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  • I N F R A S T R U C T U R E I N V E S T M E N T I N E M E R G I N G

    M A R K E T S A N D D E V E L O P I N G E C O N O M I E S

    R a j K a n n a n , M a n a g i n g D i r e c t o r

    2 Ju l y 2015 S t . Ca the r ine s Co l l ege , Ox fo rd

    A B R I E F L O O K A T I N D O N E S I A

  • Page 1 of 28

    CONTENTS

    1. Overview of Indonesia Economic, Demographic & Investment Pages 2 - 5

    2. Impediments to Continued Growth Infrastructure Deficits Pages 7 - 12

    3. Role of Institutional Investors in Infrastructure Investment Page 14

    4. Role of DFIs Increasing but faces familiar traction issues Page 16

    5. Key Takeaways Page 18

  • Page 2 of 28

    Economic Overview Solid and consistent growth and projected to become the 5th largest economy in the world by 2030

    4.6% 4.7%

    5.2% 5.4% 5.5%

    6.2% 6.5% 6.5% 6.5%

    7.2%

    0.0% 2.0% 4.0% 6.0% 8.0%

    Chile Thailand

    Ghana Nigeria

    Indonesia India

    Qatar Kazakhstan

    Vietnam China & HK

    Projected Real Annual GDP Growth

    Projected GDP 2018 (USD Billion) 10 Fastest Growing Markets

    Projected Annual GDP Growth Rate 2015-2018

    Source: Ernst & Young: Rapid Growth Markets (2014)

    $57 $277 $284 $330 $388 $451 $495 $1,311

    $2,721 $16,305

    $0 $5,000 $10,000 $15,000 $20,000

    Ghana Vietnam

    Qatar Kazakhstan

    Chile Thailand

    Nigeria Indonesia

    India China & HK

    Projected GDP (USD Billion)

    5.6 6.4 6.6 8.2 8.4 9.3

    12.2 30.3

    38.2 73.5

    0 20 40 60 80

    UK France

    Mexico Germany

    Japan Indonesia

    Brazil India

    US China

    Projected GDP (USD Trillion)

    Source: Standard Chartered: The Super-Cycle Report (2010)

    Projected GDP 2030 (USD Trillion) 10 Largest Economies

    240 265

    280

    195

    45

    180

    85

    110

    170

    2010 2020 2030

    Consuming class

    Below Consuming class

    Estimated Growth of the Indonesian Consuming Class In Million People

    Source: McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesias Potential (2012)

    Despite recent growth setbacks, Indonesias GDP is estimated to grow by 5.5% per year between 2015-2018. By 2030, the country is expected to become the 5th largest economy in the world. From 2010 2030 additional 125 million people will enter the consuming class (middle class and above).

    Source: Ernst & Young: Rapid Growth Markets (2014)

  • Page 3 of 28

    58% of GDP

    24% of GDP 9%

    of GDP

    4% of GDP

    2% of GDP

    3% of GDP

    22% of Population

    57% of Population

    6% of Population

    5% of Population

    7% of Population

    3% of Population

    GDP Contributors - 17,000 islands but 82% of GDP is from 2 Islands - Java and Sumatra, with Kalimantan growing rapidly

    Although having only 17% of total national landmass, Java encompasses 57% of the national population and produces approximately 58% of national GDP.

    A majority of industrial zones are present in Java but is expanding to the Eastern Indonesia regions. Vast resource potentials and industrial opportunities are being opened up including geothermal power, fisheries, shipyards, cocoa, palm oil, and more.

    Source: Indonesian Statistical Agency (BPS); Indonesian Investment Coordination Board (BKPM), 2013 database; Tusk Advisory Analysis

    Industrial zone

    Palm oil

    Power plants Cocoa

    Fishery Shipyard

    Corn

  • Page 4 of 28

    Demographic Bonus Enviable numbers in the productive age group with majority living in cities and most are internet savvy

    Estimated Growth of the Indonesias Population by Age Group

    In Million People

    Source: Coordinating Ministry of Economic Affairs, MP3EI Book (2011)

    196 million people will be in the productive working age group of 15 to 64 by 2030, encompassing 70% of the population.

    This advantage gives Indonesia the largest working population in the region.

    -

    50.00

    100.00

    150.00

    200.00

    250.00

    300.00

    2010 2020 2030

    Children (0-14) Adult (15-64) Elderly (65 above)

    65 58 56

    163 183 196

    28 24

    12

    240 265

    280

    70% ~69% ~68%

    Proportion of Urban and Rural Population in Indonesia

    53% 71%

    2012 2030

    53%

    Urban Population Rural Population

    Source: McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesias Potential (2012)

    32 million people are expected to move from rural to urban areas from 2010-2030.

    The need for massive investments in urban housing and employment sectors to accommodate the boom is increasing.

    74.6 83.6 93.4 102.8

    0

    50

    100

    150

    2013 29.8%

    2014 33%

    2015 36.5%

    2016 39.8% In

    tern

    et u

    sers

    (in

    m

    illio

    n)

    Percentage of total population

  • Page 5 of 28

    16,214.8

    19,474.5

    24,564.7

    28,617.5 28,529.70

    -

    5,000.0

    10,000.0

    15,000.0

    20,000.0

    25,000.0

    30,000.0

    35,000.0

    2010 2011 2012 2013 2014

    Foreign Direct Investments (in million US$)

    Investment Boost - Rising Foreign Direct Investments, mainly from neighbouring countries

    Source: Statistics on Foreign Direct Investments Realization Based on Capital Investment Activity Report Q4, 2014. BKPM Note: investment numbers exclude oil & gas and financial investments

    CAGR 11.9%

    Singapore, $5.80 , 20%

    EU, $3.80 , 13%

    Japan, $2.70 , 10%

    Malaysia, $1.80 , 6%

    USA, $1.30 , 5%

    South Korea,

    $1.10 , 4%

    China, $0.80 , 3%

    Hong Kong,

    $0.70 , 2%

    Australia, $0.60 , 2%

    Others, $9.90 , 35%

    FDI by Country of Origin (2014) (in billion US$)

    FDI in Indonesia has grown rapidly over the last 5 years and is expected to rise further. The current FDI is dominated by fellow Asian countries particularly Singapore, Japan, and Malaysia accounting for over 36%.

  • Page 6 of 28

    CONTENTS

    1. Overview of Indonesia Economic, Demographic & Investment Pages 2 - 5

    3. Role of Institutional Investors in Infrastructure Investment Page 14

    4. Role of DFIs Increasing but faces similar traction issues Page 16

    2. Impediments to Continued Growth Infrastructure Deficits Pages 7 - 12

    5. Key Takeaways Page 18

  • Page 7 of 28

    Land (70.7%) Water (22.0%) Air (2.70%) Rail (0.5%) Services (4.1%)

    Land transportation is the major contributor to logistics costs

    Source: World Bank Report State Of Logistics Indonesia 2013, Bahagia et al (2013)

    Indonesias logistics costs at 27% of GDP, is very high compared to the average ASEAN and ASIA PACIFIC logistics costs, which is at 10%

    Land Transportation contributes to more than

    70% of Indonesias logistics costs

    8.0%

    9.9% 10.6%

    13.0%

    16.3%

    20.0%

    25.0%

    27.0%

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    30.0%

    Indonesias logistics costs are much higher than in

    other ASEAN and neighboring countries

    Key Impediments to Continued Growth High Logistics Costs

  • Page 8 of 28

    Travel Time (hrs/100km)

    7.7%

    13.4%

    18.0%

    28.4%

    38.8%

    41.1%

    Indonesia

    Thailand

    Malaysia

    India

    China

    Japan

    Ratio of Double Track (%)

    Modal Share (%)

    2.3

    14

    25

    62.2

    46

    11

    12.9

    20

    63

    22.6

    19

    0

    Jakarta

    Taipei

    Hong Kong

    Rail Private Transport Non-Rail Public Transport Others

    Lack of government investments in public transport over the years has resulted in excessive use of private transport for commuting, thus causing major congestion in most cities.

    Source: Tusk Advisory Analysis

    Poor quality of roads and high levels of congestion have made the travel time in Indonesia the highest in the region, causing logistics costs to be the highest in the region.

    Lack of Double tracking reduces efficiency of the rail system in the country both for freight and passenger rail services.

    Despite the general perception that Jakarta has sufficient roads, the reality is the opposite. General land acquisition problems combined with severe underinvestment in roads have caused this bottleneck.

    Jakarta

    Singapore

    London

    Tokyo

    2.6

    2

    1.35

    1.2

    1.1

    Indonesia

    Vietnam

    Thailand

    China

    Malaysia

    Road Ratio (%)

    6.26%

    12%

    21%

    22%

    Caused by major infrastructure deficits in the transportation sectors

    0 1 2 3 4 5

    Airport Density (number per ha)

    Passenger-kilometers

    (million person-

    Cargo (tons-km) Available airline seat km/week

    Quality of Air Transport

    Infrastructure Malaysia

    Thailand

    Air Transport Indicators

    Since the deregulation in 2004, growth in air travel has gone up double digit per year, but new airport development or expansion of existing airports has not caught up. SHIA for example is designed for 22 mil passengers but currently handles 55 million passengers per year (9th highest in the world).

    1.1 2

    3 3

    4 4

    5 8

    Singapore Hong Kong

    France Australia, NZ

    UK, Los Angeles Malaysia (Port

    Thailand Tanjung Priok

    Dwelling Time (days)

    A major issue in the seaport sector is the high dwelling time that currently takes up to 8 days in Tanjung Priok, far longer than Thailand (5 days), and Singapore (1.2 days).

  • Page 9 of 28

    0

    1

    2

    3

    4

    5

    Total Renew. Water Resources (per capita)

    Freshwater Withdrawal Ratio

    Dam Storage Capacity

    No. of Large Dams (>15m)

    Large Dam Capacity

    Large Dam Density

    Malaysia Thailand China Vietnam Indonesia

    Poor management of the irrigation canals especially in the regional level has made rice production slow, thus creating issues with food security. 70% of Indonesias bulk water is currently used for irrigation, thus improved management bulk water resources is needed.

    Water Resource Infrastructure

    Source: Tusk Advisory Analysis & World Bank Report

    99.3

    73.7 89.7

    97.3 94 100 97

    32

    65

    85

    0

    20

    40

    60

    80

    100

    Thailand Indonesia Malaysia Philippines Vietnam

    Electrification Ratio (%) Urban (%) Rural (%)

    Electrification Ratio (%)

    Low electrification ratio, especially in rural areas is a major bottleneck for economic growth.

    Conclusion

    54

    1104

    1975

    0 500 1000 1500 2000 2500

    Indonesia

    Thailand

    World Standard

    Combined with under investments in the Power & Water Sectors - reaching a crisis situation

    Water Storage Capacity Percapita (m3/capita)

    Inadequate water supply for personal use deteriorates living standard in Indonesia. It will increase citizens health service expense and income loss which eventually leads to economic losses for the country.

  • Page 10 of 28

    Land Acquisition

    33%

    Spatial Planning

    22%

    Budget-related 14%

    Others 11%

    IPPKH 14%

    AMDAL 6%

    Permit 20%

    Other cross cutting issues faced by many infrastructure projects: Ambiguous legal and regulatory frameworks Lack of long-term financing Inadequately prepared projects Poor asset management Lack of consequence management Weak human capital and poor institutional capacity Lack of industry capacity Absence of community support for infrastructure projects

    Main issues:

    Main causes for the infrastructure deficits includes delivery bottlenecks, under investments and lack of government led funding schemes

    The key issues and bottlenecks faced by a selection of priority projects:

    Official expenditure data in infrastructure is around 5% of GDP The actual percentage of APBN and APBD is actually lower, since this data includes costs of office buildings for related ministries.

    3.77%

    5.24% 4.96% 5.06%

    4.26% 4.00% 4.13%

    4.72% 5.01% 5.11%

    0.00%

    1.00%

    2.00%

    3.00%

    4.00%

    5.00%

    -

    10.00

    20.00

    30.00

    40.00

    50.00

    60.00

    Private Sector

    State-Owned Enterprises

    Regional State Budget (APBD)

    National State Budget (APBN)

    Total Infrastructure Investment Share of GDP, %

    Total Infrastructure Investment

    (in USD Billion)

    Source: Tusk Advisory Analysis based on State Budget data from the Ministry of Finance Source: Tusk Advisory Analysis

    Infrastructure Investment

  • Page 11 of 28

    The Government has established KPPIP to coordinate delivery of priority projects:

    PBAS+ is designed to incentivize the privates sector concessionaire of high economic impact projects to innovate revenue creation strategies that will generate additional revenues to the government.

    Availability Payment Scheme is being considered for 1. Economic Infrastructure that has no

    revenue upsides, such as roads in rural areas, public transport, access roads or railways to remote communities, etc.

    2. Social infrastructure that naturally has low return profile such as hospital, public housing, schools and education facilities, or community facilities.

    while for Economic Infrastructure that have revenue upsides, there are proposals to consider Performance Based Annuity Schemes Plus (PBAS+)

    But change is on the way The government has established new agencies and new funding schemes for PPPs and priority projects

    Committee for Acceleration of Priority Infrastructure Delivery (KPPIP1)

    KPPIP

    Coordinating Ministry of Economic

    Affairs

    Ministry of National

    Development Planning

    (Bappenas)

    Ministry of Finance

    National Land

    Agency (BPN)

    Roles in delivering priority projects:

    o Stakeholder coordination and approval chasing mandate o Develop Pre-Feasibility Study (OBC) guidelines to be used by

    Bappenas for project screening. o Pre-Feasibility Study (OBC) guideline would consist the

    requirements for good quality economic and financial analysis for funding scheme determination.

    1In Indonesian: Komite Percepatan Penyediaan Infrastruktur Prioritas

    The Ministry of Finance is in the midst of operationalising a new PPP Unit.

    o The new PPP Unit will be directly under the fiscal agency, unlike the previous unit which was under the Planning Agency, Bappenas

    o The new PPP Unit will be directly involved in risk sharing frameworks and the design and implementation of innovative financing schemes like APS, PBAS+ etc.

    1

    2

    The Ministry of Finance is introducing Availability Payment Schemes & PBAS 3

  • Page 12 of 28

    CONTENTS

    1. Overview of Indonesia Economic, Demographic & Investment Pages 2 - 5

    3. Role of Institutional Investors in Infrastructure Investment Page 14

    4. Role of DFIs Increasing but faces similar traction issues Page 16

    2. Impediments to Continued Growth Infrastructure Deficits Pages 7 - 12

    5. Key Takeaways Page 18

  • Page 13 of 28

    01

    02 03

    04

    Sovereign Wealth Funds (SWF)

    Insurance Funds (IF)

    Special Purpose Funds

    (SPF)

    Pension Funds (PF)

    Indonesia has 267 institutions managing pension funds of USD 33 billion, mainly investing in deposits, mutual funds and bonds. No record of investments in infrastructure.

    Indonesia currently has no sovereign wealth fund. The Government Investment Unit of Indonesia (PIP) was recently dissolved and is to merge with PT SMI.

    2. PT Indonesia Infrastructure Finance (Govt commitment: USD 450 million. Disbursed USD 140 million in 2014.) A private non-bank financial institution with government seed equity. 3. Hajj Fund (USD 4.6 billion) Keep safe the Pilgrims deposits for their hajj journey. Most investments are allocated in Sharia deposits and Government Sukuk. No record of investments in infrastructure.

    1 The funds will be incorporated into BPJS in 2029. 2 Not inclusive of Pension Fund, which will come into full effect on 1 July 2015.

    There are 4 types of pension funds (% of total assets in Indonesia): 1. Civil Service Provident1 (26%) 2. BPJS (Old-age savings)2 (31%) 3. Employee-Sponsored Pension Fund

    (35%) 4. Financial Institution Pension...

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