Japan, China power Indonesian
growth By Bill Guerin
JAKARTA - Foreign investment is suddenly
picking up in Indonesia, an indication that
President Susilo Bambang Yudhoyono's pro-business
policies are finally starting to pay economic
dividends in spite of the recent nationalistic and
anti-foreign economic regulations passed by
Parliament.
New business ties with both
Japan and China promise to push Indonesia on to a
higher economic-growth trajectory in the years
ahead. Last week Yudhoyono signed a big new free-trade
agreement with visiting
Japanese Prime Minister Shinzo Abe, the first
wide-ranging bilateral pact Indonesia has ever
entered with another country.
The
so-called Economic Partnership Agreement, which
still needs to be ratified by both countries'
legislatures, will reduce or eliminate tariffs on
average by 90% on 9,275 different trade products.
According to Fujio Mitarai, chairman of the Japan
Business Federation, Tokyo views the new deal as a
platform to secure a more stable supply of energy
resources from Indonesian producers.
Jakarta is already Japan's biggest
supplier of liquefied natural gas (LNG), though in
recent months Indonesian suppliers have failed to
meet contractual delivery obligations to Japan,
South Korea and Taiwan because of slumping
production and growing domestic demand. Indonesian
state oil and gas giant Pertamina, along with the
country's biggest private energy firm Medco
Energi, last week inked a US$1.1 billion deal with
Japanese trading firm Mitsubishi for the
construction of an LNG refinery in Central
Sulawesi province that will supply the fuel
exclusively to Japan.
Also last week,
Mitsubishi purchased a 39.4% strategic stake in
Encore Energy, which holds a controlling 50.7% in
Medco Energi, for a cool $353 million. Other major
joint-venture energy deals announced last week
included the construction of a natural-gas
pipeline scheduled to run from South Sumatra to
West Java as well as two new power plants.
Japan also indicated its support for
Indonesia's Sarulla geothermal project, one of the
biggest ventures in the alternative energy source
ever designed, whereby the Japan Bank for
International Cooperation is expected to provide
the bulk of the financing for the $800 million
three-stage construction and supply venture.
China is likewise moving into Indonesia in
a big new way. State electricity utility PLN
announced this month that it had signed deals for
new power plant worth about $2 billion with
China's Dongfang Electric and Shanghai Electric.
PLN said the Export Import Bank of China would
shoulder 85% of the projects' financing and that
the new plants are scheduled to become operational
by either 2009 or 2010.
Shanghai Electric,
meanwhile, plans to build three new 350-megawatt
coal-fired plants in West Java for a total
investment of $800 million. China has committed an
additional $800 million for several other
infrastructure and energy projects, including the
construction of the $250 million Jatigede Dam in
Cirebon, as well as new thermal-driven power
plants.
China's Chengda Engineering and
Indonesian energy company PT Bosowa Energi, linked
to the family of Vice President Jusuf Kalla, plan
to build jointly a $200 million 200MW coal-fired
power plant in Kalla's home province of South
Sulawesi. Bosowa will sell electricity to PLN for
3.18 US cents per kilowatt-hour for 30 years under
an independent-power-producer mechanism.
Japanese and Chinese interest in
Indonesian energy projects is indicative of the
two net energy importers growing global
competition for new and reliable energy supplies.
The big-ticket investments are also part and
parcel of the regional rivals' competitive drive
to expand their economic influence in the region.
The big new investment plans affirm the
growing optimism surrounding Indonesia's economic
direction. Gross domestic product grew 6.3% in the
second quarter of this year, the country's fastest
year-on-year expansion since 1996.
Defying the nationalists The
new investments also notably run against the
nationalistic grain of the so-called "negative
investment list" announced last month by
Indonesia's Parliament, which outlined new
restrictions on foreign investment across various
business sectors. That's at least partially
because the Capital Investment Coordinating Board
(BKPM), a state-run agency charged with attracting
foreign investments, has played a pivotal
behind-the-scenes role in maintaining foreign
confidence over the nationalistic calls emanating
from Parliament.
The investment-promotion
agency is headed by Muhammad Lutfi, a self-made
entrepreneur who still holds substantial stakes in
several large businesses, including the
media-related Mahaka Group, and reports directly
to the president. Lufti served as Yudhoyono's
economic spokesman during the 2004 presidential
campaign and is currently one of the president's
most trusted economic advisers.
He was
appointed to BKPM's top spot in May 2005, less
than two weeks after his predecessor, Theo
Toemion, a close aide to former president Megawati
Sukarnoputri, was dismissed by Yudhoyono for his
blatantly anti-foreign sentiments, including a
physical attack against US expatriates during a
basketball game at the Jakarta International
School.
In contrast to several of his
former business contemporaries, including current
Coordinating Minister for Welfare Aburizal Bakrie,
as well as Speaker of the House of Representatives
Agung Laksono, Lufti has strongly rejected
parliamentary calls for more economic nationalism
and less foreign participation in the Indonesian
economy.
As BKPM head, Lufti has instead
moved to reduce the endemic red tape that surveys
show has long been a deterrent to new foreign
investment. A planned new national network of some
70 regional BKPM offices, meanwhile, aims to
streamline and simplify previously cumbersome
investment processes.
At the same time, he
has leveraged his past association with the Young
Indonesian Entrepreneurs Association (HPMI) to
encourage more foreign tie-ups and assistance for
the country's estimated 40 million small and
medium-sized enterprises (SMEs), including
initiatives aimed at helping local businesses
compete in global markets. Many of his business
contemporaries, including current prominent
parliamentarians and ministers, have also headed
the HPMI but have taken a more protectionist tack
to local-industry promotion.
Lufti, on the
other hand, was instrumental in the memorandum of
understanding signed last week between the
Japanese External Trade Organization and the
Indonesian Chamber of Commerce, which among other
things will create a dedicated Japanese support
desk for Indonesian SMEs. The agreement will aim
to improve Indonesian companies' standards of
production so that they will more easily fit into
the production chains common to Japanese
automotive, electronics and construction
companies.
Foreign investment has remained
a politically sensitive topic in Indonesia ever
since the International Monetary Fund recommended
that the government sell distressed assets to
foreigners and rapidly liberalize the economy as
part of the multibillion-dollar financial rescue
package the multilateral agency administered in
the wake of the 1997-98 Asian financial crisis.
Economic nationalists have clung to that example,
but Yudhoyono has demonstrated he's willing to
look beyond that history.
His political
strategists, it appears, are now wagering that a
new spurt of economic growth and job creation led
by Japanese and Chinese investment will give his
candidacy a big boost and his rival economic
nationalists a strong rebuke in the run-up to the
2009 presidential polls.
Bill
Guerin, a Jakarta correspondent for Asia Times
Online since 2000, has been in Indonesia for more
than 20 years, mostly in journalism and editorial
positions. He specializes in Indonesian political,
business and economic analysis, and hosts a weekly
television political talk show, Face to Face,
broadcast on two Indonesia-based satellite
channels. He can be reached at
softsell@prima.net.id.
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