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INFRASTRUCTURE INVESTMENT IN EMERGING MARKETS AND DEVELOPING ECONOMIES Raj Kannan, Managing Director 2 July 2015 St. Catherine’s College, Oxford “A BRIEF LOOK AT INDONESIA”
Transcript
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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 ”

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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

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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 Indonesia’s Potential” (2012)

Despite recent growth setbacks, Indonesia’s 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)

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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

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

Estimated Growth of the Indonesia’s 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 Indonesia’s 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

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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%.

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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

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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)

Indonesia’s 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 Indonesia’s 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%

Indonesia’s logistics costs are much higher than in

other ASEAN and neighboring countries

Key Impediments to Continued Growth – High Logistics Costs…

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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).

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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 Indonesia’s 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.

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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

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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

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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

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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 (Gov’t 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 Fund (8%)

To date the local institutional investors have had limited role in infrastructure investments but reforms are underway…

1. PT Sarana Multi Infrastruktur (PT SMI) (State Budget 2015 allocated USD 1.6 billion. Provided loan amounts of USD 390,000 in 2013.) A government owned infrastructure financing company.

In 2013, the total assets of insurance industry is USD 50 billion. Mainly investing in equities and bonds. Infrastructure as an asset class is still untested for these Insurance companies, for now…

The introduction of long dated financing schemes like APS & PBAS+ will provide attractive options for the Indonesian institutional investors to enter infrastructure financing.

OJK is currently drafting regulations to enable pensions funds to invest in infra

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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

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1. Sponsored projects face implementation bottlenecks

•  Funds committed to infrastructure projects are not being disbursed according to schedule as the projects are hampered with bottleneck issues, arising from delays in permit issuance, land acquisition, etc.

•  Complex bureaucracy and

administration procedures prolong the process.

ISSUES IN FUNDING DISBURSEMENTS

2. Government is undecided on the funding scheme determination

Government often takes too long to evaluate its funding scheme options based on feasibility studies, thus the committed funds remain undrawn and unused, sometimes requiring extension of draw-down terms. For example, Soekarno-Hatta high-speed railway, Jakarta MRT

USD 1.5 Billion (~ 2.7 times more than 2014)

Development Finance Institutions have increased funding commitments to Indonesia for 2015 - 2019, but fund disbursement issues remain…

Source: World Bank, official reports & Other news reports

USD 95 Billion*

World Bank China* ADB JICA IDB Others

10

12

50*

5 8

* Note: China’s commitment is $10 bil for power sector and $40 bil via a fund focused on Indonesia and other Asian countries.

10

Loan Commitments by DFIs for Indonesia 2015 - 2019

With MOF exploring the use of long dated payments schemes like APS & PBAS, there is hope that the DFI’s funds could be better absorbed.

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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

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Indonesia is a rapidly growing economy with vast potential but investments in Infrastructure and human capital is a must to guarantee continued growth Ø The new government is focused on reducing logistics costs, ensuring energy security,

food security and social equity to guide the growth;

Ø There is still vast potential for growth outside of Java; and the government is supporting many programs and investments aimed at developing these regions;

Ø Increased focus on making investment process easier and unlocking bottlenecks is encouraging;

Ø Increased funding committment from DFIs and new rules to enable local institutional investors to participate in infra investments are steps in the right direction.

Ø The government led funding schemes like APS, PBAS are prime opportunities for DFIs to help the government cross the funding barrier;

Ø DFIs also need to provide support to the government to operationalise the new institutions and to help unlock the bottlenecks in funding disbursements;

Ø Increased opportunities for international institutional investors with infrastructure investment experience to assist and co-invest with Indonesian institutional investors like pension funds that are likely to be allowed to invest in infrastructure in the near future.

DFIs and Instituitional Investors have a key role to play to guide the government in its mindset change to introduce long dated payment schemes

Key Takeaways

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T H A N K Y O U www.tuskadvisory.com

I N D O N E S I A

P T. Tu s k A d v i s o r y Pe n t h o u s e / L e v e l 2 1 ,

S o n a To p a s To w e r J a l a n J e n d . S u d i r m a n K AV 2 6 ���

J a k a r t a 1 2 9 2 0 I N D O N E S I A

Tel: +6221 250 6668 Fax: +6221 250 6228

Email: [email protected]

S I N G A P O R E Tu s k A d v i s o r y P t e L t d Le v e l 2 5 , O n e R a f fl e s Q u ay   N o r t h To w e r S i n g a p o r e 0 4 8 5 8 3 S I N G A P O R E Tel: +65 6622 5718 Fax: +65 6622 5999 Email: [email protected]

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National Connectivity

27%

National Security Social Equity

Education: Provide 12 years compulsory education for all citizens. Increase amount of productive vocational labor.

Healthcare: Provide accessible national health care system for all citizens via Health Card system and BPJS.

Productivity & Welfare: Implement reforms to boost agricultural productivity, provide affordable housing, and create a social security system.

Energy Security: Ensure 96.6% electrification ratio and develop 35,000 MW of new generating capacity

19%

Reduce Logistic Cost: Reduce overall logistic cost from 27% of GDP to 19% of GDP by 2019 to increase national competitiveness.

Access Between Urban and Rural Areas: Increase connectivity between areas to leverage the economies of less-developed regions while also paving way for urbanization

Food Security: Increasing food production to be self sufficient and less reliant to import. Targets to achieve production of 10 million tonnes surplus of rice by 2018.

Water Resilience: Increase access to clean water from 60% to 100% by 2019. Increase the average water reserve capacity per capita from 54m3/capita/year to 115m3/capita/year

Encompasses food, energy, and water resilience of the country. Focuses on reducing reliance on imports and increase domestic capacity for energy, food, and water.

Encompasses the need to increase access between regions, reduce regional disparity, reduce cost of logistics and foster trade between regions and other countries.

Encompasses the need to provide social security to the people. Increase labor quality through better education, increase livelihood through better healthcare, and increase overall welfare.

New Government Priorities – Focus on Fixing Infrastructure while Increasing Social Equity

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•  Improve connectivity by building infrastructure which leads to development of e-health, e-procurement, e-education, and e-logistics

•  Develop 2,650 km new roads and complete 1,000 km new toll roads(includes those awarded but not started)

•  Rehabilitation of 46,770 km of existing road

•  Develop 2,159 km inter-urban railways and 1,099 km urban railways in Java, Sumatera, Sulawesi and Kalimantan

•  Develop Bus Rapid Transit systems in 29 cities •  Mass rapid transit in 6 metropolitan cities and 17 large

cities

•  Develop 15 new airports •  Develop air cargo facilities in 6 locations

•  Develop 24 new or revitalized seaports •  Procure pioneer cargo vessels, livestock vessels,

transport vessels

•  Develop power plants, incl. 30 hydropower plants, with the total capacity of 35,000 MW

•  Optimize domestic refineries and build new oil refineries of 2X300,000 barrels

Logistics

To reduce logistics costs from 27% of GDP to 19% of GDP by 2019.

Energy

To achieve energy security, the GoI aims to reach electrification ratio of 96.6% by 2019.

Technology

To provide easy connectivity across Indonesia, technology infrastructure is required.

The Government Plan for 2015-2019

0 100 200 300 400 500 600 700 800 900 1000

Public housing

Water Supply & Sanitation

Water Resources

Information & Computer Technology

Energy (Oil & Gas)

Power

Sea transport

Air transport

Land Transport & Ferries

Urban Transportation

Railway

Road

Funds (IDR Trillion)

Government & SOE

Private

Source: Tusk Advisory Analysis

To realize the plan, the Government is planning to commit up to 70% of the required funding, directly and via its State Owned Enterprises with the balance expected from private sector.

Others

•  Expansion to 1 million Ha irrigation system and development of 49 new dams to increase irrigation from dams rate from 11% to 20%

•  Achieve sanitation and drinking water availability to 100% by developing water supply to 21.4 million house connections in metropolitan area and 11.1 million in rural area

•  Improve public house by developing of 5,257 twin-blocks flats to accommodate 515,717 households on lease

Forecasted infrastructure funding sources for 2015-2019

This Time with Direct Government Funding Commitments…

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The Maritime Corridor (or otherwise known as the Sea Toll) involves the establishment of 24 strategic ports to serve as a multi-linked sea transportation network which is both time and cost efficient. Maritime development involves revitalization of the shipyard industry and procurement of more patrol ships.

*) major investments including for (1) development of 24 strategic ports ~34.8%;���(2) development of 1,481 non-commercial ports ~28.3%; (3) vessel procurement for the next 5 years ~14.5%

Maritime Corridor/Sea Toll

Power Plants Development

Achieving Economic

Growth 6-7%

By 2019 the government needs to develop at least 35,000 MW of new generating capacity on top of previously unachieved targets

96.6% Electrification Ratio 85.7 GW Generating Capacity

PLN

IPP

§ 16.4 GW new generating cap. § 50,000 kmc new transmission § 82,000 MVA of relay circuits § 150,000 kmc new distribution

§ 18.7 GW new generating cap. § 360 kmc new transmission

Total Investment

IDR 980 Trillion (~USD 98 Billion) is required to fund power plants, transmission networks, as well as distribution networks

State Budget

PT. PLN IPP IDR 100 T (~USD 10 B)

IDR 445 T (~USD 44.5 B)

IDR 435 T (~USD 43.5 B)

PLN and State Budget can only fund a total IDR 200 Trillion (USD ~20 Billion) and require equity injection, direct lending, and tariff adjustment to fill the 345 Trillion (USD ~34.5 Billion) gap in funding

IDR 592 T (~USD 59.2 B)

for sea transport including sea toll*

Required Investment

State Budget ~IDR 260 T (~USD 26.0 B)

SOE ~IDR 238 T (~USD 23.8 B)

Private ~IDR 164 T (~USD 16.4 B)

Planned Funding Diversification

Source: Bappenas Document, Jan 2015

Source: Bappenas Document, Nov 2014

Exchange Rate : USD 1 = IDR 10,000

And prioritizing maritime sector’s growth and Power Generation & Transmission…

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Accumulated Government Funding Allocation 2015-2019 in IDR Trillion

* Numbers updated based on available publicized data (Bappenas Deputy of Development Funding presentation, January 2015) *** Including Disaster Management Sector (BASARNAS, BPLS, etc.) and development of specific regional area (Surabaya, Gresik, Batam) ***Source: Background Study RPJMN 2015-2019, Bappenas, developed by Tusk Advisory. – Assumed exchange rate $1 = IDR 13,000

For the next 5 years, the required investments in infrastructure is around $430 billion, however the funding gap is massive…

Total Revenue*

Routine Expenditure

Surplus 1* Non-routine Non-infrastructure

Expenditure

Infrastructure Expenditure*

Available** government

funding

IDR1,415

IDR5,519

Funding needed for

infrastructure***

Funding gap

IDR4,104

Base Line

Infrastructure Funding Gap 2015-2019 in IDR Trillion

The above funding gap is not possible to be filled with direct investments by the private sector alone. As demonstrated in the last decade, most of the planned projects are not bankable thus would require some form of government fiscal support – including via long dated payment schemes

Baseline

IDR1,415

IDR 3,725 IDR 2,310

IDR 7,641 IDR 11,366

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The recent increased budget for infrastructure is very encouraging, however converting these additional funds to actual projects requires better delivery mechanisms and better governance framework…

SiLPA and SAL amount from 2008 to 2013 IDR Billion

44,706

120.000

100.000

80.000

60.000

40.000

20.000

-20.000

0

105.324

46.549

98.910

66.524

23.964

94.616

79.950

2009 2008

21,020

70,263

25,722

66,594

2010 2011 2012 2013

SILPA (Sisa Lebih Pembiayaan Anggaran/Financing Surplus)

SAL (Saldo Anggaran Lebih/ Excess Balance)

*State Budget Realization **State Budget Revision (APBN-P) ***Proposed State Budget Revision (RAPBN-P), current State Budget Allocation is IDR 189.1 T

However, looking at the amount of SAL/SiLPA each year, providing additional budget for infrastructure alone is not sufficient to overcome infrastructure delivery problems…

For 2015, the government has increased the infrastructure budget by over 50% from last year

86 114.2

145.5 155.9 177.9

281.1

0

50

100

150

200

250

300

2010* 2011* 2012* 2013* 2014** 2015***

State Budget Allocation for Infrastructure IDR Trillion

>50%

In addition, Government has committed under the RPJMN 2015 - 2019 to increase infrastructure funding by 2.5 times higher than what was spent in 2010-2014

Up to April 2015, only 2% of the allocated budget for Ministry of Public Works has been spent – Key reasons includes slow start to awarding of projects and the issues related to land and permits… Government is thus exploring holistic and comprehensive reforms to fast track infra delivery…

Source: GoI Financial Reports

Source: MoF Press Release

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FISCAL AND MARKET REGULATORY

To encourage infrastructure delivery, the government has implemented fiscal, market, regulatory and institutional reforms…

INSTITUTIONAL

Law No. 2/2012 on Land Acquisition for Public Infrastructure

•  Regulated timeline for the process •  Appointment of better Land Appraisal Team

to calculate fair compensation •  Improved compensation determination

method to avoid community rejection Revision on Pres. Reg. No. 67/2005 on

Public Private Partnership (PPP) •  Broader scope of infrastructure allowed for

PPP •  Provides legal basis for availability

payment for return of investment mechanism

PT Sarana Multi Infrastruktur Provides alternative source of fund and promotes PPP projects. PT Penjaminan Infrastruktur Indonesia (Indonesia Infrastructure Guarantee Fund) Provider of guarantee to increase project attractiveness for investors. PT Indonesia Infrastructure Finance Focuses on the revitalization of private investment for Indonesia infrastructure.

•  To accelerate permit processes, Indonesia Investment Coordinating Board (BKPM) has launched one single window permit processes on Jan 26th 2015

•  Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) focuses on the preparation and delivery of priority projects, from funding scheme determination to monitoring and debottlenecking

•  PPP Unit at Ministry of Finance to facilitate the development of Final Business Case

COMPLETED

Fiscal •  Viability Gap Funding (VGF)

The GoI would contribute a maximum 49% per project cost in VGF.

•  Land Revolving Fund A facility to support land acquisition for toll road projects; managed by the Ministry of Public Works.

Market • Bond Issuance for Infrastructure Projects

Issuance of municipal bonds.

ONGOING

Fiscal •  Availability Payment (PBAS)

The GoI is committed to periodically pay investors for providing infra assets and satisfying standards of operation.

Market •  Issuance of infrastructure companies’ bonds

Indonesia Stock Exchange is examining ways to ease and accelerate bond issuance for infrastructure companies.

Revision on Pres. Reg. No. 54/2010 on Public Procurement

•  Accommodation of retainer fee •  Utilization of procurement agent to

procure within public procurement system, allowing accelerated process

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Page 26 of 28 Source: National Single Window for Investment, Indonesia Investment Coordinating Board (BKPM), 2015

Before PTSP After PTSP

The Indonesian Investment Coordination Board (BKPM) launched the One Stop Service Center (PTSP in Indonesian) on January 26th 2015 in an effort to streamline investment permits for all sectors. This program gives BKPM the authority over 134 key permits usually issued by the 22 different ministries/agencies. The PTSP would put the permit issuance process into a single roof in BKPM thus ensuring faster process and clear guidelines. The process is expected to be optimal by April 2015.

Legal Permits Land Use Permits

Coordination w

ith Region

Industrial License

In the past investors have had to seek permits and licenses from individual government agencies. They would refer to BKPM for business permits while refer MoF for taxes. Investors would need to go to ministry of law for legal permits while going to sector ministries for sector/operational permits. Before the PTSP it takes on average 260 days to issue a full business permit. The worst, licenses for power plants - is estimated to take up 930 days or almost 3 years.

Other Licenses

INVESTORS

INVESTORS

OTHER AGENCIES

The new One Stop Service Center would encompass 22 different ministries and agencies into a single service center for investment managed by the National Single Window for Investments. This integrated coordination would accelerate permits from an average of 260 days to only 90 days. It even promises to expedite power plant permits to just 240 days. The OSSC provides consultation, front office and administration services to investors. The office provides issuance for investment, business expansion, tax levies, import and export permits, and human capital permits.

OTHER AGENCIES

OSSC (PTSP)

PERMIT ISSUANCE

260 days 90

days

Average time

260 days

To encourage investments including infrastructure, the government has centralized and shortened approval process for permits and licenses…

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INFRASTRUCTURE DELIVERY WHEEL INFRASTRUCTURE DELIVERY WHEEL

POLITICAL COURAGE

& COMPREHENSIVE

REGULATORY REFORMS

VIA INFRASTRUCTURE���

LAW

1

DEBOTTLENECKING

LONG-TERM FUNDING

COMMITMENT &

FULLY PREPARED PROJECTS

2

ACCELERATED SPATIAL PLANNING INCLUSION

& IMPROVED AMDAL

AND IPPKH APPROVAL

3

4

EMPOWERED REGULATORS

& GUARANTEE LAND

ACQUISITION VIA IIGF

5

IMPROVED GOVERNANCE

OF DELIVERY VIA SIDA

& INSTILL VALUE

FOR MONEY

6

INTRODUCE INDUSTRY

EXPANSION PROGRAMS

& COMMUNITY

CONSULTATION SCHEMES UNLEASH PUBLIC

SECTOR CAPACITY &

CREATE PUBLIC-PRIVATE PMOs

IMPROVED ASSET MANAGEMENT

& INTRODUCE

CONSEQUENCE MANAGEMENT

8

7

Source: Tusk Advisory Analysis

Additional holistic reforms are being considered that will increase institutional investor interests via long dated funding schemes…

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Pure BOT High

Revenue Risk

APS No

Revenue Risk

Revenue from extra traffic will give the private sector incentives to innovate. By doing so, it will stimulate economic activity. Examples of innovations: • Development of industrial and

commercial area along the road • Upgraded rest area for events •  In-situ events, bazaars, market…

Shifting Paradigm

FROM - Toll road as a mode to get from point A to B

TO - Toll road as a destination by itself, thus generating higher

traffic

INNOVATION

Year

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Operation and Maintenance

Revenue

Cost Construction

Revenue sharing

Fixed annuity

•  Fixed annuity payment ensuring a fixed agreed IRR (say 14%)

•  All revenue above 14% IRR due to extra traffic is shared between Government & private (60:40)

PBAS

PBAS

Source: PBAS+ is an alternative funding scheme for sub-financial economic infrastructure projects developed by Tusk Advisory

PBAS+ enables the development of strategic projects with high economic impact today and pay for it over 20 to 30 years from future tax revenue of the government combined with the revenue collected from the project itself.

Such as PBAS+ for sub-financial economic infrastructure projects to incentivise both the government and the concessionaire


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