indo infrastructure (block by block technocrats get things rolling) 20140221

8/12/2019 Indo Infrastructure (Block by Block Technocrats Get Things Rolling) 20140221

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Indo infrastructureSpecial report

FindCLSA research on Bloomberg, Thomson Reuters, CapIQ and themarkets.com - and profit from our evalu@torproprietary database at clsa.com

Sarina Lesmina, CFAHead of Indonesia [email protected]+62 21 2554 8820

Jessica Tosin+62 21 2554 8831

21 February 2014

IndonesiaInfrastructure

BUYs

Indocement

Jasa Marga

Wijaya Karya

Outperforms

Perusahaan Gas

PTPP

Semen Indonesia

www.clsa.com

Block by blockTechnocrats get things rolling

Interviews with

technocrats inside

Watch Sarina on CLSA TV
http://www.clsa.com/http://www.clsa.com/https://www.clsa.com/member/video/542685547https://www.clsa.com/member/video/542685547https://www.clsa.com/member/conviction/market/buyshttp://www.clsa.com/http://www.clsa.com/


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Indo infrastructure

2 [email protected] 21 February 2014

Contents

Executive summary .......................................................................... 3

Indonesias infrastructure buildout ................................................... 4

Investment thesis ............................................................................. 6

Much to be done ..............................................................................13

Green shoots of progress .................................................................18

Financing needs coordination ..........................................................43

How to play the theme .....................................................................55

Company profiles

Indocement .............................. 65

Jasa Marga ............................... 71

Perusahaan Gas ........................ 75

PTPP ........................................ 79

Semen Indonesia ....................... 83

Wijaya Karya ............................ 87

Appendices

1: Interviews ..................................................................................... 912: Land-reform bill .............................................................................. 97

3: Politics .......................................................................................... 99

4: Other hidden gems ....................................................................... 102

5: Recommendation history ............................................................... 103

All prices quoted herein are as at close of business 19 February 2014, unless otherwise stated

Indonesia in focus
https://www.clsa.com/member/reports/537664285.pdfhttps://www.clsa.com/member/reports/537660864.pdfhttps://www.clsa.com/member/reports/537666146.pdfhttps://www.clsa.com/member/reports/542678029.pdf


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Executive summary Indo infrastructure

21 February 2014 [email protected] 3

Block by blockInfrastructure is a hopeless topic in Indonesia - jam karet (literally rubber

time, meaning extended waiting) has become synonymous with Jakartatraffic. Despite plenty of initiatives over the years, implementation has been

poor; and there is much to be done. However, some technocrats are finally

putting the building blocks together. Financing is possible, but requires

government support. Regardless of the challenges, we expect the next

administration to push for more infrastructure investment, the multiplier

effect of which will drive robust economic growth.

Indonesia lags its Asian peers by a wide margin in terms of infrastructure

adequacy. Logistics costs/GDP was a high 27% in 2013, which is not surprising

given that the country has the smallest road network per land area, and it

costs more to ship between its islands than overseas. That said, the lucrative

domestic market has continued to bring in investment. The Japanese

government, in particular, has a long investment history in Indonesia (eg, auto

industry); the Japan Bank for International Cooperation is financing MRT, and

Japanese banks are among the largest foreign operations in Indonesia.

Coming from a low base, there has been some impressive progress: railway

services have been revamped; the main ports throughput has doubled in three

years with more expansion to come; and MRT construction has begun. But

acceleration is essential and while some technocrats have been leading the

charge, government support is crucial.

The National Development Planning Agency estimates Indonesia needs to

invest US$550-600bn (12% of GDP; China spent 9% over 1992-2011) in

infrastructure over the next five years. Financing the gap is possible but

requires unprecedented coordination between the government, state-owned

enterprises, onshore commercial banks and international aid agencies. This

will be challenging, thus the central government needs to play a major role.

While progress is encouraging, a solid framework needs to be put in place so

infrastructure reform can continue long after these technocrats are gone. For

instance, enforcement of the new land bill (effective end-2014 for ongoing

projects) is key to accelerate land clearing - a major bottleneck. Given that

rollout takes time, incumbents should continue to benefit in the medium term.

This year marks a turning point as a new government comes in and we hope

the green shoots of progress can pick up speed. Our key picks are Indocement,

Semen Indonesia, Wijaya Karya, PTPP, Jasa Marga and Perusahaan Gas.

Government infrastructure spending

Source: Government of Indonesia

55 64 73 76 80

118

145171

230

1.6 1.6

1.5

1.4

1.3

1.6

1.8

1.9

2.3

0.81.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

050

100

150

200

250

300

350

400

450

500

2006 2007 2008 2009 2010 2011 2012 13F 14F

(Rptn) Government capital spending

% of GDP (RHS)

(%)

Green shoots of progress

Financing needscoordination

How to play the theme

Much to be done

Execution on

infrastructureinvestment to improve

Governmentinfrastructure spending is

picking up, but needsacceleration and more

private participation


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Indo infrastructure


Indonesias infrastructure buildout

Source: Google Maps, CLSA


5/107

Investment thesis Indo infrastructure


Infrastructure needs to pick up paceThere is a Chinese saying that for a country to prosper, build roads first.

Chinas massive infrastructure investment in the mid-1990s paid off as GDPgrowth soared. In 2008-09 it reached an inflection point, where the boost

from more investment became marginal. With its infrastructure adequacy

lagging many regional peers by a wide margin, Indonesia is years away from

that inflection point.

Much to be doneIndonesia has a high logistics costs/GDP ratio of 27%. We doubt it can

sustain GDP growth at the 10-year average of 5.5-6% if the country does not

invest in infrastructure development.

Chinas GDP growth and road coverage Indos GDP growth and road coverage

Source: IMF, CIA Factbook

Logistics costs as a portion of GDP

Source: World Bank (2012 data)

Railway length per capita Road density (network per land area)

Note: We show only the closest proxies for

Indonesia in Asia. Source: World Bank, KAI

Note: We show only the closest proxies for

Indonesia in Asia. Source: CIA Factbook

0.0

0.1

0.2

0.3

0.4

0.5

0

2

4

6

8

10

12

14

1996

1998

2000

2002

2003

2004

2005

2006

2007

2008

2009

2011

13CL

Real GDP growth

Road coverage (RHS)

(%) (km/m)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

(15)

(10)

(5)

0

5

10

1996

1998

2000

2002

2003

2004

2005

2006

2007

2008

2009

2011

2013

Real GDP growth

Road coverage (RHS)

(%) (km/m)

0

5

10

15

20

25

30

Indonesia Vietnam Thailand South

Korea

Malaysia Japan USA Singapore

(%)

157

53 49

21

0

20

40

60

80

100

120

140

160

180

Japan India China Indonesia

(km/m people)

0.270.35

0.43 0.44

0.71

1.08

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Indonesia Thailand China Malaysia Philippines Korea

(km/km)

Indonesia has a

high logistics costs/GDP of 27%

With a 4% Cagr in

road density over1996-2013, Indonesia

has underinvested

Multiplier effect ofinfrastructureinvestment

Insufficient railwaysand roads for publicand goods transport


6/107



Railway length in Indonesia Dwelling time at key seaports

Source: Source: Ministry of Transportation,

Directorate General of Railways

Source: World Bank

Cost to ship a 20ft container from Jakarta

Source: IPC

Daily capacity of public transport: Greater Jakarta versus Singapore

Greater Jakarta (current) Greater Jakarta (2020 plan) Singapore (current)Buses 763,000 1,843,000 3,481,000MRT 0 400,000 2,649,000Taxis 75,000 270,000 967,000

Railway 700,000 1,500,000Total 1,538,000 4,013,000 7,097,000Coverage per person (%) 6.4 16.7 129

Source: CLSA, companies

The lucrative domestic market has continued to attract investment, but it is a

critical time for infrastructure growth. The Japanese government in particular,

has a long investment history in Indonesia (eg, autos industry) and its banks

are among the largest foreign operations in the country, yet its focus is not oninfrastructure funding. For the first time since 1992, the Japan Bank for

International Cooperations (JBIC) survey of Japanese companies ranked

Indonesia No.1 destination again for foreign direct investment (FDI) over the

medium term, last year (up from the third place in 2012).

JBIC ranking: Japanese companies choice of FDI destination

2013 2012Indonesia 1 3India 2 2Thailand 3 4China 4 1Vietnam 5 5Brazil 6 6

Mexico 7 7Myanmar 8 10

Russia 9 8USA 10 9

Source: JBIC

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1867

1870

1880

1890

1900

1939

1950

1955

1990

1995

1996

1997

1998

1999

2000

2001

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

(km)

0

1

2

3

4

56

7

8

Jakarta

Thailand

Malaysia

LosAngeles

Australia

France

HongKong

Singapore

(days)

0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

Singapore

HongKong

Bangkok

Shanghai

Tokyo

Hamburg

Padang

Medan

Banjarmasin

Makassar

Ambon

(US$) (km)Shipping cost per 20ft container

Distance (RHS)

Indonesia is Japanesefirms No.1 destination

for foreign

direct investment

It costs on average 12xmore to ship from

Jakarta to domesticseaports than to

ship to Singapore

Railway networkhas not expanded

in past 20 years . . .

. . . and dwellingtime at seaport is long

Local market attractsinvestment but needsto ease infrastructure

bottleneck


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Green shoots of progressComing from a low base, there has been impressive progress in Indonesias

infrastructure buildup. Some technocrats have been leading the charge, butgovernment support is crucial for acceleration.

Tanjung Priok capacity IPC profit

IPC ROI IPC assets

Source: IPC

Railway operation turned around Cargo transport was revamped

Source: KAI

Number of train accidents A blast from the past

Source: KAI Source: CLSA

3.8 4.6

5.7 6.2 6.2

10.7

18.7

0

2

4

6

8

10

12

14

16

18

20

2009 2010 2011 2012 2013 2017 2023

(m TEUs)

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013 14F

(Rpbn)

22.0

23.0

24.0

25.0

26.0

27.0

28.0

2007 2008 2009 2010 2011 2012

(%)

0

5,000

10,000

15,000

20,000

25,000

2009 2010 2011 2012 2013 14F

(Rpbn)

(200)

0

200

400

600

800

1,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2006

2007

2008

2009

2010

2011

2012

2013

14F

(Rpbn)(Rpbn) Revenue

NI (RHS)

19.2 19.0 18.9 19.3

22.0

27.0

10

12

14

16

18

20

22

24

26

28

2008 2009 2010 2011 2012 2013

(m tonnes)

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011 2012 2013

Major seaportscapacity doubled

since 2009, and 72%expansion underway

IPC that runs 12seaports in Indonesia

booked a 20%profit Cagr since 2009

Coming from lowbase, ROI rose sharply,while assets more than

doubled in five years

From loss-making in2008, state-owned

railway operator sawa 33% profit Cagr

Cargo transportwas revamped

Trains arebecoming safer . . .


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E-ticketing launched in 1H13 Paper tickets were phased out

Source: KAI

Medan-Kuala Namu airport train Inside the airport train

Source: www.railink.co.id Source: www.merdeka.com

MRT Jakarta starting construction New tollroad to seaport

Source: CLSA

Passenger growth in past five years Top 10 busiest airport in the world

Source: Airports Source: Airports Council International (2012)

15.8

11.4

10.0

8.3

4.0

1.7

1.5

1.1

0.7

0.4

0 2 4 6 8 10 12 14 16 18

Soekarno-Hatta

Dubai

Beijing

Singapore Changi

Hong Kong

Los Angeles

Atlanta

London Heathrow

Dallas-Fort Worth

Tokyo (%)

95

82

70

68

67

64

62

59

58

58

0 10 20 30 40 50 60 70 80 90 100

Atlanta

Beijing

London Heathrow

Tokyo

Chicago O'hare

Los Angeles

Paris Charles de Gaulle

Dallas-Fort Worth

Soekarno-Hatta

Dubai (m)

. . . and more modern

First airport trainto city was launchedin Medan (39km)

MRT has begunconstruction (after

being a perpetualconcept since 1986)

New tollroad toTanjung Priok

nearly done

Soekarno-Hatta isin the process of

doubling its capacity


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Newly arrived TransJakarta bus fleet E-payment launched in January 2013

Source: TransJakarta Source: CLSA

We interviewed some of the technocrats leading the change. They are

capable, and reform-minded leaders. Nonetheless, while they have worked

wonders, governments support is crucial to leapfrog to the next level.

Financing needs coordinationThe National Development Planning Agency estimates the country needs

US$550-600bn in the next five years for its infrastructure needs. Hence,

infrastructure spending as a portion of GDP needs to triple to 12%.

There is a US$75bn annual financing shortfall from what the government and

the private sector are spending. We estimate over a five-year period,

US$450-500bn could be raised by various sources (government, SOEs,

onshore banks, etc) to support infrastructure spending, bridging the gap with

private investment.

While capacity is available, realisation requires an unprecedented level of

coordination between parliament, the Ministry of Finance (MOF), state-ownedenterprises (SOEs), onshore commercial banks and international aid agencies.

This will be challenging and thus needs full support from the central

government.

Public funding sources

Source Amount (US$bn) Assumption

Government debt capacity 200 50% public debt:GDP

Subsidy savings from the budget 150 5 years subsidies at the current level

State owned enterprises 41 200% debt to equity (70:30 debt:equity)

Onshore banks and capital markets 37 5-year growth in onshore funds (10% per annum), 25%dedicated to infrastructure lending

Development agencies,government to government

30 Annual peak commitments of JICA, ADB and World Bank x5

Total 458

Source: CLSA

What US$30bn can provide for infrastructure 3,600km of tollroads, which will more than quadruple the current network. Or 27,000km railway, which will increase current network (5,040km) by

five times.

Or 94m twenty-foot equivalent units (TEUs) port capacity, which willincrease Tanjung Priok Ports capacity by 15x.

Or 10x more on current MRT capacity (with additional 350km). Or 30GW of coal-fired power generation, which will almost double current

national capacity of 36GW (out of which 26GW is in Java).

TransJakarta buswayfleet rose by 50% to

about 2,000 units

E-payment systemlaunched last January;five banks participate

Needs US$550-600bnin the next five years

Annual US$75bnfinancing shortfall

If US$30bn annualsubsidy is removed

Public funding canbridge the gap, but

requires unprecedentedcoordination


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How to play the themeWhile current progress is encouraging, a solid framework needs to be in place

so infrastructure reform can continue long after these leaders are gone.

A key catalyst will be the enforcement of the land-reform bill which will

become effective the end of this year for projects that are in the land-clearing

phase. This is hoped to accelerate the land-clearing process which is currently

a major bottleneck.

Given that rollout takes time, existing incumbents should continue to benefit in

the medium term. This year marks a turning point as a new government comes

in and we hope the green shoots of progress will sprout more quickly. Key direct

beneficiaries are cement, construction, tollroad and oil & gas sectors.

Our stock picks in these industries are Indocement, Semen Indonesia, Wijaya

Karya, PTPP, Jasa Marga and Perusahaan Gas. Compared to regional peers,

Indonesian infrastructure plays are trading at higher average 15CL PE (13.3x

versus 12.1x), but they offer greater return potential.

Indocement (INTP IJ - BUY). We expect Java to remain the key focusof infrastructure development; 56% of Indonesias cement demand comes

from the region. Indocement is a key beneficiary given its Java focus. The

company has strong pricing power (superior margin and ROIC),

dominance in Java and a strong balance sheet to finance growth.

Valuation has also become less demanding versus its peers. We raise our

target price from Rp24,500 to Rp27,500 on increasing optimism over a

renewed investment cycle. Our fair value is based on 17x 15CL PE, or one

standard deviation above its historical mean.

Cement consumption if GDP growth rises to 7% Cement penetration (consumption/capita)

Source: CLSA, ASI Source: 2012 World Bank, Indonesian Cement Association (ASI)

Jasa Marga (JSMR IJ - BUY).Being the largest and most experiencedtollroad operator in Indonesia, Jasa Marga stands to benefit from the

potential acceleration in infrastructure development, with implementation

of the land-reform bill to kick in by the end of 2014. The company is

expanding its network by 32% by 2017, with the imminent completion of

the crucial Jakarta Outer Ring Road (JORR) 1 this year. Moreover, its

margin is likely to improve with operational leverage and more

automation. Its valuation has become less demanding with superior ROEversus its peers. Our Rp7,200 target price is at a 25% discount to our

estimated NAV.

0

100

200

300

400

500

600

0

20

40

60

80

100

120

140

2013 2020

(m tonnes) (kg)

Consumption (LHS)

Consumption/capita

1,637

1,119

591 563503

233 199 165

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Chin

a

Singapor

e

Malaysia

Vietnam

Thailan

d

Indonesia

Philippine

s

India

(kg)

Full support fromgovernment is needed

Largest tollroadoperator, Jasa Marga

to benefit

Enforcement of newland bill is key catalyst
https://www.clsa.com/member/company/index.asp?clsa_id=1726https://www.clsa.com/member/company/index.asp?clsa_id=1726


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Wijaya Karya (WIKA IJ - BUY).Wijaya Karya is our top pick in theconstruction sector due to its diversified earnings and ability to win

frontier projects such as the MRT. In addition, it continuously branches outearnings leveraged to infrastructure via a new business line from pre-cast

concrete manufacturing to asphalt manufacturing. The stock is trading at

11.4x 15CL PE. Our Rp2,350 target price is based on 13.5x.

Pembangunan Perumahan (PTPP IJ - O-PF). Contribution fromKalibaru Phase 1 boosted the construction companysgrowth in 2013. Its

participation in the Rp8tn project also raises its chance to win Phase 2.

The firm gets business from both SOEs and the private sector, which gives

it a buffer against any slowdown in government infrastructure spending.

Pembangunan Perumahan is the second-cheapest contractor in our

coverage universe. Our 12-month target price is Rp1,510.

Perusahaan Gas (PGAS IJ - O-PF). PGas is the dominant gas supplierin Indonesia. To overcome stagnant distribution volumes, the company isbuilding a second LNG-receiving terminal and has purchased interests in

upstream fields in Indonesia. Disputes over pipeline access leading to

margin compression or a value-destructive merger with Pertamina are

overblown, depressing the stock price and providing a buying opportunity.

We continue to rate PGas an Outperform and raise our target price from

Rp5,000 to Rp5,500, removing the probability ascribed to a Pertamina

takeover (previously 30%).

Semen Indonesia (SMGR IJ - O-PF).As the largest cement player inIndonesia with a presence in all key regions, Semen Indonesia stands to

benefit from the potential acceleration in infrastructure development.

Capacity expansion enabled it to gain back lost market share in 2013, and

it will add another 10.8m tonnes by 2017. We raise our target price from

Rp14,500 to Rp16,500 on increasing optimism over a renewed investment

cycle. Our fair value is based on 17x 15CL PE, or one standard deviation

above its historical mean and we maintain our Outperform call.

Asean infrastructure valuations

Company Code Mkt cap(US$m)

Rec Price(Rp)

Target(Rp)

Upside(%)

Div yld(%)

TSR(%)

PE (x) ROAE(%)

NetD/E

(%)14CL 15CL

IJM Corp IJM MK 2,449 O-PF 5.8 6.6 15 2.8 18 12.8 13.8 11 40

Gamuda GAM MK 3,054 O-PF 4.6 5.3 15 3.0 18 16.0 15.5 13 7

Megawide MWIDE PM 449 BUY 12.8 15.7 23 0.6 23 15.3 12.0 15 59

EEI EEI PM 231 O-PF 10.7 12.2 14 1.9 16 12.7 12.1 15 (5)

Stecon STEC TB 660 BUY 16.3 26 60 3.2 63 15.5 13.2 19 (79)

Siam Cement SCC TB 15,146 BUY 412.0 510 24 4.1 28 12.1 11.1 23 75

Lafarge Republic LRI PM 1,166 BUY 9.1 16.4 80 5.3 85 12.3 10.7 22 (13)

Average regional plays 13.8 12.6 17 12

Indocement INTP IJ 7,054 BUY 22,650 27,500 21 1.7 23 15.4 13.9 22 (53)

Semen Indonesia SMGR IJ 7,527 O-PF 15,000 16,500 10 2.9 13 17.1 15.5 24 (4)

Holcim Indo SMCB IJ 1,381 SELL 2,225 2,160 (3) 2.4 (1) 16.5 14.2 11 23

PTPP PTPP IJ 569 O-PF 1,390 1,510 9 1.5 11 13.6 10.5 24 86

Waskita Karya WSKT IJ 491 O-PF 660 550 2 1.7 3 15.5 12.7 15 (4)

Wijaya Karya WIKA IJ 1,036 BUY 1,995 2,350 18 1.4 19 15.2 11.4 23 34

Jasa Marga JSMR IJ 3,135 BUY 5,450 7,200 32 1.5 34 20.8 19.2 18 70

Perusahaan Gas PGAS IJ 10,357 O-PF 5,050 5,500 9 4.4 13 11.5 12.0 32 (4)

Average Indonesian plays 15.6 13.4 21 26

Source: CLSA

Semen Indonesiais our second

pick in the space

PTPP sees upside fromseaport expansion
https://www.clsa.com/member/conviction/market/buys


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Section 1: Much to be done Indo infrastructure


Much to be doneIndonesia lags its regional peers by a wide margin in terms of infrastructure

adequacy. Logistics costs as a portion of GDP was a high 27% in 2013. Not asurprise given that the country has the smallest road network per land area,

and it costs more to ship between its islands than overseas. While the

lucrative domestic market continues to draw in investment, it is critical time

for its infrastructure to expand before the bottleneck starts hindering its

economic growth.

Logistics costs as a share of GDP rose from 24% in 2012 to 27% in 2013.

Transport makes up the bulk of logistics costs, followed by inventory (10%)

and administration (5%). It is questionable that Indonesia could maintain its

GDP growth at the 5.5-6% average of the past decade if the country does not

invest in infrastructure development.

Figure 1

Logistics costs as a portion of GDP (2013)

Source: World Bank

Figure 2

Key infrastructure metrics

Unit Indonesia Regional avg

Road density km/km 0.27 0.60

Port dwelling time days 7 3

Rail capacity km/m people 21 79Electrification ratio % 65 90

Source: World Bank, CIA Factbook, Government of Indonesia

Acceleration is neededFor instance, taking into account the medium-term capacity expansion of public

transport facilities in Greater Jakarta, the coverage (per population) will only

double to 13.6% in 2020. Unless the government boosts capacity additions,

traffic congestion will continue with ever-rising car demand, if not worsen.

Public transport capacity in Greater Jakarta will have to grow by 50% per

annum to enable 100% coverage, like in Singapore. There is no necessity for

cars in Singapore given that its public transport capacity of 7m people/day is

more than enough to cover its 5.5m population. Our previous Indonesia

country head, Nick Cashmore, who lives in Singapore these days, also pointed

out this interesting statistic on MRT penetration for some cities in the world.

0

5

10

15

20

25

30

Indonesia Vietnam Thailand SouthKorea

Malaysia Japan USA Singapore

(%)

To be as efficient asSingapore, capacity has to

rise by 50% per annum

Public transportpenetration in GreaterJakarta will double by

2020, but only to 13.6%

Indonesias logisticscost as a portion of

GDP is high and rising

Indonesia lags in

infrastructure adequacyby a wide margin

There is much to bedone in infrastructure


13/107



Figure 3

Greater Jakarta public transport daily capacity

(No. of people) Current 2020 Note

Greater Jakarta railway 700,000 1,500,000

TransJakarta busway 360,000 1,440,000 Assume quadrupling capacity by 2020

Jakarta MRT - 400,000

Other public buses 403,000 403,000 Assume stagnant. To be replaced by TransJakarta buses

Taxis 75,000 270,000 Assume 20% pa growth

Public transport 1,463,000 3,743,000

Greater Jakarta population (people) 24,000,000 27,600,000 Assume 2% growth

Coverage (%) 6.1 13.6

No. of private vehicles 7,800,000 13,280,000

(No. of people) Current 2020 Note

Source: Companies

Figure 4

Singapore's public transport daily capacity (2012)

(No. of people)

MRT 2,525,000

LRT 124,000

Bus 3,481,000

Taxi 967,000

Total 7,097,000

Source: SMRT, LTA, SBST

Figure 5

MRT ridership per population

Note: Future capacity for Jakarta. Source: Government websites

On seaport, there was notable progress in debottlenecking (refer to the

following section), but much effort is needed to make it as efficient as

Singapore, where dwelling time for cargo is only a day.

Domestic shipment cost is high compared to international rates. It is more

expensive to ship goods from Jakarta to Padang (North Sumatra), which is

about 1,000km away, than to ship from Jakarta to Hamburg (11,000km). If

this issue is not addressed, Indonesia will lose out (especially with the setup

of the Asean Economic Community in 2015) as foreign companies are likely torelocate their manufacturing hubs outside Indonesia, where it is easier to ship

goods from neighbouring countries into the country.

0

10

20

30

40

50

60

70

80

Hong Kong Singapore London Manila Bangkok Jakarta Mumbai

(%)

Capacity of 7m people/day more than enough tocover its 5.5m population

Indonesias MRT coveragehas a long way to go

Domestic logisticcost needs to be

reduced substantially


14/107



Figure 6

Dwelling time at key seaports

Source: World Bank

Figure 7

Cost to ship 1x20 container from Jakarta to various cities

Source: IPC

In the railway space, capacity per person is low. Operator Kereta Api

Indonesia (KAI) plans to more than double railway track length to 12,000km

by 2030. This will match its capacity (km/m people) to Chinas level.Figure 8 Figure 9

Railway network Railway length per capita

Source: World Bank, KAI

0

1

2

3

4

5

6

7

8

Jakarta Thailand Malaysia Los Angeles Australia France Hong Kong Singapore

(days)

0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

Singapore

HongKong

Bangkok

Shanghai

Tokyo

Hamburg

Padang

Medan

Banjarmasin

Makassar

Ambon


Distance (RHS)

20,035

66,23964,460

5,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Japan China India Indonesia

(km)

157

49 53

21

0

20

40

60

80

100

120

140

160

180

Japan China India Indonesia

(km/m people)

Much effort is needed toimprove efficiency of

Tanjung Priok seaport

It costs on average12x more to ship from

Jakarta to most seaportsof Indonesia than

to ship to Singapore


15/107



Figure 10

Current railway capacity

Source: World Bank, KAI

Road development needs to accelerate as well, with Indonesia having the

smallest road network per land area in the region.

Figure 11

Road network per land area

Source: CIA Factbook

Lastly, the expansion of Soekarno-Hatta airport will allow it to take twice

more passengers in the next few years, but currently it is running at close to

3x its capacity.

Domestic market continues to appealWith its rapidly expanding middle class, Indonesia remains an attractive FDI

destination, especially to Japanese companies, many of which already have a

strong foothold in the country.

The JBICs 2013 survey of Japanese FDI outlook ranked Indonesia the most

promising country to do business in over the medium term (third place in

2012), while China fell from No.1 to No.4. Last year marks the first timeIndonesia took first place since 1992.

5,000

6,667

32,381

21

49

157

(50)

0

50

100

150

200

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Current km China Japan

(km) Indonesia To catch up Density (RHS) (km/m people)

0.27

0.35

0.43 0.44

0.71

1.08

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Indonesia Thailand China Malaysia Philippines Korea

(km/km)

Indonesia needs tomore than double its

rail capacity to matchChinas railway density

Road networkneeds expansion

Many Japanese firmsalready have a strong

foothold in the country


16/107



Figure 12

JBIC ranking: Japanese companies choice of FDI destination

2013 2012

Indonesia 1 3

India 2 2

Thailand 3 4

China 4 1

Vietnam 5 5

Brazil 6 6

Mexico 7 7

Myanmar 8 10

Russia 9 8

USA 10 9

Source: JBIC

JBIC is funding the MRT Jakarta project, and Toyota is collaborating with the

city government to find solutions for the traffic congestion. All these are dueto the large potential of the domestic market which will boost the presence of

Japanese companies/products in Indonesia.

Nonetheless, the countrys infrastructure bottleneck will eventually take a toll

on consumption if it does not get fixed. In such case, will a 10% GDP/capita

Cagr still be realistic? Can annual disposable income growth keep up with

inflation due to high logistics costs? When growth stalls, FDI will disappear.

Figure 13

Ranking of infrastructure quality

Source: World Economic Forum, The Global Competitiveness Report, 2012

107

101

98

92

88

87

82

69

65

58

36

34

25

24

23

22

18

16

15

10

9

8

7

6

5

4

3

2

1

0 20 40 60 80 100 120

Brazil

Rusia

Philippines

Indonesia

Egypt

India

Italy

China

Mexico

South Africa

Australia

Turkey

United States

United Kingdom

Saudi Arabia

South Korea

Spain

Japan

Canada

Netherlands

Germany

Austria

Iceland

United Arab Emirates

France

Hong Kong

Finland

Singapore

Switzerland

Indonesia ranks poorly ininfrastructure quality

Indonesias rankingmoved to No.1 from

No.3in JBICs FDIoutlook survey 2013

When growth stalls,FDI will disappear

JBIC is funding the

MRT Jakarta project


17/107


18/107

Section 2: Green shoots of progress Indo infrastructure


Figure 14 Figure 15

Rainy season always brings floods . . . . . . in Jakarta

Source: CLSA

We interviewed Ahok in his dwelling in

North Jakarta. Not a surprise that he

considered traffic and floods to be the

most problematic issues and his and

Governor Jokowis first priorities since

they took office.

The pair had shown progress by

revitalising some dams in Jakarta,

notably the Pluit Dam in the north - an

area which was usually worst impacted

by flood. While the flood in Pluit was

much less severe this year since thedam is completed, many areas in

Jakarta were still flooded quite badly.

Unfortunately, Ahok mentioned there are more than 200 dams in Jakarta and

many are not functioning well. Hence, it will take time to make Jakarta flood-

free. (Refer to Appendix 1 for our full interview with Ahok).

For instance, even when it took a relatively short period (about a year) to

reconstruct Pluit Dam, the Jakarta government had to relocate about 1,000

squatters who occupied the bank of the dam to low-cost apartments. The

same approach was done for Ria Rio Dam in East Jakarta. Pluit Dam was also

made into a nice public park as part of the citys goal to increase green space.

Figure 17 Figure 18

Pluit Dam (before) Pluit Dam (now)

Source: www.panoramio.com Source: CLSA

Flood has becomea chronic issue

Pluit Dam in the northhas been revitalised

Figure 16

Basuki Ahok Purnama

Source: CLSA

Jakarta deputy governor

Quite an effort to clearsquatters to makeway for Pluit Dam


19/107



On traffic congestion, Ahok reckoned that building roads will not be enough to

solve the problem. The solution is more mass rapid system. Hence, the

government of Jakarta had been pushing ahead with a grand plan to integratethe busway (TransJakarta) system, commuter trains and the future MRT

using busway as the backbone. The aim is to provide better and more public

transport to reduce the number of cars on the street.

Ahok believes the budget this year should be enough to fund the Jakarta

governments infrastructure initiatives. Since our interview with Ahok, after

many delays, the Jakarta Provincial Assembly (DPRD) finally passed the 2014

budget of Rp72tn, a 44% increase from last year, and higher than what Ahok

had estimated (about Rp69tn).

Expanding TransJakarta busway systemTransJakarta is a bus rapid transit system initiated back in 2004. However,

due to a lack of buses and routes, traffic congestion still prevails. Moreover,the previous local government mandated that all TransJakarta buses have to

run on Bahan Bakar Gas (gas fuel) but the lack of supply of pump stations

reduce bus operational time to only four hours per day. Ahok mentioned that

this mandate has now been scrapped.

Figure 19

Usual scene at TransJakarta busway station

Source: www.ahok.org

The current 12 corridors (routes) of busway should be supported by 1,700

buses, but unfortunately there are only 580 units. Hence, Pemda Jakarta

(local government of Jakarta) had allocated Rp6tn (US$500m) to procure

1,000 buses for the TransJakarta fleet and 3,000 medium-sized buses for

regular public transport. Some will be used to replace ageing buses (ie, the

shabby regular public buses). This is hoped to reduce headway time for

TransJakarta (the space between one bus and another) from 15-20 minutes

to 5-7 minutes, and to almost double the number of daily passengers from

360,000 (2013) to 700,000 in 2014.

TransJakarta received 310 new buses by the end of 2013 from China, 90 of

which have started operation in January 2014. Also, to increase transparency,

future procurement will be done through an online system (e-catalog).

Long wait forthe bus to come

Grand plan to integrate

the busway system,commuter trains

and future MRT

Due to a lack of

buses and routes, thebusway system fails toease traffic congestion

Aim to double number ofdaily passengers from

360,000 in 2013 to700,000 in 2014


20/107



Figure 20

Additional buses rolling in

Source: www.beritajakarta.com

Pemda Jakarta added one corridor last February, serving Pluit in North

Jakarta to Tanjung Priok port. With this addition, the 12 corridors of

TransJakarta cover 207km with 228 stations. Three more are under

construction and targeted to finish in 2015.

Five banks expanded the usage of their electronic cards to the busway

system. Since the launch of the system on 22 January 2013, 20% of

transactions were made via electronic tickets.Figure 21 Figure 22

Banks electronic cards for TransJakarta Newly arrived fleet

Note: BRIZZI is from BRI, Flazz is from BCA,

jakcard is from Bank DKI, and e-money is fromBank Mandiri. Source: CLSA

Source: www.tempo.co

Free double-decker buses in main corridorsOn 16 January 2014, the first free double-decker bus route was launched.

The buses circle the main corridors of the city (Bundaran HI/HI roundabout

to Medan Merdeka Barat, Harmoni, Juanda, Gedung Kesenian Jakarta,

Cathedral church, Istiqlal Mosque and Balai Kota). Five buses run on the

route and they come with CCTV, internet connection, TV, GPS system and

air-conditioning. The plan is to increase the number of buses to 50 by year-

end and to add routes to suburbs and tourist places. The first double-decker

bus was first launched in Solo in February 2011 when Joko Jokowi Widodowas the mayor.

Nov 2013

Jokowiallocated

~Rp1.16tn(US$96m) toprocure 1,000

buses forTransJakarta.

21 Dec 2013

Jakarta'sTransportation

Agency(Dishub)

announced that310 out of

1,000 buseshave arrived inTanjung Priok.

Ential.

15 Jan 2014

30 newarticulated

TransJakartabuses beganoperation in

Corridor II andIII.

22 Jan 2014

Additional 30new articulatedTransJakartabuses beganoperation in

Corridor V andVIII.

30 Jan 2014

30 morearticulated

TransJakartabuses beganoperation inCorridor IX.

To build 38 morecorridors by 2030

Free double-deckertourist bus route

Electronic paymentsystem was launched

Banks participating in

providing electronicpayment system


21/107



Figure 23 Figure 24

Free double-decker bus in Jakarta Double-decker tourist bus in Solo

Source: www.tempo.co Source: www.duoinsolo.blogspot.com

Integrating with trainsKAI and the Jakarta government have agreed to integrate KAI commuter lines

from suburbs with the TransJakarta buses by connecting the stations. The

first focus will be on three big stations (Pasar Senen, Jatinegara and Tanah

Abang). There are also some park and ride facilities for TransJakarta

commuters to park their vehicles near the stations (available in six locations).

Key challenge in Ahoks view is coordination with the central government. As

an example, TransJakarta terminals are owned by Pemda Jakarta, but

management is under the Ministry of Transportation.

Seaport - A barrage of changeWithout capacity expansion, container traffic at Tanjung Priok had almost

doubled in the past three years to 6.2m TEUs in 2012, above its designed fullcapacity of 4m TEUs per annum.

Under new management led by RJ Lino in 2009, the Tanjung Priok Port had

undergone massive revitalisation which is still ongoing. This includes

debottlenecking at the physical facilities and workflow processes.

Tanjung Priok is managed by Pelindo II, which operates 12 ports in 10 of

Indonesias provinces. In 2012, the company was relaunched under the new

Indonesia Port Corp (IPC) brand with a tagline Energizing trade, energizing

Indonesia. This 130-year-old port is the busiest in Indonesia. It is located

north of capital Jakarta and processes 65-70% of the countrys exports.

Figure 25

RJ Lino, Tanjung Priok Port

Robert Joost Lino was born in East Nusa

Tenggara in 1953, and obtained his civilengineering degree from ITB Bandung in1976 (ITB is one of the top 10 universities inIndonesia). He also studied hydraulicengineering in the Netherlands. RJ Lino hadworked at IPC during the oil boom in 1980sas a project manager. He left in 1990 andmade a successful foray into the privatesector; one of it was a stake in a commercialport in China. In May2009, RJ Lino wasappointed as the new managing director ofPelindo II, replacing Abdullah Syaifuddin,

whose tenure came to an end.

From left to right: Sarina, RJ Lino and DanielOen, CLSA Indonesia Head of Sales

Source: Tanjung Priok Port, CLSA

KAI commuter linesfrom suburbs with theTransJakarta buses by

connecting the stations

Above-100% utilisation

Tanjung Priok is130 years old

Jokowi launched freedouble-decker

bus in Jakarta

RJ Lino led thetransformation in IPC


22/107



Figure 26

Container traffic at Tanjung Priok

Source: IPC

After a period of stagnation, IPCs revenue tripled from 2009 to 2013 (33% Cagr)

to Rp7.7tn with profit before tax doubled to Rp2.6tn (18% Cagr). The company

targets Rp20tn in 2018 and expects profit margin to expand from 35% to 40-

45%. The ports expansion (Kalibaru project) will raise its capacity by 72% in

2017, and another 74% in 2023. Moreover, given debottlenecking, IPCs ROI

had increased to about 28% from 23% before while total assets doubled in the

past five years. IPC is running at an Ebit margin of about 27%.

Figure 27 Figure 28

IPC saw 33% revenue Cagr in five years Profit doubled in five years

Note: 2013 unaudited. Source: IPC

Figure 29 Figure 30

Capacity expansion Assets doubled in past five years

Figure 31 Figure 32

Return on investment (ROI) Leverage (debt/equity)

Source: IPC

2.4 2.5 2.6

2.9 3.1

3.3 3.4 3.6

3.9 3.8

4.6

5.7

6.2 6.2

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F

(m TEUs)

0

2,000

4,000

6,000

8,000

10,000

2007 2008 2009 2010 2011 2012 2013 14F

(Rpbn)

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013 14F

(Rpbn)

3.8 4.6

5.7 6.2 6.2

10.7

18.7

02468

10

1214161820

2009 2010 2011 2012 2013 2017 2023

(m TEUs)

0

5,000

10,000

15,000

20,000

25,000

2009 2010 2011 2012 2013 14F

(Rpbn)

22

23

24

25

26

27

28

2007 2008 2009 2010 2011 2012

(%)

26

27

28

29

30

31

32

33

2007 2008 2009 2010 2011

(%)

Debottlenecking enableddoubling of capacity

in past three years

Operator IPC is running atan Ebit margin of 27%

Strong recovery inIPCs financials

Capacity to rise by72% in 2017 and

another 74% in 2023

ROI recovered andleverage improved


23/107



Improving soft infrastructure (labour productivity)IPC invested in training programmes and has set up IPC Academy by

collaborating with Netherland Maritime University Rotterdam, with vocational

training programmes. In the past few years, it had also sent 166 staff for

further studies overseas.

Figure 33

Overseas training for IPCs employees

Master programme - Overseas

Region University People

Europe Erasmus, KLU, IHE-DELFT, NMU, WMU, ITMMA 83

UK Plymouth, Liverpool, Southampton, Newcastle 28

China Shanghai Maritime University, Renmin University 13

Australia Victoria, Wollongong, Melbourne 3

Total 127

Executive MBA - Overseas

Program

EMBA - Inhouse IPC - Kuhne Logistic University in Germany (program for 15 months) 34

EMBA - Asia Pacific National University of Singapore (entry 2013) 2

EMBA - Overseas National University of Singapore - UCLA (entry 2013) 1

EMBA - Overseas IMD Business School Switzerland (entry 2013) 2

Total 39

Grand total 166

Source: IPC

Salary was also adjusted to be competitive with market. RJ Lino said that

after two years, a fresh graduate can earn up to Rp14m/month (US$117)

total compensation. As a comparison, fresh graduates with one to two years

experience at a state-owned telco earn about Rp11m/month. Fresh graduatesworking at oil companies get about Rp7.5-8m/month, and those working for

commercial banks start at Rp4-5m/month. IPC employs about 2,400 people.

Figure 34

Employees compensation

Source: IPC

Standardising operations and debottleneckingTo increase capacity without expansion, IPC also focuses on standardising

core operations, launching round-the-clock terminal services, implementingnew IT system, deepening the channels and strengthening the walls of the

port. Ongoing effort is also put on changing management from regional base

(of 12 ports) to business base (by function).

0

100

200

300

400

500

600

700

2009 2010 2011 2012

(Rpm pa) Class 4 Class 6 Class 9 Class 11 Class 16

Training programmesin place

Employees becomemore motivated

as compensation ismade competitive

Internal restructuring and

capacity debottlenecking


24/107



Mega project: Kalibaru (new Priok) expansionKalibaru Port project concession was awarded in April 2012 to IPC, and it

should increase Tanjung Prioks annual capacity by 12.5m TEUs by 2023. The

project broke ground in March 2013. The concession is for 70 years, with

provision to extend it by 25 years.

The project consists of two phases:

First phase of three container terminals with total 4.5m TEUs and two fuelberths. Time frame is 2013-17. Total investment is about US$2.5bn. This

will cover 172ha container land area with 2,400m length of quay. RJ Lino

mentioned that Terminal 1 will be completed by end-2014; Terminal 2 after

1.5 years, then Terminal 3 after another 1.5 years. Each terminal will have a

draft of 16m, allowing a container ship with a capacity up to 8,000 TEUs to

dock. The draft will be deepened to up to 20m for larger ship (18,000 TEUs).

Second phase will commence in 2018, with another four containerterminals with total capacity of 8m TEUs. Total cost is about US$1.5bn;

targeted to be completed in 2023.

Mitsui & Co won the tender to operate new Prioks first container terminal

(CT1), eliminating Maersk Line and MEC. Development has reached about

45%, completion is expected by end-2014. Royal HaskoningDHV, a Dutch

project management and engineering consultancy service provider, won the

contract to supervise the construction of the main port extension.

Figure 35 Figure 36

Tanjung Priok (before) Tanjung Priok (now)

Source: IPC

Figure 37 Figure 38

Kalibaru expansion in progress Kalibaru expansion in progress

Source: CLSA Source: IPC

IPC expects to generate about US$250m annual Ebitda, but this will not be

enough to fund Kalibaru Phase 1, which requires US$500m a year. The

company holds about US$200m cash, so external funding is needed.

Interestingly, despite being a SOE, RJ Lino said IPC does not receive any

budget nor any sort of guarantee from the government.

Capacity to rise further:by 72% in 2017

and 74% in 2023

Need to raise capitalto fund Kalibaru

Tanjung Priokwas revitalised

New capacity expansion

is on the way

Mega project expansionstarted in March 2013


25/107



IPC expects much of the expenditure to be financed through commercial

loans. Mitsui as operator had agreed to put in capital of US$100m and will

lease CT1 for US$14m (paid every three months); yearly adjusted perinflation for 20 years.

Current debt/equity (D/E) is a low 32%, hence technically IPC can gear up.

But, to finance expansion with just loan, D/E will have to rise to about3x.

Hence, RJ Lino mentioned that IPC will set up a subsidiary called Pelabuhan

Tanjung Priok this year to handle all operations and expansion of the Tanjung

Priok port. It will be able to raise financing and plans to list in the stock

exchange in the next two years.

RJ Lino mentioned that the subsidiary will have 700ha land under right to

use title (HPL - Hak Penggunaan Lahan). The title can be converted into

leasehold HGB - Hak Guna Bangunan) and the estimated value is a whoppingUS$10bn.

New access road in progressA new access road to the port is under construction by the government. This

11.4km tollroad is likely to be fully operational by the end of 2015. As of now,

3.4km is completed.

Figure 39

New Tanjung Priok tollroad under construction

Source: CLSA

Another plan - Main Sea Corridor across IndonesiaIPC plans to build a main sea corridor connecting the east and west of

Indonesia called Nusantara Pendulum. This will connect Belawan port on the

northeast of Sumatra to the Sorong port in West Papua (a straight-line

distance of more than 3,600km), with six key ports along the way. The focus

is on expanding the capacity of the key ports: Belawan, Jakarta (TanjungPriok), Surabaya (East Java), Makassar (South Sulawesi) and Sorong.

A subsidiary may belisted for capitalraising

To be fully operationalby the end of 2015

Connecting the eastand west of Indonesia

Interestingly, land assetsare worth US$10bn

Mitsui had putin some capital


26/107



The aim is to reduce domestic logistics costs. IPCs data show it costs less to

ship goods from Jakarta to Hamburg (11,000km away) than to Padang

(Sumatra) - which is only 1,000km away. It is also 45% cheaper and three tofour times faster to ship goods from Singapore to Jakarta than from Dumai to

Jakarta (Note: Dumais location in Sumatra is close to Singapore).

Figure 40

Cost to ship a 20ft container from Jakarta to various cities

Figure 41

Nusantara Pendulum main and sub corridor

Source: IPC

Reform, by default, always brings resistanceThe transformation of Tanjung Priok was not without resistance; and as

expected, most came from within IPC. As mentioned by RJ Lino during our

interview, IPC is a highly politicised place with a high number of direct and

indirect stakeholders. (Refer to Appendix 1 for the full interview).

Some employees went on strike recently demanding RJ Lino to resign. The

strike was initiated by a labour union, established by the ex-director of human

resources, who recently resigned.

0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

Singapore

HongKong

Bangkok

Shanghai

Tokyo

Hamburg

Padang

Medan

Banjarmasin

Makassar

Ambon


Distance (RHS)

It costs an average 12xmore to ship goods from

Jakarta to domestic portsversus to Singapore

Capacity expansion planfor main seaports

IPC is highly politicised


27/107



MRT - Finally happeningThe long-awaited MRT Jakarta project is finally happening. Studies on Jakarta

Mass Transit System started in 1986, but it only kicked off recently whenJokowi approved it after a long evaluation process.

New management of MRT Jakarta (MRTJ) was appointed in March 2013 with

Dono Boestami as the President Director. MRTJ is 99.5% owned by the

government of Jakarta and 0.5% by PD Pasar Jaya. It was incorporated in

June 2008.

Figure 42

Dono Boestami, MRT Jakarta

Dono Boestami was CFO of IndonesiaInfrastructure Finance (IIF) for a brief fewmonths before he started heading MRTJakarta in March 2013. He graduated from the

University of Wisconsin with a degree in civilengineering in 1985, followed by a mastersdegree in construction project managementfrom Golden Gate in 1989. His experience wasmostly financed-related, as director ofinvestment banking at Danareksa, director ofBarclays Capital Securities Indonesia,president director of Citigroup SecuritiesIndonesia, finance director of Atlas Resources(2011-12) and CFO of PTBA (2006-11).

Source: MRT Jakarta, CLSA

The first contract for Phase 1 underground package was signed on 11 June

2013, which was subsequently followed by ground-breaking in October. Various

consortiums of Japanese and Indonesian contractors will develop the project.

First stage: North-South corridor (23.8km):

Phase 1: Lebak Bulus - Bundaran HI (15.7km) will have 13 stations (sevenelevated stations of 9.8km and six underground stations of 5.9km). Target

completion is 2017. The distance between stations is 0.6-2.0km and the

estimated travel time for the whole distance is 30 minutes.

Phase 2: HI to Kampung Bandan (8.1km) is slated to be completed in 2018.The second stage, the East-West corridor (87km), is in the due-diligence

phase; target 2024-27. This corridor will run to the Greater Jakarta suburbs.

Interesting funding schemePhase 1 funding requirement of about 140bn (US$1.4bn) will be mostly

financed by soft loans from the Japan International Cooperation Agency

(JICA) (totalling 125bn) with the remaining 14.6bn from the regional

governments budget (APBD). The soft loans carry 0.1-0.2% annual interest

rates; about US$100m had been drawn down last year. In total, the MRT

project is estimated to cost 273bn (US$2.7bn).

This project is the first in Indonesia that uses a three-level subloan

agreement scheme between the lender (JICA) and the central government,

local government and regional SOE (MRTJ). The loan agreement is between

the two governments (Indonesia and Japan), hence leaving MRTJ to focus on

its core function, which is to develop-build-operate-and-maintain theinfrastructure and facilities, and to develop area around depot and stations

along the MRT corridors.

Studies on JakartaMass Transit System

started in 1986

Phase 1 15.7km ground-broke in October 2013

Phase 1 (15.7km)to finish in 2017

Dono Boestami - the newhead of MRT Jakarta

MRT Jakarta to focus onbuild and operation

JICA provides soft loanfor the US$2.7bn project


28/107



The structure is designed to ensure practice of clean governance. For

instance, the contract of work is between MRTJ and contractor/consultant,

and MRTJ is in charge of managing the project. However payment tocontractor/consultant comes directly from the lender (JICA) based on invoice

issued by contractor/consultant to MRTJ.

Figure 43

Planned Jakarta MRT

Source: Jakartamrt.com

Figure 44

MRT funding scheme

Note: DJPK (Direktorat Jenderal Perimbangan Keuangan) - Directorate General of Financial Balance; DJPU (Direktorat Jenderal Pengelolaan Utang)- Directorate General of Debt Management; DJKA (Direktorat Jenderal Kereta Api) - Directorate General of Railways Management and Bappenas -

State Ministry of National Development Planning. Source: MRTJ

DJPK(MoF)

BAPPENASDJKA(MoT)

DJPU(MoF)

Central Government

Contractor/consultant

Lender

MRTJ

ProvincialGovernment of

DKI Jakarta

Loan agreement (LA)

4. Drawdown notice& document

3. Invoice () Grant (49%)/Loan (51%)

Capital (Equity)

Contract

2. Invoice ()

1. Invoice ()

5. Directpayment ()

MRT Jakarta projectstarted construction

at the end of 2013

Unique funding scheme to

ensure clean governance


29/107



Figure 45

Jakarta MRT project under construction

Source: CLSA

To transport 400,000 passengers a dayMRTJ projects 936 maximum passenger capacity for each trip with each train

set consisting of six cars. Hence estimated daily capacity is 120,000 people.

Future target is about 400,000/day (third year into operation).

Integrating with KAIs commuter line and busway systemThe MRTJ network will integrate with the railway systems commuter lines

that run from Jakartas suburbs into the city. Moreover, it will also integrate

with the TransJakarta busway system. Separately, Ahok mentioned to us thatthe busway system will serve as the backbone for the integrated public

transport network in Jakarta.

First time for everyoneWe asked Dono Boestami whether he sees any risk with the project. He

admitted that there will much trial and error given it is the first of its kind in

Indonesia; for the stakeholders, it is their first MRT experience. (Refer to

Appendix 1 for the full interview).

No doubt this project bears high execution risk, but if it is successful, it opens

up many opportunities to replicate in other big cities in Indonesia.

Railway system - Evolution of a dinosaurIndonesian railway service has been perceived as one of the worst in the

world for a long time. Images of chaotic stations and commuters riding on top

of trains during Lebaran season often come to mind when people talked about

KAI. The dinosaur was deemed hopeless: its assets and facilities were old,

and its 27,000 employees were of subpar quality.

To some extent, it wasnt entirely the dinosaurs fault. An aggressive

expansion in railroads started in the 18th Century until 1939. However it

ceased in 1970s when government aggressively pushed the development of

the autos industry. More than 2,000km of railroads were closed between 1939

and 1996 as mostly were unprofitable.

Since then, there was hardly any growth until 2011 when some 150km wereadded. The near-5,000km railway network today is only 8% longer since

2010, and 3,700km of it is in Java.

Construction has started

Estimated initialdaily capacity is

120,000 people and torise to 400,000 in year 3

Busway system toserve as the backbone

for the integrated publictransportation network

Was one of the worstrailway system

in the world

New project bearsexecution risk


30/107



Figure 46

Railway length in Indonesia

Source: Ministry of Transportation, Directorate General of Railways

KAI started its transformation in 2009, led by Ignasius Jonan (Jonan). The

company started booking positive profits since 2009, and enjoyed a 33%

earnings Cagr since. Moreover, Ebit margin swung from negative to positive,

hitting 10% in 2012. ROE and ROA have also risen to 11% and 5%.

Jonan mentioned that he expects 2014 net profit to reach about Rp800bn (a

65% increase from an estimated Rp483bn in 2013), with revenue targeted to

grow 20% per annum until 2020.

Figure 47

KAI revenue and profit

Note: 2013 result is unaudited. Source: KAI

Figure 48 Figure 49

Ebit margin turned positive in 2009 ROE and ROA have recovered sharply

Source: KAI

0

1,000

2,000

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7,0008,000

1867

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(km)

(200)

(100)

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0

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2006 2007 2008 2009 2010 2011 2012 2013 14F

(Rpbn)(Rpbn) Revenue NI (RHS)

(15)

(10)

(5)

0

5

10

15

2006 2007 2008 2009 2010 2011 2012

(%)

(4)

(2)

0

2

4

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8

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2008 2009 2010 2011 2012

ROE ROA(%)

A 33% profit Cagr over2009-13; KAI projects

65% YoY growth toRp800bn in 2014

Stagnant railway networkgrowth in past 20 years

Profitability improved


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Figure 50

Ignasius Jonan, KAI

Jonan was appointed as head of KAI inFebruary 2009 by Sofjan Djalil, then SOEMinister. Despite a lack of experience inrailway, his task was to reform theinstitution. Jonan graduated as anaccountant from Airlangga University inSurabaya, East Java (one of the top 10universities in Indonesia), followed by aMaster of Arts degree in international affairsfrom Fletcher School, Tufts University. Priorto KAI, he was managing director and headof investment banking for CitigroupIndonesia from 2006 to 2008. His first SOEcareer was as the head of Bahana Indonesiaover 2001-06.

Source: KAI, CLSA

Started with low-hanging fruitsKAI started with overhauling the medium- and long-haul rail services which

are deemed more profitable, less complicated and less in the spotlight (as

compared to Jakarta which carries 65% of total national train passengers).

Stations were renovated, and services were improved.

This helped turned KAI around from loss-making into profitable, and also

generated enough funding to revitalise the Greater Jakarta network without

having to rely too much on the government budget. To some extent, it also

gave the new management enough experience and time to prepare for the

big overhaul of Greater Jakarta network in 2013.

Revitalising assetsIn 2009, KAI had 406 locomotives; only 330 were functioning but about 60%

were more than 20 years old. There were only 1,243 train sets and 45% were

more than 30 years old. The number of trains was not enough hence they

often ran up to 1,400km/day - way past the ideal 900km. Some rail condition

was also quite bad (Note: There is a total of 3,216km of railways in Java and

1,348km in Sumatra). All these resulted in many train accidents.

Figure 51

Number of train accidents

Source: KAI

0

20

40

60

80

100

120

140

160

2005 2006 2007 2008 2009 2010 2011 2012 2013

Overhauling startedin outer-Jakarta

Drastic improvement intrain safety as old trains

were replaced and rail

condition has improved

Ignasius Jonan ledtransformation in KAI


32/107



Revitalisation took longer than expected given a lack of funding from the

government while companys P&L was also weak. Nonetheless, KAI managed

to order 150 locomotives in 2009 to be delivered in stages until 2013. Withthese, the number of trains in operation in Greater Jakarta increased to

566/day (per September 2013) from 384 units at the start of 2013. The

capacity of cargo transport also rose 40%. KAI also bought 2,400 carriages.

With assets revitalisation, coupled with workforce reform, the number of train

accidents dropped significantly to 57 in 2012 from 140 in 2005.

Internal cultural reformPrior to 2009, KAI was a big SOE but with very low labour productivity.

Employees were not motivated as remuneration was one of the lowest among

SOEs and compensation was not linked to performance. These, coupled with

poor monitoring also induced corruption within KAI. It is not a surprise that

according to Jonan, cultural reform is the hardest thing for this big dinosaur

that employs 28,000 full-time employees and 7,000 contract workers. (Referto Appendix 1 for the full interview with Jonan.)

The new management started the reform by implementing merit-based

performance review for its employees, and hiring some good professionals to

help implemented change. Remuneration and benefits were also increased to

be at par with other large SOEs. Various trainings were also launched,

including overseas trainings to learn about best practices in railway service;

and were given to various staff levels within the company.

During his recent visit to Madiun, our deputy head of research Jayden

Vantarakis pointed out that there is a 12,000 capacity employee training

facility (rail engineers) in the city ready for its first students in 2014. Locatedin the western part of East Java, Madiun is home to Inka, a company that

builds new trains and potentially monorail vehicles.

Figure 52

KAIs training facility in Madiun

Source: CLSA

Shifting to modern railway servicesIn 2012, train tickets could be purchased at post offices and convenience

stores, versus previously only sold at stations. Boarding system based on ID

checking and a one seat, one passenger policy was also implemented. This

greatly reduced congestion at ticket counters (especially during peak

seasons), and also eliminated the need for commuters to buy from illegal

sellers (calo). Eliminating the calo also helped cut internal corruption as

previously, most of the calocollaborated with internal staff.

Eliminated illegalticket sellers in 2012

Merit-basedcompensation

was in place

A 12,000 capacity trainingfacility opens for its first

students in 2014

Lack of funding from

government to make aswift revitalisation


33/107



In 2013, KAI launched online ticketing system (www.kereta-api.co.id)where

seat booking can be done 90 days prior to departure. It went on to provide

ticketing application through Android and Blackberry. KAIs website recentlywon a few awards from the SOE Ministry, and got into top five spots for IT

Excellence Award 2012 Asia Pacific from IDC and Fairfax Business Media.

E-gates were launched in April 2013 and e-ticketing cards have replaced

paper tickets, starting with six stations of Jakarta-Tangerang line. As of

September 2013, 389 electronic gates were installed in 67 stations. Bank

Central Asia is the first that enabled its Flazz card to be used as a payment

form for train tickets.

On the Greater Jakarta lines, the first progressive tariff was implemented in

June 2013. This was very much welcome by commuters as payment is now

based on the distance they travel.

KAI is also in the process of implementing a full ERP solution in 2014 using

SAP. Human resources was the first module implemented at end of 2011.

Figure 53 Figure 54

No more paper tickets in Jakarta lines E-ticketing cards/ticketing on Android

Source: KAI Source: CLSA

Figure 55

Electronic gates

Source: CLSA

Progressive tariffintroduced in June 2013

Electronic cards replacedpaper tickets last April

Online ticketing systemwas launched in 2013

Towards modernisation

E-ticketing with cards andthrough mobile phonesreplaced paper tickets
http://www.kereta-api.co.id/http://www.kereta-api.co.id/


34/107



After long negotiation with the government, non-AC (air-conditioning) services

were finally eliminated in July 2013. These government-subsidised lines were

hardly profitable given a tariff of just Rp2,000 for every route regardless ofdistance. Besides no AC, the old trains were also unsafe for commuters.

Starting December 2012, KAI embarked on a programme to clean up

stations from illegal kiosks and street vendors in six main lines in Greater

Jakarta. In total, about 5,300 kiosks and street vendors were cleared from

63 stations, despite numerous protests from those affected. Besides leaving

the stations clean and orderly, the cleanup resulted in safer and wider

parking area for vehicles.

Figure 56 Figure 57

Back then . . . . . . and now

Figure 58 Figure 59

Motorcycles parking lot at Bogor station Car parking lot at Depok Station

Figure 60 Figure 61

Manggarai station before Now sign says Selling stuff is prohibited

Source: CLSA

More public facilities at stationsMost stations now have minimarts inside or outside the stations. There are

Starbucks and KFC at Gambir. Banks have also opened up ATM branches.

Phased out non-ACtrains in July 2013

Cleaning up stationsin Greater Jakarta

Unsafe trainswere phased out

Safer and widerparking area

Illegal street vendorswere cleared


35/107



Interesting note on 7-11 from our previous country head, Nick Cashmore:

7-11 has signed agreement with PT KAI last year and now has stores in three

stations (Gambir, Senen and Manggarai) and all are operating well. Averagecustomer/day is higher (1,200) compared to independent stores (800-900)

and average sales per day is Rp18-19m after three months of opening,

compared to independent stores that usually reach target of Rp20m after nine

to 12 months. Ticket price is lower but there lots of opportunities to improve

products and services especially on food for commuters. Definitely more

stores in train stations to come in 2014.

Figure 62 Figure 63 Figure 64

7-11 in front of entrance gates Indomaret minimart Alfamart in trains parking lot

Figure 65 Figure 66 Figure 67

Starbucks at Gambir station BNI and BRI ATMs BCA ATM

Source: CLSA

All-in-all, the series of improvement in Greater Jakarta network resulted in a

jump in passenger volume from about 450,000 to 550,000/day by the end of

2013. The phasing out of lower margin lines (non-AC) also helped improved

KAIs financials.

Figure 68

Rising commuters in Greater Jakarta

Source: KAI

0

20

40

60

80

100

120

140

160

2009 2010 2011 2012 2013

(m) AC train Non AC train Total

Convenience chain 7-11

expanding locationsat train stations

Ridership increased asservice improved


36/107



KAI targets ridership of 1.5m passengers/day in 2020 for Greater Jakarta

network. This is almost a double from todays 700,000, or at estimated

growth of 12% per annum. Jonan mentioned that it will be achieved throughincreasing length of tracks (target 12,000km by 2030), freight capacity, and

replacing old rolling stocks (train set).

Figure 69 Figure 70

Ladies-only wagon Inside the train

Source: CLSA

Much upside from cargo transportAfter some lobbying time to the government, since February 2012, cargo

transport by train has become more competitive versus trucks given cargo

trains are now allowed to run on subsidised fuel (just like for trucks cargo

transport) following government approval. As such, cargo transport jumped

22% to 27m tonnes in 2013, and is likely to reach 60m tonnes in 2020 (12%

Cagr) with double-track railway from Jakarta to Surabaya.

Currently revenue is dominated by passenger transport (53%), 40% from

cargo transport and remaining 7% from others such as stations

management, property income, etc.

Figure 71 Figure 72

KAI revenue breakdown Cargo transport

Source: KAI

Cargo transport is expected to increase substantially post the operation of the

double-track rail from Jakarta to Surabaya in 2014. As of end of 2013, the

progress on the double-track rail had reached 97% and the hope is this

727km can operate in 1H14. Some plots, unfortunately, are still under land

clearing process. Moreover, given the recent flooding in some areas, there is

risk that completion may be pushed back.

This railway will play a crucial role in distributing goods from east to west

Java as the Trans Java toll-road project is not seeing much progress apart

from the sections that are developed or under development by Jasa Marga.

Passengertransport

53%

Cargotransport

40%

Other income7%

19.2 19.0 18.9 19.3

22.0

27.0

10

1214

16

18

20

22

24

26

28

2008 2009 2010 2011 2012 2013

(m tonnes)

A 727km double-trackrailway from Jakarta-

Surabaya in 2014

Target 1.5mpassengers/day in 2020

Facilities have improved

Cargo volume jumped22% in 2013 to 27mtonnes and to grow

to 60m by 2020

Cargo transport nowmore competitive


37/107



The first airport train - Medan to Kuala Namu airportFirst train to airport from city was launched on 25 July 2013 from Medan

(North Sumatra) to the new Kuala Namu International Airport; a 40-minute

ride for the 39km distance. In a day it can transport 3,000-4,000 passengers.

Raillink, the JV between KAI and Angkasa Pura II is the operator.

Figure 73 Figure 74

Medan-Kuala Namu airport train Inside the airport train

Source: www.railink.co.id Source:www.merdeka.com

Next airport train - Soekarno-Hatta airport to Halim airportThe Ministry of Public Works expects the tender for pre-qualification for

airport express train from Halim airport to city centre to Soekarno-Hatta

airport to start around April 2014. KAI mentioned that feasibility study was

completed in December 2013. The project will be under a public-private-

partnership (PPP) structure and the route will be a loop to Cawang, Pluit and

stops at terminals 2 and 3 of the airport. Next phase will be getting the

environmental licence (AMDAL) and then land clearing. The express train will

be a combination of underground and elevated routes. It is expected that the33.8km journey can be completed within 30 minutes on this airport train

versus one to three hours by car.

Key challenge will be on land clearing given this airport train will pass some of

the most populated area in the city.

Outside Jakarta, there was also a new diesel train connecting Jogja and

Madiun with regular commuter services as noted by Jayden.

Figure 75

New train connecting Jogja to Madiun

Source: CLSA

Transporting 3,000-4,000passengers a day

Soekarno-Hatta airporttrain to be tendered soon

First airport train to thecity started in 2013

Expect more newtrains rolling in
http://www.merdeka.com/http://www.merdeka.com/


38/107



Tollroads - 2014 a key turning point?From 1978 to 1998, Indonesias tollroad network expanded by a healthy 16%

Cagr. Pre-Asian Crisis, during late President Soehartos time, a lot ofinfrastructure was built. Post crisis, however, things slowed dramatically with

a 3% Cagr over the past 15 years.

The tollroad sector was deregulated in 2005 under the new president Susilo

Bambang Yudhoyonos (SBY) directive, and to ensure a viable IRR, a tariff

regulation was in place whereby tollroad tariff adjustment is based on

cumulative two-year CPI, adjusted every two years. The first infrastructure

summit in 2005 attracted many foreign investments, but execution was poor.

The rise of democracy was a good thing, but the lack of proper legal

framework made land acquisition for public infrastructure project a major

hurdle.

In early 2012, the much-anticipated land-acquisition bill was passed.

However, it came with a clause that prohibits the new bill to be implemented

on projects that are already in land clearing phase until the end of 2014. It

remains to be seen whether the new government can place this land bill in

effect this year as stipulated. Alas, for the past two years, only 20km of

tollroads was added; now totalling about 770km.

After much delay in land clearing, the first section of Jakarta Outer Ring Road

(JORRW2N) Kebon Jeruk-Ciledug route (5.7km), the missing link of JORR1

finally started operation on 27 December 2013. This is a strategic section that

should help alleviate congestion in JORR1.The 10km Bali Nusa Dua airport

tollroad also commenced operation last year. Jasa Marga operate these two.

Figure 76

Indonesian tollroad network

Source: BPJT

A whiff of good newsRecently, there is good news on the near-70km six elevated-tollroad project

of Jakarta Tollroad Development (JTD). In December 2013, Jokowi finally

gave a green light. The environmental license was signed (Amdal), and PPJT

(concession contract) is targeted to be signed in February/March2014.

0

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1978 1982 1986 1990 1994 1998 2001 2003 2005 2007 2009 11 12 13

(km)

Slow progress intollroad development

in past 10 years

Slow growth intolltoad network

New land-clearing bill tobe effective end of 2014

Land clearing is themajor bottleneck despitea good tariff adjustment

mechanism

Missing link of keyring road is up

Development of 70km ofelevated tollroads to start


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Figure 77

Jakarta inner-tollroad plans

Stage Tollroad (km) (Rptn)

1 Semanan (Rawa Buaya) - Sunter 17.88 9.76

1 Sunter - Pulo Gebang (Bekasi Raya) 11.00 7.37

2 Duri Pulo - Kp Melayu 11.38 5.96

2 Kemayoran - Kp Melayu 9.65 6.95

3 Ulujami - Tanah Abang 8.27 4

indo infrastructure (block by block technocrats get things rolling) 20140221

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