Global Business Guide Indonesia

Indonesia
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Business Updates | Unleashing the Potential of Indonesia’s Eastern Islands in 2014

Home to several of the country’s most rapidly growing provinces, East Indonesia is fast emerging from the shadows of the more developed islands in the west. With West Papua (15.8% GRDP growth), Southeast Sulawesi (10.4%), West Sulawesi (10.3%), Maluku (7.8%), North Maluku (6.7%) and Central Kalimantan (6.7%) among the many provinces in the region with 2012 growth rates above and beyond that of the rest of Indonesia (BPS); businesses have increasingly turned their attention from Java and Sumatra to what is now being recognised as Indonesia’s latest investor hotspot.

The focus on East Indonesia brought about by its impressive growth figures as well as its considerable supply of natural resources has in turn put the spotlight on the many challenges that stand in the way of companies looking to enter the market and made evident some of the harsh realities of the economic disparities between this region and West Indonesia. As an underdeveloped market within an emerging market, some of these differences are to be expected; however it stands to reason that a region that makes up over 40% of the country should be contributing more than 10% of GDP – a point made in a panel discussion dedicated to East Indonesia at the 2014 Indonesia Summit hosted by The Economist. Ascertaining East Indonesia’s viability as a leading investment destination is a process that often gets caught up in concerns related to the magnified prevalence of issues inherent to the country. However, it is important that investors keep in mind that confronting these challenges is a worthwhile sacrifice to make, given the lucrative business opportunities that this underserved market far less saturated than the rest of Indonesia has to offer.

Bringing Power to the People

A lack of infrastructure is often referred to as one of Indonesia’s primary impediments to growth but is particularly problematic in East Indonesia, where a widely dispersed population makes it difficult to provide efficient energy to isolated towns and villages. As of the end of 2011, East Indonesia’s max power capacity stood at 2,603 MW or approximately 10% of the capacity afforded to the Java-Bali region alone. Moreover, low electrification ratios in regions such as Papua, with only 32.1% of the population covered by an electric grid, and Maluku, with 62.1% electric coverage (PLN, 2013), severely impinges upon the willingness of businesses to enter the market.

There is however, presently a thrust of momentum towards the undertaking of new infrastructure projects designed to improve upon the region’s shortcomings in power distribution; driven by the government’s goal of achieving 90% electric grid coverage by 2020. As is detailed in Indonesia’s Masterplan for Accelerated Economic Development (MP3EI), Indonesia plans to construct a host of new power plants and electricity transmission facilities in East Indonesia, including a 120 MW gas and coal fired steam power plant (PLTGU) in Barito Utara, Central Kalimantan, a 1,472 km transmission network in Central Sulawesi projected to require 1,888 trillion RP in investment, and a 2 x 5 MW geothermal field in the West Halmahera District of North Maluku worth an estimated 320 trillion RP in investments, among others.

Projects in East Indonesia more recently identified in the 2013 edition of the Ministry of National Development Planning’s (Bappenas) PPP Book include the construction of the Karama Hydro Power Plant in West Sulawesi. With a capacity of 4 x 112.5 MW, this power plant will serve to channel electricity through a 150kV transmission line to the Mamuju Substation before being retransmitted to South Sulawesi for distribution to the entire island when Sulawesi’s power grid is fully interconnected (which will take place between 2013-2020). Private partners in this $ 1,335 million USD project are responsible for financing, construction, operations and management during the concession period and bidding is tentatively scheduled for the latter half of this year.

Projects carried out to address one of East Indonesia’s most pressing problems are in and of themselves opportunities for well-established foreign investors capable of taking upon the responsibilities of the private partner in these large scale initiatives. Recently announced revisions to the negative investment list only serve to make this opportunity more attractive (See Changes to the Negative Investment List Tabled; Approval Expected Shortly – Updated), with foreign ownership in power plants over 10 MW and electricity distribution facilities both increasing from 95% to 100%, insofar as the projects are developed in accordance with the PPP framework.

Supplying Supportive Infrastructure & Technology

Other opportunities to foreign investors include providing high tech solutions for companies seeking the latest in natural resources equipment and facilities to be implemented in East Indonesia. By way of example, Shell in 2011 partnered with Inpex Masela to develop the Abadi gas field in the Arafura Sea on the basis of its expertise in floating LNG technology. Foreign investors should also anticipate increased demand for supporting infrastructure in the LNG industry such as pipes and storage tanks, given PLN and Pertamina’s joint initiative to develop a LNG network in Indonesia’s eastern islands through the construction of eight receiving terminals. Also, rising interest in deep-sea exploration to access Indonesia’s considerable offshore hydrocarbon reserves will necessitate the use of semi-submersibles and drillships.

Establishing Ecotourism

In keeping with the emphasis on lucrative investment areas tied to East Indonesia’s rich natural endowment, foreign companies should look to enter the region’s ecotourism industry, now open to up to 70% foreign investment from 49% following changes to the negative investment list. An alignment of government regulation and burgeoning domestic demand for air travel builds for an opportunity that must not be overlooked, particularly given that leading local airline Garuda Indonesia has already announced plans to offer new flight services to eastern parts of the country such as Ende, Bima and Tambolaka. The demonstrated success story of Raja Ampat, Papua should serve as motivation for international investors looking to open ecotourism services in the many pristine and secluded islands of East Indonesia. Furthermore, firms not in the ecotourism industry should rest assured that the development of this type of service in East Indonesia will act as a boon to the establishment of an array of complementary services and industries as a direct result of tourism’s significant multiplier effect on economic and social development.

Approaching East Indonesia

To enter the East Indonesian market and establish a firm foothold in what is sure to be a region central to the country’s climb up the world’s largest economy rankings, it is necessary to be patient and work closely with the community and government. As was explained by Mr Maarten Wetselaar, Executive Vice President of Integrated Gas at Shell during the 2014 Indonesia Summit, investors must form strategic value partnerships with community members and government officials prior to carrying out any project in East Indonesia to develop a keen understanding of what each party hopes to gain from the development of a new power plant or gas field. Equally important is making the company’s targeted economic outcomes clear and transparent to the community.

More so than the rest of Indonesia, investment into Eastern Indonesia is truly a long term commitment; beyond needing to be patient in working with regional government officials less familiar with foreign investors, international companies entering the market are doing so in its most prominent industries such as extractives, which have lengthy set up and exploration periods. However, firms willing to dedicate time and energy now will find themselves perfectly positioned when East Indonesia becomes a leading driver of national economic growth. With several firms having already made the move into the region, such as Bosowa Corp, and many others planning to do so in the immediate future; 2014 is shaping up to be a formative year for East Indonesia and one in which some its vast potential will finally be realised. 

Global Business Guide Indonesia - 20th January 2014

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