinking, as well as sanitation. This is particularly important in burgeoning cities and towns where the arrival of rural newcomers imposes excessive pressure on the existing below-capacity drainage and sewer systems. There will also be waste management issues to deal with, which will demand improved methods of treatment, disposal and handling. The final infrastructure component of the Master Plan is architecture, construction and engineering, with the building of modern roads, the improvement of ports, and completion of other major civil engineering projects, all identified as important drivers for growth. The development of such projects will allow the faster, cheaper delivery of goods and produce to domestic and international markets.

Unlocking Development

So while Indonesia’s 240 million-strong population makes for an exceptionally dynamic marketplace, the country’s inadequate and crumbling roads and erratic power grid ensure the country’s true potential is not yet being truly exploited. For that to happen, over each of the next five years an additional $70 billion USD is Partners Needed needed to augment the $115 billion USD worth of infrastructure However, given their sheer number, the government fundamenprojects already scheduled or in progress. tally lacks the capabilities to implement all the infrastructure projects Understandably, President Susilo Bambang Yudhoyono and that it deems essential. So while it the Indonesian government have The ability to improve infrastructure has plans for revitalising the counconcluded that elevating today’s quickly will be the major determinant of try’s most heavily congested contransport, aviation, communicatainer ports, and the construction of tions and energy infrastructures Indonesia’s future growth. three more in Jakarta, Batam and to true 21st Century standards is Papua, this can only be done with construction and engineering fundamental for tomorrow’s prosperity. It has encapsulated this expertise and muscle from outside the country. thinking into a ‘Master Plan for the Acceleration and Expansion So the government will require foreign companies to contribute of Indonesia’s Economic Development’ (MP3EI), a blueprint for to the $468.5 billion USD necessary to make its plans a reality. To growth that concentrates on four particular elements of infrastrucachieve this, it is looking to establish collaborative projects through ture improvement. public-private partnerships (PPPs) with interested outside invesFirst, there is energy. While raw materials, inexpensive labour tors. and an abundance of land should encourage a vibrant manufacOne example is the joint venture between Indonesian coal comturing sector, the country’s industrialists are all too often hamstrung pany Adaro Energy and two Japanese construction firms in the by unreliable and geographically-limited power generation and building of a $3.2 billion USD coal-fired power plant in central Java. transmission systems. Aware that without a long or extensive track record in similar On the plus side, Indonesia benefits from having some of the ventures some potential funders might be reluctant to commit, the world’s most widely available geothermal power. This, together government is prepared to inject finance to bridge the ‘viability gap’ with the potential offered by energy production using biomass in schemes where profit margins are too commercially slender for from the region’s palm oil plantations, creates an opportunity to comfort. develop compact, distributed generation plants serving local comShould everything go to plan, with foreign investment forthcommunities. ing, then Indonesia’s GDP will rise to $4.5 trillion USD by 2025 Take-off Time and its per capita income quintuple from $3,000 USD a year curSecondly, aviation. The exceptional nature of Indonesia’s island rently to $15,000 USD. This will require Indonesia to consistently geography is the perfect catalyst for the development of an expost growth rates of 7% to 8% year on year, something that it can citing domestic aviation marketplace for short-haul flights. Howonly do by throwing off infrastructure constraints. If it manages to ever, more effective traffic control systems and on-ground support achieve that, the country will find itself moving from 17th position in networks are essential if the expectations of a rapidly expanding the world to well and truly sitting at the economic top table. STRATEGY

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Infrastructure

Inspiring Investment How committed is IIF to catalysing Indonesia’s infrastructure development? Committed to approximately 2 billion USD in prospective financing. Kartika Wirjoatmodjo

President Director, PT. Indonesia Infrastructure Finance (IIF)

Ask any Indonesian business owner what they need to develop their business, and it’ll only be a matter of time before they raise the subject of infrastructure. Through the Master Plan for the Acceleration and Expansion of Indonesian Economic Growth, the Indonesian government is committed to the economic growth of the country, and it sees improving Indonesia’s infrastructure as an essential part of that design. To facilitate this progress, IIF was established, an organisation that aims to encourage and support commercially viable infrastructure projects.

In short, infrastructure development has not been commensurate with the rapidly growing Indonesian economy. The good news is that better infrastructure will not only solve these problematic gaps, but will actively contribute to faster economic growth. Indonesia is one of the top 20 largest economies in the world and some experts believe that infrastructure resolutions could speed up economic growth to above 7%. Kartika firmly believes that the future is bright, but that infrastructure investment must accelerate to avoid missing valu-

Infrastructure investment must accelerate to avoid missed opportunities.

Encouraging Development

IIF is a private non-bank financial institution that is purpose-built to attract private investment in infrastructure projects in Indonesia. In addition to providing a variety of financing instruments, IIF also acts as an advisory service and aims to become a national repository of experience, skills and monetary resources that will encourage infrastructure development. President Director of IIF, Kartika Wirjoatmodjo, is under no illusions about the scale of development that is required. He describes many of the existing infrastructures, including roads, ports and airports, as already being close to or exceeding capacity, which has led to a variety of unwanted anomalies in the distribution of goods and services. Meanwhile, eastern Indonesia region has a lot to catch up in regards to their infrastructure and economic development despite its rich natural resources. Infrastructure in the region needs to be improved to reduce currently prevalent high logistic costs, improve individual and firm productivity as well as opportunity for advancement.

able opportunities. Indonesia has a GDP of over $700 billion USD and a per capita income of $3,000 USD, but the government’s 2025 goal is to increase GDP to over $4 trillion USD and per capita income to over $14,250 USD. For this ambition to be realised, Indonesia’s current economic structure - which is primarily based on agriculture and the harvesting of various natural resources - needs to become more focussed on industrial production processes. Better infrastructure will support better connectivity and will boost economic activities in areas such as agriculture, mining, energy, industrial, marine, tourism and telecommunications.

Development Begins

As you would expect from any government-backed organisation, IIF has to take a “big picture” approach and ensure that the projects they support are not only commercially sound, but socially and environ-

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mentally responsible, as well as compliant with international standards. Imminent investment activities include participation in the construction of a 117 km toll road and a gas-fired power plant. Advisory support for public sector projects in the water sector and renewable energy sector are also expected to get underway during the next few months. But this is just the beginning. There are other prospective financing projects in medium term in sectors as diverse as power, port, transportation, water supply, telecommunication and gas distribution. These prospective projects will require financing by IIF of approximately 2 billion USD within the next 5 years.

Quality of Life

Indonesia’s goal of economic growth is a target that is not only important for the business sector, but is also fundamental to reducing social and income inequalities and improving lives throughout the entire country. High quality education and better health care facilities are just two of the invaluable side effects of the countries long-term development plans. Kartika and IIF are well aware of the significance of what they are attempting to achieve and that infrastructure improvements offer more than mere logistical advantages. For this reason they are calling on financial institutions, institutional investors, infrastructure sponsors and the international business community to collaborate with IIF and take full advantage of the financial and intelligence resources that are on offer.

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INFRASTRUCTURE

A Bold Decision - This Key Reform Aims to Secure Indonesia’s Future The Indonesian government have demonstrated their commitment to the future of the country’s economic growth with a crucial new bill. While most countries would be overjoyed with growth in the 6%-6.5% range, Dr. Muhamad Chatib Basri is the Chairman of Indonesia’s Investment Coordinating Board (BKPM), speaking at the “Asian Investment Conference 2012,” was insistent that to take full advantage of the benefits of having a youthful population this number needs increasing to at least 9%. Infrastructure, he believes, is key to achieving this target. Reynaldi Hermansjah, Finance Director of Indonesia’s largest toll road operator, Jasa Marga, echoed this sentiment and pointed to the recently passed “Land Reform” bill as an example of how government policies have the potential to accelerate the construction of Indonesia’s infrastructure. The “Land Reform” bill was passed into Indonesian law in January 2012 – around 12 months after it was first introduced – and is primarily concerned with the alteration of land ownership rights. This new law increases the speed at which the government can appropriate land that is crucial to infrastructure projects and ensures a fair sale price for the original owner. A special committee has been formed to review each case individually and determine

the appropriate remuneration. Legal options are still available for landowners that wish to dispute the decisions made as a result of the bill but the framework is now in place to fast-track crucial land acquisition. One of the concerns that is frequently cited by nervous investors is uncertainty around legal issues. Creating consistency and urgency in the land acquisition part of the process will go a long, long way towards creating reliability over the associated costs and timeframes. As a result, this new bill is expected to double infrastructure spending over the next few years. The value of this reform was recognised almost immediately as stocks in property and toll road companies increased on the same day that the bill was passed. Passing the “Land Reform” bill was a huge test of the Indonesian government’s willingness to make the tough choices needed to drive economic growth forward; the bill, although possibly unpopular with land owners currently locked in negotiations, is a huge step forward in smoothing the way for foreign investment in the many available infrastructure projects that are required for Indonesia’s long-term success.

Firm Foundations…Solid Success A structure is only as strong as its foundation, and BAUER has been building on solid achievements for over twenty years. PT BAUER Pratama Indonesia (BAUER), led by Anthony Setiawan for over ten years, is an international foundation specialist, providing geotechnical contractor services and manufacturing specialist foundation equipment. BAUER can be contracted to carry out a wide variety of construction services, but are equally capable of providing a complete end-to-end service that includes project design, provision of specialist machinery, and completion of the construction work. BAUER is a subsidiary of renowned organisation, BAUER Spezialtiefbau Germany, a global force in advanced foundation technology that can trace its roots back to the late 18th century. Operating in seventy countries, the BAUER Group employs almost 10,000 workers, and boasts an annual turnover of over EUR 1.4 billion. Anthony Setiawan Anthony credits the company’s unrivalled success to their emphasis on quality, reliability and delivManaging Director ering a world-class service. Projects are carefully managed and potential problems are identified well PT BAUER Pratama Indonesia in advance so that innovative solutions can be found, this attention to detail enabling the company to complete projects on time and on budget. Clients can also rely on a quick response to queries and concerns; BAUER prides itself on its ability to solve technical problems and implement practical and economical solutions. Over the last 20 years, BAUER has worked on over 200 major projects, all over Indonesia, and in a wide range of construction sectors, including foundation of a building, infrastructure, marine and industrial. Notable developments include the Manhattan Hotel in Jakarta, the Plaza Indonesia, the Senayan Complex, the Paiton Power Plant (Unit 7), the Koja Car Terminal, the Sumarecon Flyover Bekasi, the Quay Wall in Batam, Holcim and Indocement Plant, and Ciputra World 2 Jakarta. The Indonesia Economic Masterplan (MP3EI) will require much additional construction, and BAUER is eagerly looking forward to being fully involved in this crucial area of Indonesia’s growth, both in the planning and execution stages of development.

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Blue Economy

Where development and preservation find balance.

With the second largest coastline in the world, 5.8 million square kilometers of marine area and fisheries that represent more than 37% of the worldâ&#x20AC;&#x2122;s total species, Indonesia is a nation defined by its oceans. The Ministry of Information and Communication Technology is promoting a campaign to remind Indonesians of the important role the water has played both economically and culturally throughout history. â&#x20AC;&#x153;Blue Economyâ&#x20AC;? encourages Indonesia to recognize that its greatest resources lie not only to the land but to the ocean as well the paradigm shift to equalizing Land and Ocean Resources that will bring long term growth and development to the archipelago.

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TELECOMMUNICATION & IT OVERVIEW

Indonesia’s Wireless Network - Mobile Phones Have Never Mattered More For Indonesia, wireless internet is not a convenience; it’s an essential means to staying digitally connected to the rest of the world. While businesses in most parts of the developed world are scrambling to catch up with the rapid shift to mobile internet use, Indonesia has for quite some time relied heavily on its mobile phone coverage to provide access to the Web. Rolling out broadband on an archipelago replete with dense woodland and rugged terrain is a challenge and, in fact, any kind of wired internet is still an extravagance for the vast majority of Indonesian’s families. Mobile internet may be considered a luxury for many countries but in Indonesia it is far and away the most viable means of staying connected.

rolled out. And it’s not just good news for the operators. The fight to attract virgin users has become a tussle to encourage customers to switch providers, effectively forcing the operators to abandon a destructive “race to the bottom” and instead focus on providing a greater quality of service.

Maturing Market

The paramount importance of offering a superior service has trigged a significant transition in the telecoms sector. Investment in infrastructure is increasing and leading to greater collaboration 4G Imminent and possible consolidation among the providers. For instance, In 2012 the number of mobile phone subscriptions in Indonesia while competitors may be reluctant to share tower space, once a exceeded the number of residents. Although this statistic is slightly network reaches a certain standard and the playing field is levelled, misleading as many mobile users have more than one subscripthe need to guard real-estate becomes redundant. The market has tion it is still indicative of the importance of wireless services and reached the point where it is more cost-effective for the providers explains why the fiercest competito sell the towers to specialist firms The Palapa Ring project will bring tion among telecoms providers is and lease the space back, even if broadband access to all of Indonesia’s to be found in this area rather than that means rubbing shoulders with fixed-line provision. Around 40% the competition. The Indonesian major cities as early as 2015. of mobile phone customers use government, in recognition of this mobile data services for email access and Web browsing but, as development, is urging this process forward by forcing the sale of 3G transfer rates are limited, 4G integration is keenly anticipated. tower space to any willing investor. Download speeds will subsequently increase to as much as 100 Sleeping Giant mbps but is unlikely to be widely available until 2014. The Ministry Mobile internet access may be the way forward but that doesn’t of Communication and Information Technology are considering mean that fixed-line services have been forgotten. The Palapa which 4G frequency to implement, only too aware of the imporRing project is a network of over 35,000km of underwater fibretance of this network to Indonesia’s ability to connect to the rest of optics and over 20,000km of underground cables that will bring the online world. broadband access to all of Indonesia’s major cities as early as Maintaining Profitability 2015. Although, at least initially, only a small proportion of mobile usThe cost of PC equipment may still put broadband access out ers will be able to afford the additional cost of 4G, in one of the of reach of much of Indonesia’s population but as affluence grows most populous countries in the world with a higher than typical and wired internet availability increases, this future market is the mobile phone-using demographic, this small segment of users still very definition of a sleeping giant. offers tremendous profit potential for the country’s mobile service In the past, investors have been hesitant about the Indonesian providers. Even the largest operators in the country have seen a telecoms market, primarily because of the high level of competition. drop in the average revenue per user but internet use offers profit With 11 companies, Indonesia has the same number of network margins so much greater that it is able to offset recent deficits. providers as India and Australia combined, and there are question Consequently, the focus in the market is to encourage more users marks over whether the market can continue to support this many to invest in smartphones and increase their data usage. The vast players. majority of Facebook users in Indonesia, for example, access the Opinion, however, is shifting. The percentage of the population social networking site through their mobile phone and it is this kind with disposable income is growing and, combined with the imof social and recreational use that is still driving profitability. Couple minent introduction of 4G and broadband access, as well as the this with the introduction of low-end–and consequently budgetprospect that the government may step in to force at some level friendly –smartphones, and there is every reason to believe that of consolidation, leads to the conclusion that expansion is still likely there is still plenty of market share to fight for, even before 4G is and explosive growth a very real possibility. STRATEGY

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ENERGY & MINERAL RESOURCES OVERVIEW

It Possesses a Wealth of Natural Resources, But For the Moment Indonesia Lacks the Power to Unlock Them Indonesia offers the international investor an incredible variety of mineral and energy options, but are they ready to buy into them? Indonesia’s energy and mineral sector is of strategic imporrent 50%), and coal production double to 33%. tance, providing both resources for domestic needs and much As part of a commitment to sustainability, Indonesia, like many needed income and foreign exchange. However, with ambitious other countries, is increasingly focused on developing renewable growth plans, the country needs to develop a more effective energy sources. Consequently, it’s looking at a range of different long-term strategy for making the most of its wealth of natural technologies including nuclear energy, hydrogen (fuel cell techresources. Most particularly, it must find ways to build an energy nologies), solar power, and the gasification of coal. Hydropower, infrastructure that lifts the country to a higher economic level so it which has been used for larger scale energy projects, will probcan fulfil its goal of being in the world’s top ten economies. Such ably be confined to mini-hydro schemes in remote areas, given aspirations may be curbed by a network that consists of separate the potential environmental and social problems associated with power systems, rather than the fully integrated grid required by a new reservoirs. Geothermal power, however, is likely to be a major modern economy. If Indonesia is to meet the growing demands component of the Indonesian energy sector, with some 43 geoof industry, manufacturing and its thermal power plants planned by more affluent middle class, signifi2014, giving nearly 4000 MW of Without sufficient readily available cant investment in power plants, installed capacity. With 40% of our sustainable power, Indonesia’s economic planet’s geothermal reserves falling an efficient grid and better final ambitions will be thwarted. delivery to the customer is needed. within its control, Indonesia, already But with the government unable to the third largest geothermal elecfully finance a sector it has traditricity producer behind the US and tionally supported, Indonesia must look to international investors the Philippines, has the potential to become a world leader in this to fill the funding gap. Unsurprisingly, this plans to draw $28.34 technology. billion USD of FDI into the sector this year. Aside from energy, Indonesia possesses vast mineral resources Of the substantial revenue of 415.2 trillion IDR the state earned that include: bauxite, copper, tin, iron and nickel, manganese, chrfrom the sector in 2012, oil and gas are the largest contributors, omite, lead, titanium, and rare metals like platinum. With restrictions with crude oil production averaging 860,000 barrels per day in already in place on the export of such raw materials, as Indonesia 2012. Not quite the predicted 930,000 barrels per day, but at a looks to move away from commodity exporter to value-added prohigher average price ($112.7 USD per barrel) than a presumed ducer, those investing in mineral processing will be expected to set per barrel price of $105 USD. up their own smelters to turn what they mine into metal product wealth. Energy Remix Concerns about the balance between risk and return associated With large reserves of hydrocarbons yet to be exploited, there with heavy-duty investment in Indonesia have in the past made the are many investment opportunities not only in upstream producinternational investment community reluctant to plunge headlong tion, but also in the downstream development of refineries, storinto major projects. However, economic growth rates returning to age facilities, pipe networks and other distribution services. Prodprevious highs, an intention to improve other areas of infrastructure ucts such as natural gas, coal bed methane, petroleum fuel, gas and a buoyant financial sector, many previously hesitant investors fuel, LPG and other refined products, are also potential revenue are beating a path to Indonesia’s door. With so much untapped popoints. More opportunities will follow as the government redirects tential, there’s no reason to believe the government won’t be able the country’s energy mix, which by 2025 should see gas making to attract the investment it needs to quite literally inject new energy up about 30% of energy production, oil at 20% (down from its curinto the economy.

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Energy & Mineral Resources

Envisioning an Optimal Energy Mix Future Energy sufficiency is crucial to the success of economic and industrial advancement, and Indonesia’s proactive stance is a bold strategy to emulate. A priority on Indonesia’s national exigencies list is the achievement of an energy mix parity that is 25% renewables and 24% fossils by the year 2025. Enshrined in the presidential regulation 5/2006, this objective embeds within it six strategic energy targets, which according to Dr. Evita H. Legowo, contributes to infix Indonesia’s overall energy well-being. Specifically, she designates these sextet of targets to include maintaining an oil production quota of one-million BOPD, a 50% national operatorship stake in joint ventures projects, and achieving 91% composition for local content. A skilled national workforce ratio of 99%, secured supply of domestic energy and industrial feedstock, and increasing added value to entrench sustainable development complete these targets. Dr. Ing. Evita Herawati Regarding the development of new and renewable energy to attain Indonesia’s energy mix obLegowo Former Director General jectives, Dr. Legowo unambiguously avers, “…Such efforts accelerate overall economic advanceDirectorate General of Oil & Gas ment through direct impingement on local natural resources and human capital development. Their Ministry of Energy & Mineral resultant multiplier effects benefit the local and national economy.” Resources Ask how Indonesia can reclaim a net exporter status by 2020 and Dr. Legowo enthusiastically posits credible justifications, “...New drilling and exploration activities across the frontier area, deep sea and eastern Indonesia. Production maximisation techniques on current fields and tapping of new layers, and finally, the implementation of Enhanced Oil Recovery technology (EOR) in potential fields.” The concurrent consequences of Indonesia’s energy mix policies translate into abundant opportunities for the international business community. Foreign expertise, investment and cooperation are essential to actualise Indonesia’s energy, infrastructural and diverse economic objectives. The advantages of being a free trade proponent and ASEAN’s economic mainstay accord its investors manifold benefits, including direct connectivity to key markets like China, India and Europe. Indonesia’s favourable policies as exemplified by efforts such as the new PSC terms and generous tax incentives confirm an assiduous commitment to investors’ best interests, no blandish marketing required.

Energy Boost Oil and gas production may have slowed, but the Indonesian Petroleum Industry knows what it takes to re-energise the market. Of all the industries that are contributing to Indonesia’s rapid economic growth, oil and gas are arguably the most important, providing around 25% of the government’s income and generating direct investment of up to $16 billion USD. Little wonder then that Elisabeth Proust, president of the IPA, has expressed concern over a recent decrease in local oil and gas production. The government has set a production target of one million barrels per day, by 2014. IPA, representing the interests of 90% of Indonesia’s oil and gas upstream industry, supports this goal, but emphasises the importance of creating regulations that encourage investment and development rather than fomenting uncertainty. Significant economic, political and regulatory progress has already been made, “Establishing policies to encourage national and international organisations to Elisabeth Proust continue to invest in the industry is key to sustaining and growing this vital industry in Indonesia,” President Indonesian Petroleum Association (IPA) said Proust. She added that the government is now making a greater effort to establish a clear and President Director & General Manager constructive dialogue between all stakeholders within the industry. Proust believes that the government’s objectives are eminently achievable because there are Total E&P Indonesie still major fields in Indonesia that are yet to be developed. Additionally, although new investors are welcomed, the major international players are already present. Attracting prospective investors is as important as maintaining relationships with the existing investors by establishing better incentives for exploration and by keeping IPA involved in the early dialog and discussion with the government in policy formulation. Proust is calling on the government, not to react to the drop in production by creating unnecessarily restrictive regulations; the result could be an endless cycle in which the government tightens its grip, fewer companies commit to exploring for new reserves, investors are repelled, and production falls even lower. Hopefully the dialogue between the government and the industry should prevent such escalation. The oil and gas industry is ready to open up new energy fields and take the risks in exploration and development but expects positive signals from the government. IPA is committed to create this positive dialogue. STRATEGY

Indonesia 2013

Embracing the future.

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Special Feature (West Sumatra)

Long Thought a Sleeping Giant,West Sumatra Has the Power to Become an Essential Component of Indonesia’s Economic Engine Investment in geothermal energy and added value production are the way for West Sumatra to become less reliant on commodity exports. The province of West Sumatra is a land of plains, lakes, mountainous volcanic highlands and an offshore archipelago. Spread across some 42,130 km² it makes up 2.2% of Indonesia’s total area. Situated on Sumatra’s West Coast, the province is divided into 12 districts and has seven cities. It is home to over 7 million people of which the majority, over 840,000, live in the province’s capital, Padang. West Sumatra has eight seaports and two major airports, connecting the province not only with Indonesia’s main cities, but also internationally, through direct flights to Kuala Lumpur in Malaysia and Singapore. On land, the Trans-Sumatran Highway is a major route running North West to South East through West Sumatra. West Sumatra’s main employment sectors are mining, where cement production plays a major part; services, mostly tourism; fishing, for species such as tuna; and agriculture, the largest sector of all. Here commodity or cash crops like cacao, rubber, oil palm, sugar palm, coffee, tea and coconut make up most of the production, alongside staples such as rice, maize, peanut and soybean, and subsidiary crops such as gambir.

for the development of a downstream rubber industry that adds extra value to the core product. One idea is the construction of a tyre production factory. Though not a major crop like rubber, cocoa or coconut, approximately 80% of the world’s production of gambir comes from West Sumatra. A shrub, gambir is used in the pharmaceutical, food, leather, cosmetics, chemical and agro industries. Currently there is only one production plant in West Sumatra, leaving scope for development of this sub-sector of the agricultural industry. With the underwater wealth of the Indian Ocean lapping against its shores, West Sumatra has been designated as the central tuna fishing area for western Indonesia. The strategic location of West Sumatra also means that its ports are ideally located for one of the most important shipping lanes in the world, offering links to the major Asian economies of India, China and Japan. With additional investment, not only will the West Sumatran fishing fleet be able to grow in size and capacity, but this in turn will act as a catalyst for a supporting infrastructure that will ripple economic growth into the surrounding areas.

Strategy Change

New Opportunity

This will require a change in strategy, with the province, just like While tourism, mining, fishing and agriculture might be seen the rest of Indonesia, becoming more focused on creating valueas traditional magnets for investment, it is in one far more modadded products, rather than relying primarily on the export of raw ern sector that Indonesia, and perhaps West Sumatra in particucommodities. To do this effectively will require greater investment lar, has the potential to become a world leader, and that is in the in both new and existing industries, signs of which can already development of geothermal energy. West Sumatra is one of the be seen. So while Indonesia-wide investment stood at just $27 most earthquake-prone areas of Indonesia, with major seismic billion USD for the whole of 2011, in the first quarter of 2012 alone events occurring in 2009 and 2010. While this geological turbuinvestment from domestic and inlence has obvious downsides, it West Sumatra: ready and waiting to ternational sources was already does mean that the province has significantly higher at $71 billion add economic wealth to its cultural rich- access to one of the world’s most USD, according to Indonesian significant sources of geothermal ness and natural beauty. trade minister. West Sumatra is power. Given the limited long-term also increasing its own efforts to encourage more inward funds to sustainable potential for other energy industries such as oil, coal the province through Regional Potential Investment Exhibitions. and hydropower, geothermal energy is an exceptionally attractive Particular sectors that are seen as primary targets for such alternative power source for Indonesia as a whole. This has not funding include tourism. West Sumatra has both a natural beauty gone unnoticed, and if the province meets its plan, this will see five and a cultural heritage that makes it potentially a highly attractive new geothermal power plants up and running by 2015. An influx of tourist destination. However, the province currently lacks any real investment into West Sumatra would allow it to become a geotherinfrastructure to draw in and then support an influx of international mal energy hotspot not just in Indonesia but the world. holidaymakers, though a feasibility study has already looked at the Alongside geothermal, the province’s administration also plans possibility of constructing a cable car in the Anai Valley region. This to build more biomass power plants that will use urban and rural could act as a catalyst for regional growth and give another focal waste for energy production, together with up to 3,000 small-sized point for visitors to West Sumatra. solar plants and 10 micro-hydro power plants, funding for which will For West Sumatra, rubber is a most significant crop but one come from the state budget. All will contribute to the energy infrathat has traditionally only been seen as a commodity, based on a structure, with West Sumatra becoming a driving force in helping simple production and export model. However, there is potential Indonesia achieve its ambitions for economic growth. STRATEGY

Indonesia 2013

SPECIAL FEATURE (BATAM)

Idyllic Investment With a WideVariety of Profitable Sectors, Fast-Tracked Applications & Preferential Rates, is There a Better Place in Indonesia to Invest? In the late 1970s the island of Batam was just another undeveloped landmass with a few coastal villages and swathes of uninhabited land. Just 30 years later and Batam is almost unrecognisable, boasting its own airport, tourist and business centres, numerous hotel and beach resorts, six golf courses, marine facilities and a thriving industrial hub. The comprehensive nature of its industrial facilities has given rise to the misconception that Batam is primarily a manufacturing area. There are, however, a number of other areas of industry that are flourishing and ripe with investment opportunities; these include oil and gas, commercial fishing, tourism, petrochemicals, infrastructure development, insurance, and multimedia.

tors. Visas are straightforward to obtain and foreign nationals are permitted 100% ownership of resident businesses and the freedom to purchase and own residential property. Profitability is also aided by a number of financial and taxation benefits including no import or export tax or duty on equipment, machinery and materials; no VAT on exports (unless being sold to other non-bonded areas of Indonesia); a Generalised System of Preferences facility with 28 other countries; a Double Taxation Avoidance Agreement with 51 countries; reduced income tax for certain industries; and competitive rates on the lease of land, utilities and labour costs.

Infrastructure

Movement internally and externally is well catered for. There are already over 1,000 km of roads and highways with additional lanes This article would fill the rest of the magazine if it were to relate, provided in the busiest segments. So effective is the road network in-depth, the range of advantages that have made Batam so popthat traffic jams are virtually non-existent even during the busiest ular with domestic and international investors. What follows is not periods. Hang Nadim International Airport offers eight flights per an exhaustive list but a mere samday to Jakarta, around 50 flights a pling of what is available. Location: week to other Indonesian cities and Investment is aided by a number of More than 25% of the world’s trade can handle both passenger and financial and taxation benefits. and more than 50% of the world’s cargo aircraft. And the three seaoil and gas services pass through ports on the island, between them, the Straits of Malacca where Batam is located. Add to this the fact serve cargo ships and more than 100 ferry trips a day to Singapore that it is just 40 miles from Singapore, and it’s not hard to figure and Malaysia. out why this island was targeted for rapid development. Industrial Day-to-day infrastructure is also well in hand. Electricity is providfacilities: Industrial businesses in Batam are popular with invesed by the state-owned electric company and private power plants, tors because of the low cost of construction; a 1,000 square-metre and fresh water provision meets WHO standards and is available factory on a 2,000 square-metre lot would cost around $200,000 through six man-made reservoirs. These extensive facilities have USD to build which, includes the cost of purchasing the land. For been provided by the government and private investments and those wishing a more expedient route, vacant, ready-made factohave proved to be instrumental in the successful development of ries are available to hire. Some industrial complexes offer a packBatam and its attractive status with investors from all over the world. age solution that includes the processing of all necessary permits Anything Goes and licenses, employee recruitment, and accommodation for the There are virtually no restrictions on the types of development workforce. Skilled Labourers: With over half a million people residthat can be catered for in Batam, whether it is light industry, heavy ing on the island, Batam offers a readily available pool of personindustry, tourist attractions or anything in between. There are now nel. The nature of the job market on the island means that many more than 550 foreign businesses and more than 10,000 local residents already have many years’ experience in both skilled companies in Batam. Multinational representatives include Epson, and unskilled factory positions. Free Trade Zone: In 2006 a free Hyundai, Nippon Steel, Sanyo, Philips and Siemens, to name just trade treaty was signed between the governments of Indonesia a few. and Singapore that encompasses Batam and the neighbouring None of this would have been possible without the late, Dr. Ibnu islands of Bintang and Karimun. Tourism: Tropical weather all year Sutowo (former president of state-owned oil company, Pertamina), round, marine facilities, golf courses, and first-class resorts attract former Indonesian President, Prof. Dr B.J. Habibie, and more rearound one million visitors every year. Investment in tourism-recently the current President, Susilo Bambang Yudhoyono, who lated business makes up around 16% of total private investment. established the Free-Trade-Zone status. For these men’s efforts, Zero Red Tape Indonesia, the inhabitants of Batam, and the many investors who Much effort has been made to pave the way for foreign inveshave profited have much to be thankful.

Crucial Advantages

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Indonesia 2013

Special Feature

An Island of Possibilities – Batam’s Fast Growing Energy Hub Kris Wiluan, founder of Citramas Group, reveals why an island in the Riau Islands Province of Indonesia is rapidly growing into one of the most important destinations in South East Asia for the growing global oil and gas industry. ity, telecommunication and roads were constructed and installed in the Citramas facility, which is located in the Kabil Industrial Estate (KIE) - a 500-hectare prime industrial and residential estate in Nongsa, the north eastern part of Batam. Today, Nongsa not only boasts an industrial park and world-class port and custom clearance facilities, it also has hotels and golf courses to accommodate the needs of visitors and residents in KIE. Annexed to Nongsa and a ten-minute drive from KIE, are ferry terminals where ferries operate on a regular basis and the Hang Nadim International Airport where visitors can fly from various destinations to Batam. “Being one of the first business groups to build a strong foothold in Batam, I am proud to say that we have grown together with the island and witnessed its transformation over the years as it develops into one of the preferred locations in South East Asia for the global oil and gas industry” believes Kris.

Quality and Safety Awards from RasGas (an ExxonMobil /QP jv), April 2007

Energy Evolution

Today, more than 25% of the world’s trade and over 50% of the world’s oil and gas services pass through the Straits of Malacca. Sitting strategically in this route is Batam – the island where opportunities begin and possibilities become realities. The vision of an international oil and gas manufacturing and fabrication hub came to Kris as he foresaw that with Singapore rapidly racing for a slice of the world’s energy market and entrenching itself as a rig builder to the world, the need for land and labour that will ultimately exceed what the republic can locally fulfil. The answer was Batam, with its close proximity to Singapore. Citramas Group was established, and through the years it has developed into a major player in the oil and gas industry in Batam and Indonesia. The companies under the Citramas Group focus

kris Wiluan Founder of Citramas Group Batam, a little known Island, puts itself on the map of the global oil giants as a place where rigs, oilfield and tubular goods that comply with international specifications and standards can be built and manufactured. Today, Batam – a designated Free Trade Zone, equipped with modern state-of-the-art facilities, infrastructure, knowledge on know-how to serve both the upstream and downstream activities of the energy industry, is poised for growth as Asia joins the world’s energy race. Tracing the development of Batam over the last two decades with Kris Wiluan, a pioneering entrepreneur on the island, provides a good insight into the history and potentials in this island as well as the abundant opportunities still waiting to be explored.

Batam Rises

Back in the 1970s, Batam was a sleepy fishing village inhabited by fishermen and their families. Looking at Batam today, one cannot help but be amazed by its speed of development over such a short period of time. In the 1970s, Kris, convinced about the potential that the island had to offer, started his oil and gas company. This marked the beginning of the Citramas Group – an Indonesian oil and gas manufacturer, fabricator and rig builder, whose internationally accredited products and services are used in oilfields globally spanning Canada, the Americas, Europe, China and Australia. The development of Batam and Citramas are inter-twined. In the course of growing Citramas, Kris started to invest and build the infrastructure on the island. Essential utilities like water, electricSTRATEGY

Assembly of large diameter pipes at DSAW

Indonesia 2013

Special Feature primarily on manufacturing, fabricating, design and engineering parts of rigs and the components used for drilling and production. The key oil and gas businesses under the umbrella of the Citramas Group are…PT Citra Tubindo tbk, a public-listed company and a world-class manufacturer and service provider for oilfield and tubular goods, specialising in high performance proprietary pipes and premium thread connections for international use. PT Dwi Sumber-Arca Waja, an internationally licensed manufacturer of large diameter steel pipes and structural tubular to support the

“

Whenever I invest, I consider how this Investment can improve and benefit Indonesia.

A large diameter pipe being assembled at DSAW

”

garded businesses that are already using this oil and gas hub. In addition to the Citramas Group of companies, some of the existing tenants include SMOE (a subsidiary of Sembcorp Marine), Bredero Shaw, ConocoPhillips, Premier Oil and Parker Drilling.

needs of the oil and gas industries. PT Citra Tubindo Engineering, a company that provides fabrication of Drilling rigs and offshore platforms, as well as conversion, modification and construction of Petrochemical modules. The KIE, where the operations of the Citramas Group reside, is specifically developed to accommodate light, medium and heavy industries in a variety of lot sizes. Open to investors, the KIE offers the opportunity to lease land as well as the option to rent or buy ready-built factories. Even more importantly the KIE is strategically located immediately adjacent to the Citranusa

Investors Welcomed

Citramas Group is constantly looking for niche markets into which it can expand and become market leader but the primary vision is the development of an Integrated Oilfield Services Hub that can provide a broad spectrum of specialised products and services to the regional and global oil and gas industry. Batam’s Free Trade Zone, its solid infrastructure and the KIE with its ready factories is an attractive combination that will open the way to greater investments and we are about to witness a new phase of rapid growth and development in this region. There is plenty of scope for Indonesian businessmen to venture into and participate in the oil exploration industry but Citramas Group and Batam are also keen to welcome foreign investors; Batam and the KIE has all the necessary facilities and infrastructure – not to mention well-designed leisure and hospitality resorts – to serve the needs of future tenants. We invite you to explore Batam and see for yourself what can be achieved at one of the most important trade and investment destinations in South East Asia.

Pipe Connectors produced by PT Citra Tubindo

Kabil Port, a government-designated ocean port in Batam. The Citranusa Kabil Port is easily the most important element of the business infrastructure in Batam. Not only is it easily accessible from the KIE, it offers a comprehensive service centre; this facility provides integrated CIQP/Customs Immigration and Quarantine & Port Services. It provides the capabilities and resources needed to support all the operational requirements of the surrounding businesses, including a stocking and staging point for offshore drilling, logistics, an operational base for oil and gas companies, drilling companies and a variety of specialist support service companies. Evidence of the value of the KIE can be found in the highly reSTRATEGY

CTE rig construction process

Indonesia 2013

COMPANY PROFILES

Middle Eastern Promise Indonesia continues to expand its international business relationships with a prestigious link to a famed Qatari bank. PT Bank QNB Kesawan Tbk

Trading connections between the Middle East and Indonesia can be traced back hundreds of years. Although for some time South-East Asia was primarily a conduit connecting China with Arabian and Indian goods (and vice-versa), by around the 7th century A.D. Indonesia had become a trade destination in its own right, becoming a source for luxury items such as rainforest-sourced aromatic woods and exotic spices such as cloves, nutmeg and mace. Fast-forward to the present day and Indonesia and Middle Eastern trade relations have never been stronger, epitomised by QNB Kesawan, the first Indonesia bank to

Indonesia could not have wished for a more prestigious manner in which to develop ties with the Middle East. be almost 70% owned by a Middle East organisation, the renowned Qatar National Bank (QNB) Group. Indicative of Indonesia’s blossoming ability to attract sizeable international investment, QNB Kesawan is developing a wealth of new possibilities for the organisation and for the local economy.

Safe & Secure

Indonesia could scarcely have wished for a more prestigious manner in which to develop ties with the Middle East. QNB Group is the largest bank in the MENA region and, according to an update published by Global Finance magazine in 2012, is considered to be one of the 50 safest banks in the world and the leading financial institution in the MENA region. Perhaps even more significantly, QNB Group has been

expanding rapidly over the last few years and now, through its network, subsidiaries and associate companies, operates in 24 countries. Its almost 70% stake in QNB Kesawan is a clear vote of confidence in Indonesia’s development and its ability to cultivate effective trading relationships with the Middle East. Through QNB Group’s acquisition of QNB Kesawan, Indonesia now boasts a dedicated Middle East desk that will greatly facilitate trade business services between these regions.

Ambitious Aspirations

sion of accounting and payroll services to large corporations and SMEs, and Retail Banking will target affluent demographic segments for deposits.

Honest & Accountable

QNB Kesawan’s statement of its core values, as you might expect, speak to their drive and desire for success but what also comes through strongly is their determination that the growth be meaningful and honourable. Showing a keen understanding and respect for Indonesia’s local customs, values and culture, expressions such as “achieve the highest professional standards,” “be concerned for the wellbeing of people and environment” and “be honest, fair and accountable” are well-suited to one of Indonesia’s oldest and most reputable banks, founded almost 100 years ago. While many acquisitions can unintentionally lose the spirit of the original business, the creation of QNB Kesawan has been remarkable in managing to keep the vision and status of this Indonesian institution intact. QNB Kesawan has built a solid bridge between Indonesia and the Middle East that stands to benefit both the regions it connects.

With over 40 branches and numerous ATM access points, supported by ATM Bersama, QNB Kesawan has hit the ground running and has wasted no time in creating new and highly desirable banking products and services within the Corporate Banking, Wholesale Banking and Retail Banking sectors. Technology-enabled convenience and simplicity of process are the two benchmarks through which QNB Kesawan, by 2017, aims to become an Indonesian icon, rewarding its customers and stakeholders with outstanding financial performance. The security and strength of QNB Group coupled with the local, friendly reputation of QNB Kesawan has resulted in a bank that is more than the sum of its QNB Est.: 1964 considerable parts. The QNB: named 50 Safest Banks in the world possibilities for ongoing QNB: acquired almost 70% shares of Bank growth and profitability Kesawan are vast and QNB KesaQNB Kesawan: 1st Middle East Bank in wan has made no secret Indonesia of its far-reaching ambiQNB Kesawan Head Office: Jakarta, Indonesia tions. Wholesale BankQNB Kesawan branches: > 40 ing presents prospects Website: www.qnbkesawan.co.id for domestic trade deals in key sectors and provi-

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Indonesia 2013

COMPANY PROFILEs

Bankable Growth Not content with posting three consecutive years of outstanding financial numbers, BankVictoria International is creating a whole new level of quality customer service. PT Bank Victoria International Tbk

The 1997 Asian Financial Crisis created substantial challenges for the Indonesian banking system and work is still ongoing to create and establish reforms that will protect the system from any unexpected future events. Two of the most important resulting changes are a focus on increasing bank capital and the development of creative and customer-centric banking products and services. And it’s in these two areas that Bank Victoria is a shining.

Strength to Strength

Bank Victoria began its commercial operations in 1994 and went IPO on the Jakarta/IDX in 1999 with the mission of

Meeting customer needs and exceeding their expectations has always been BankVictoria’s primary goal. delivering the best service for its customers and maintaining prudent banking principles, and has since gone from strength to strength; in 2010, in response to the minimum capital requirements that were set by the “Indonesian Banking Architecture” program, Bank Victoria acquired Bank

Swaguna and rebranded it as Bank Victoria Syariah. Bank Victoria’s steady progress and its growth can be linked to three specific areas of business…Jakarta Network: In terms of number of branches, Bank Victoria is one of the top ten banks in the Greater Jakarta area. This is great news for their account holders who, as of November 2012, have easy and convenient access to 97 branches in this region alone. A valuable partnership with ATM Prima also provides ready use of over 40,000 ATM machines. Segmented Market Targeting: A competitive marketplace makes it essential for Bank Victoria to find ways to differentiate itself, and it achieves this by focusing on commercial and SME loans for middle to high class clients. This niche is, in itself, competitive but a consistent, stable performance and high yield is a clear indicator of its success in this field. Additional offerings in the form of micro-financing are made available through their aforementioned subsidiary, Bank Victoria Syariah. Customer Focus: Meeting customer needs and exceeding their expectations is Bank Victoria’s primary goal and it accomplishes this through the development of professional human resources that recognise the importance of forming strong

STRATEGY

customer relationships. Customer loyalty is rewarded through the granting of preferential rates based on the length of the relationship, the number of products obtained and the number of entities registered with the bank.

One Bank Approach

While there is much to admire in the financial results and prudent care of Bank Victoria, its most striking innovation is its consistency of service and product. The concept, entitled “One Bank Approach,” is a scheme that aims to provide a uniformity of product, price, service and policy across every branch and customer contact point. This symmetry of service, designed to maximise efficiency and customer satisfaction, even extends to the customer and employee interaction. Clients of the bank are assigned a single relationship officer who acts as a single point of contact. This methodology is also applied when customers frequently attend more than one branch; a “shadow relationship team” liaises to ensure consistency of service is maintained.

Future Promise

Smaller banks that are unable to meet the requirements set by the “Indonesian Banking Architecture” program are being absorbed by the larger institutions. Although a relatively young bank, Bank Victoria has clearly demonstrated that it is in the latter category and is well on target to meet the compulsory policies and reforms that are instilling confidence in the country’s ability to handle challenges that come its way. Indonesia’s vast market and robust economy bodes well for Bank Victoria’s future and there is every indication that it will continue its prosperous tradition. Indonesia 2013

COMPANY PROFILES

High-Rise Ambitions With investors demanding nine times the shares available,Waskita Karya proved a massive market hit in what was last year’s only IPO of a state-owned company. PT. Waskita Karya (persero) Tbk Techno Valley in Riyadh, Saudi Arabia

For Waskita Karya, 2012 proved to be a year of momentous significance with the state-run Indonesian construction and property company turning for the first occasion not to the government for its future financial requirements, but to the stock market instead. Since its establishment in 1961, Waskita Karya has grown progressively on a staple construction regime of power plants, bridges and high-rise buildings, with Jakarta International Airport, BNI

Ambitious growth plans should see Waskita Karya making significant progress in the next two years. City, BI Building and Mandiri Plaza Tower among an expanding portfolio of large and prestigious schemes. However, the Asian financial crisis of the late 1990s temporarily derailed the company’s progress, forcing it to diversify into freeway investment and EPC projects, and precision tubing for the oil and gas industry. More recently, landmark developments like the King Saud University in Riyadh, Saudi Arabia, have unmistakably demonstrated that Waskita Karya is back on track doing what it’s best known for.

tive that sets it apart from other regional competitors. Despite mounting debts that necessitated a restructuring of company finances in 2010, by the end of last year, buoyed by increasing evidence that Indonesia’s growth rates were heading back towards previous highs and with the promise of upcoming government-funded projects heading its way, Waskita Karya had its corporate sights resolutely locked on expansion. However, with the government realising that these ambitions could only be achieved through external funding, Waskita Karya announced its plans for an IPO in late 2012. This would see the state divesting itself of approximately 3 billion shares, in other words a 32% stake, that would raise between $104 million USD and $125 million USD from investors.

Market Frenzy

With the majority of the offering (90%) targeted towards a domestic audience, overseas investors were encouraged to purchase Waskita stocks through the secondary market after the initial release. Despite an absence of appetite for IPOs due to the global economic slowdown, the

Indonesian financial community jumped at the opportunity to buy into Waskita Karya, with investors demanding nine times the number of shares that were eventually made publicly available. On 19th December, Waskita Karya became the only state-owned company to be listed on the Indonesia Stock Exchange in 2012, with 3.08 billion shares selling on the open market at a price of 380 IDR each. With all of the offering sold, this will provide the company with an investment injection of 120 million USD. Of this, about 60% will be for working capital with the remainder going to support the company’s property development projects in the region, particularly a pre-cast concrete plant and a new toll-road scheme. Fuelled by this IPO finance, the company’s Board is confident that Waskita Karya will surge forward in 2013 to realise an income target of 1.18 billion USD, a significant advance on this year’s 930 million USD. With net profits also expected to increase from the 25.7 million USD of 2012 to 37.5 million USD, if everything goes to plan, those who bought in to the company are likely to discover they’re sitting on a hot investment property.

Competitive Advantage

With headquarters in Jakarta and more than 1000 employees distributed between 29 in-country and 2 off-shore branches, Waskita Karya’s firmly positioned as one of Indonesia’s leading companies. Its extensive marketing network and range of production facilities across Indonesia means that it also possesses something distincSTRATEGY

Indonesia 2013

COMPANY PROFILES

Growth Through Diversification Alkindo, the eco-friendly manufacturer of paper tubing and packaging materials, plans to use its innovative advantage to fight world food shortages. PT Alkindo Naratama Tbk

PT Alkindo Naratama Tbk has always prided itself in producing products of the highest quality. The company was founded over 20 years ago in 1989 as a paper converter specialising in paper tubes used as technical carrier for the filament industry. These tubes are also used in the tire cord, paper, plastic and other industries that require winders. During these 20 years, through extensive diversification they have emerged as a major market leader for paper tubes and other paper products including paper core and honeycomb. To accomplish this they stress the concept of partnership with their clientele. This is achieved through the maintenance of good quality and service. Their company logo even reflects this concept by combining three interconnected images representing Alkindo, the customer and the customer’s customer, linked together by product quality and dependability. Continued commitment to quality and service has enabled Alkindo to grow in both experience and capacity. Today it is equipped to deal with the large and small-scale needs of various industries. Company capacity allows for the annual production of 35,000 tons of durable and efficient paper products for the plastics, furniture, and glass industries.

IPO Allows Expansion

In order to sustain high levels of quality and to provide the best product possible, Alkindo has invested in raw material. They have also worked to expand their production capacity and now maintain two plants covering approximately 60,000 square meters of land containing 30,000 square meters of building. Production staff includes 350 employees. To accomplish this and to acquire the funding needed to accelerate future growth, the company issued its first IPO in July of 2011. The offering was oversubscribed by a factor of three. Alkindo hopes to use the additional income to continue its expansion and diversification of products. Floating shares currently stand at 27.27% with the goal being to make as many as 40% of the company shares available to the public. The company is planning a rights issue offering of additional shares to existing shareholders.

Innovation Brings Awards

In November 2011, Alkindo was awarded Winner in the Heavy Duty Packaging category by the Indonesian Packaging Federation. Subsequent to this, in January of 2012, they were awarded with best Heavy Duty Packaging category by the Asian Name: PT. Alkindo Naratama Tbk Packaging Federation. Est.: 1989 This recognition both at Employees: 350 the state and regional Products: Papercore, Papertube, Honeycomb levels reflect Alkindo’s Board, Supporting Products on-going success as a Type: Public Company provider of quality prodIDX Listing: July 12, 2011 (ALDO) ucts and customer servOffice: Bandung, Indonesia ices and its standing as Factories: Bandung, Indonesia a leading industry innoWebsite: www.alkindo.co.id vator, factors which the company is continually STRATEGY

seeking to improve.

Diversification

Alkindo plans to use its advantage as the leading producer of technical paper tubes, combined with its commitment to employ the most innovative technology in paper processing machinery, to strengthen its position as the market leader. Being keenly aware of the projected future world food shortage, the company’s directors have also established plans to apply Alkindo’s expertise to produce inventive food products through expansion into the agro based food industry. To aid in this expansion, several potential agro-food companies are currently being considered for purchase with the approval of BAPEPAM (Indonesian Capital Market Supervisory Agency). But Alkindo is no stranger to innovation. They were the first company in Indonesia to produce honeycomb, a form of paper panelling that can replace wood that is being used in the furniture industry. Manufactured under their exclusive patent— Hexcell® in Indonesia, honeycomb is exceptionally eco-friendly as are the company’s other products which are manufactured from recycled paper. The Hexcell® technology is used in the manufacture of furniture, pallets and boxes, packing materials for the import/export industry.

Company Commitment

To become the industry leader in quality and service, the company is committed to strive to perpetually improve current products by obtaining the best raw materials available, developing new techniques and production processes, and if necessary to invent new machineries to aid in the process. Indonesia 2013

COMPANY PROFILES

Dividends of Leadership

Exceptional leadership fostered on a distinctive corporate strategy is a guarantee for market share increase and Indopoly group serves as its prime example. PT Indopoly Swakarsa Industy Tbk. Purwakarta Factory, Indonesia

The twin pillars of advanced technology and capable human resource stanchion PT Indopoly Swakarsa Industry Tbk’s passion for superior quality and sustainable development. That its ilene brand enjoys an enviable reputation across the global film packaging market space is a result of commendable corporate culture and operational efficiency. From its first production facility in Purwakarta, Indonesia, with an initial annual output of 10,000 tons, its President Director, Henry Halim, backed by a proficient management team has grown Indopoly into a recognisable global player in Biaxially-Oriented Polypropylene (BOPP) and Biaxially-Oriented Polyester (BOPET) films production with current annual output of 100,000 tons from multiple plants in China and Indonesia. With a 2010 turnover of IDR 1.625 trillion and a shareholder equity of IDR 1.062 trillion, the group continues to demonstrate characteristics of commercial successes that are pointers to outstanding business strategies.

Three Pronged Strategy

Every organisation’s performance critically hinges on its corporate strategy, and in Indopoly’s case, it is no exception. The foresight of the group’s President Director, Henry Halim, fashioned a business strategy by which the group has thrived in the global film packaging products arena. It is a strategy that relies on the three elements of Horizontal Diversification, Vertical Integration and Globalisation as its value based drivers. By it the Group has continued to increase market share, foster more than expected growth, and their streamlined implementation has culminated in strategic market advantages. In essence, the strategy of Horizontal Diversification engenders

competitive advantages by price differen(both in China) ably complements its plant tiation through product diversification, and at Purwakarta, Indonesia; chiefly in ensurthis of course, is essential to widening the ing a constant supply of output to clients group’s market offerings. Thus, for examand catalysing the winning of new markets. ple, it produces various types of high end There are also benefits of free trade agreecigarette films, special types of BOPP and ments with foreign nations, which accrue to BOPET films including an adhesive free Indopoly because of these international procoating variant that is suitable of thermal induction locations. Among Indopoly’s global sulation purposes, oxo-biodegradable and customers are notable international giants high barrier metallised films, and is currently such as Indofood, Kraft Foods, Detmold developing an anti-counterfeit film for fraud Packaging, Crown Industries and Djarum prevention and security needs. from Asia, 3M and Al Nil from Europe and The Vertical Integration strategy is the the Middle East and PennPac from South spearhead of the group’s efforts at utilising America. its affiliations synergies and product spinoffs Visionary Corporate Values to increase its competitive edge. Clear inWithin fifteen years, Indopoly group has stances of this strategy implementation mastered the opportunities and challenges includes its one of primary suppliers status from operating in two of the world’s most to one of the largest converting companies competitive economies, to transform into a and fellow affiliate, PT Supernova Flexible business entity with over 150 clients globally Packaging, the acquisition of metallising and valuable public listing on the Indonemachine for production of high barrier metsian Stock Market. These are feats founded allised films, and the Group’s integration to on a strong sense of value as enshrined in produce the adhesive free BOPP and BOthe group’s vision and philosophy. Its corpoPET thermal films. rate ethos emphasises sustainable develAs for the Globalisation prong of Indopoopment and innovative spirit, and it is clearly ly’s business strategy, it has opened the reflected in its unwavering stance on progateways to new markets in five continents fessionalism, constructive teamwork and by according advantages of directly leveraging on the locational benefits of its operating plants in Indonesia and Name: PT Indopoly Swakarsa Industry Tbk. China. Maximally, it thus Business: Flexible packaging film manufacturer harnesses the interplay Est: 1995 of comparative operaHead Office: Jakarta, Indonesia tional advantages and Factories: Indonesia (1) & China (2) least cost combinations Rep. Office: Illinois, USA among its facilities to efArgentina, South America fectively serve its local IDX listing: July 9, 2010 (IPOL) and global demands. Clients: >150 global The strategic location of Capacity: 100,000 Ton/Year two production plants in Kumming and Suzhou

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COMPANY PROFILES market-oriented solutions for its personnel. Therefore the leadership of Mr. Henry Halim is consistent with its goals for the cultivation of optimal motivational and productive influences among Indopoly’s highly capable personnel. To that end, the group’s Human Resource Department implements a proactive personnel improvement policy with an overall scope for skills and capabilities training, team building, and leadership focused roles. Indeed the department’s recent deployment of a Human Resource Information System is geared towards accelerating Indopoly’s drive to keep ahead of the competition. Similar efforts are mirrored by its promotion of policies that create safe, healthy and conducive workspaces as

computers and books to drinking straws make up about 13% of Indopoly’s production output. Currently fine food-packaging accounts for the largest chunk of its film packaging production by a sizeable 45% of its output and as for the remaining 42% of its output capacity, it caters to cigarette packaging. To be specific, these outputs consist of high-end cigarette film types, special BOPP film types with thermal capabilities, oxo-biodegradable films, and specialty film types (matte and 12-15μ thin films). Breathable, high oxygen transmission film for fresh-cut products also constitute a part of the output, and in the near future, a customised anti-counterfeit film for security and fraud prevention purposes, which is

nies such as Unilever, Gudang Garam and Crown Industries spiked to sales volume to 74,216 tons.

Social Responsibility

Indopoly embraces a positive future with the confidence that an innovative management strategy has positioned the company to experience record growth. Leveraging its manufacturing success and expanded marketing reach, the company has implemented key upgrades to equipment and training programs to meet an ever-increasing global demand for BOPP and BOPET films. Known for its quality and reliability, Indopoly has established a reputation for excellence that has drawn

Indopoly validates its successes on a 3 pronged corporate strategy of horizontal diversification, vertical integration & globalisation. BOPP Machine, Purwakarta Factory, Indonesia

stipulated by its Health, Safety, and Environment (HSE) regulations, which bears a conformity to the high international standards. All of these efforts attest to the culture of excellence and superior performances that has borne notable research and development feats, technological breakthroughs and new cutting-edge products. From boardrooms to research laboratories and production floors, the group is unwavering with its policy of equipping its personnel with the most advanced equipment and operational capabilities. This accounts for the utilisation of state-of-the-art Bruckner machines and high technology supporting machines from Kampf and Atlas for the manufacture of its impressive products line-ups.

Market Share Prospects

For a market that witnessed a consistent growth of about 7% during Indopoly’s first four years of operations and is projected to increase at an enduring pace of 6% from 2009 to 2014, the group’s future prospects are extremely promising. Its total output percentage for specialty films that are used for packaging a diverse range of products from

BOPET Machine - Control Room, Purwakarta Factory, Indonesia

presently undergoing development, will be added to its output. All of these, position Indopoly for a considerable market share increase because of a global BOPP film demand that is predicted to rise from 5.922 million ton in 2010 to 7.477 million tons in 2014. In the same time span, global BOPET film demand is expected to grow from 2.616 million ton to 3.671 ton. Significantly, it is noteworthy to mention that the highest demand is expected from Central and South East Asia where Indopoly is already an established player. Currently operating four production lines for BOPP films output across its production locations, the Purwakarta facility largely caters for the domestic Indonesian market and exports of film packaging for food and cigarettes manufacturers. For its Chinese factories, the Kumming facility’s entire production capacity is dedicated to meet demand from China’s leading cigarette manufacturers, while the Suzhou plant output focuses on specialty films for high-end customers both in China and overseas. In 2010 Indopoly’s actual sales figures exceeded expectations by about 32% as patronage from compa-

STRATEGY

international recognition. It has thrice been awarded the 100 Star Enterprise Award for foreign-owned companies operating in The People’s Republic of China, and a Superior Award from the American Institute of Baking, and counts among its clients some of the world’s most prestigious companies. Under the direction of Mr. Henry Halim, Indopoly has achieved a level of growth and success that has served both the company’s shareholders, and those who benefit from the Indopoly’s progressive corporate responsibility policy. The company’s environmental campaigns in West Java, educational funding programs for underprivileged children, and sustained disaster relief efforts provide testament to Indopoly’s commitment to community service. This dedication to responsibly develop its business infrastructure, ensure the vitality of the company’s human capital, and assist surrounding communities, secures not only Indopoly’s future success, but also an elite place among Indonesia’s most valued companies.

Indonesia 2013

COMPANY PROFILES

A 21st CenturyYarn With state-of-the-art technology at their fingertips, a global market that spans five continents, and an A-list customer base, PT Sulindafin spins yarn and fibre that you can believe in. PT. SULINDAFIN (MEMBER OF SHINTA GROUP) Polyester Staple Fiber Production Line

Whether you’re dressing up for a long day at the office, or dressing down for sports, you probably give little thought to the highly skilled processes involved in the production of the fabric that goes into your apparel. For PT Sulindafin, however, the fabric of your apparel represents decades of intensive manufacturing and trailblazing technologies that push the boundaries of what can be achieved through polyester production. Sulindafin, established in 1978, is a member of the Shinta Group that began life as a textile trading business in 1960. A strategic move into manufacturing took place in 1971 with the construction of a warp knitting mill, and this became the genesis of three decades of growth and innovation that has positioned the Group at the forefront of polyester and textile production in Indonesia. From a layperson’s perspective it would be easy to dismiss polyester production as a straightforward process with a single purpose, but take a closer look at Sulindafin’s operations and you’ll find complex and highly advanced manufacturing techniques with a diverse range of purposebuilt products.

Pioneering Polyester

Sulindafin has a proud history of growth and innovation that began with the pioneering of polyester POY (partially-oriented yarn) production in Indonesia in 1978. Increased demand led to the growth of the company and a number of new plants were added as the Shinta Group formed an impressive vertically integrated manufacturing chain from polyester polymers, chips and fibre, through to yarns and fabrics. Through a policy of reinvestment and

expansion, operations were expanded to meet growing demand, including a continuous process poly-condensation plant (1986), a direct spinning POY plant (1991), a batch polymerization plant (2003), an expanded yarn dyeing facility (2008) and an expanded dope dyed yarn facility (2010). As of 2012, Sulindafin, with an annual production capacity of 80, 000 tons of polyester and 4,000 tons of nylon, is rightly considered to be a significant player in Indonesia’s Polyester Yarn and Fibre industry. With consistent high quality and a diverse range of products, Sulindafin has developed an export operation that circles the globe, featuring in Asian, Middle-Eastern, North American, South American and European markets.

Functional Yarns and Fabrics

to draw moisture away from the skin onto the outer surface of the fabric, where it can quickly evaporate. This thermoregulatory effect keeps your clothes dry and comfortable. SULGUARD® (Antimicrobial) The yarn is infused with a special additive containing silver that delivers an antimicrobial function to the fabric, making it highly practical in the creation of swimwear, undergarments, socks, shoe linings and medical textiles. The antimicrobial function also makes it invaluable for apparel worn in business environments where a high level of hygiene is crucial, such as hospitals, research laboratories and food preparation areas. The antimicrobial additive used in SULGUARD® is environmentally friendly, non-toxic, safe and compatible with human skin, and remains active, even with frequent use and wash. SULNATURAL® (Natural Feel) For thousands of years, natural fibre linen has been prized for its fresh, cool and slightly rough texture but limited availability and high cost has resulted in declining usage. SULNATURAL® is polyester yarn manufactured using a unique false-twisting technique that gives it the appearance, feel

Although largely unnoticed by consumers, there have been some outstanding technological advancements in polyester yarn production of which Sulindafin has taken full advantage. In 2006, to complement its traditional range of products, Sulindafin introduced the exclusive SULSUITE® collection – the result of years of extensive research and development. SULCOOL® (Moisture Management) Name: PT. Sulindafin (Member of Shinta Group) If you live in a humid Est.: 1978 environment, or engage Employees: 2,300 in sports or other active Business: Polyester chips, Staple fibre, Polyester leisure pursuits, you’ll ap& Nylon filament/textured yarns preciate the importance Affiliate’s Business: Ring spun yarns in Cotton/ of lightweight clothing Polyester/Viscose blends and Woven/Knit fabrics that allows your skin to Type: Private Company breathe and stay cool. Office: Jakarta, Tangerang, Bekasi & Bandung, Apparel created from fabIndonesia rics using SULCOOL® Factories: Tangerang & Bekasi, Indonesia fulfils both criteria, by utilising capillary action

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Indonesia 2013

COMPANY PROFILES and durability of linen, but at the same cost as polyester yarn. SULSHIELD® (Flame Retardant) By adding a phosphorous-organic compound during the polymerisation/spinning process, SULSHIELD® yarn has permanent flame retardant functionality which does not wash away. When placed near an ignition source, fabrics made with SULSHIELD® yarn absorb heat and melt away to prevent it from catching flame. Meeting stringent safety standards, fabrics made with SULSHIELD® yarns are ideal for military, fire service and industrial work uniforms. They are also being actively used in home furnishing such as curtains and upholstery.

have enabled Sulindafin to produce a diverse portfolio of consistently high quality materials. In recognition of its commitment to excellence, stringent quality control and adherence to international quality standards, Sulindafin was awarded ISO 9001 certification in 1998 and upgraded to ISO 9001:2008 in 2010. In addition, its products have been tested and certified in accordance with Oeko-Tex Standard 100 and have been proven to meet human ecological and azo-dye requirements.

Spinning Success

Sulindafin is committed to a growth strategy that revolves around superior

certified, are: PT Sulindamills: A spinning mill established in 1990 with a capacity of 83,000 spindles, Sulindamills is one of the quality producers of ring spun yarns in Indonesia. Given that international knitting and weaving industry standards are high with compliance remaining a high priority, Sulindamills utilises machinery and technology from leading European and Japanese suppliers. All yarns produced at Sulindamills are electronically spliced and cleared in a fully air-conditioned plant. PT Shinta Indah Jaya: The first manufacturing unit of the Shinta Group established in 1971, Shinta Indah Jaya supplies quality knitted fabrics to a host of apparel

An export operation that circles the globe.

Circular-Knitting Machines

SULWAVE® (Oceanic Charm) Fabrics made with SULWAVE® yarn possess a special, wave-like design, creating a unique and aesthetically pleasing appearance. While retaining all the practical benefits of polyester - lightweight, durable and crease-resistant - SULWAVE® fabrics possess a high degree of comfort with a visual impact that adds a subtle elegance to fashion-wear.

Technology and Quality

Sulindafin’s innovative and technological feats are in no way serendipitous, but rather a result of a strategic investment in cutting-edge technological advances from engineering companies such as Zimmer AG, Reiter Scragg, Barmag from Europe and Teijin Seiki & Murata from Japan, that

Ring Spinning Mill

quality, reliability, innovation and competitive prices. Its successes has been the result of retaining the best talent, a trained workforce of 2300, utilising the finest equipment, maintaining a high standard of service and above all, a strong commitment to customers. Maybe there isn’t a single thread that holds everything together. Perhaps it’s a combination of these key factors that have manoeuvred Sulindafin into a significant polyester producer with a customer-base in diverse industries like apparel, home furnishing and automobile interiors that spans five continents.

Integrated Textile Chain

The other main manufacturing companies within the Shinta Group, all ISO 9001

STRATEGY

industry leaders as well as international sports and fashion brands. PT Shintatex: Home to one of the most modern textile mills in Indonesia, Shintatex produces high quality woven polyester fabrics. Every month, about 2.4 million yards of ladies dress and blouse fabrics are produced for an eminent customer base that includes leading international fashion brands and stores.

Shinta Group seeks.....

Shinta Group is turning its attention towards a lucrative push into the Middle East and North African territories and would welcome communication from consumers of fibre, yarns and fabrics and other suppliers to the textile industry to discuss potential mutually beneficial partnerships.

Indonesia 2013