VZCZCXRO3297
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #3237/01 3232336
ZNR UUUUU ZZH
R 192336Z NOV 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2114
RUCPDOC/DEPT OF COMMERCE WASHDC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0104
RUEHBY/AMEMBASSY CANBERRA 0103
RUEHBJ/AMEMBASSY BEIJING 3711

UNCLAS SECTION 01 OF 07 JAKARTA 013237 
 
SIPDIS 
 
DEPT FOR EAP/IET, EB/IFD/OIA 
DEPT PASS OPIC, EXIM, TDA 
DOE FOR TOM CUTLER/PI-32 AND COURTNEY GILLESPIE/PI-42 
COMMERCE FOR USDOC 4430--GOLIKE 
TREASURY FOR IA-ANDY BAUKOL 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EINV ECON ENRG EAIR ELTN ECPS ID
SUBJECT: INFRASTRUCTURE FORUM ATTRACTS INVESTORS AND 
HIGHLIGHTS MODEL PROJECTS 
 
REF: A) JAKARTA 0336; B) JAKARTA 2984; C) 05 JAKARTA 975 
 
¶1. (SBU) Summary.  The Government of Indonesia (GOI) renewed 
its appeal for private investment under it's five-year, USD 
150 billion infrastructure development program at a November 
1-3 Infrastructure Forum in Jakarta.  President Susilo 
Bambang Yudhoyono (SBY) touted improvements in Indonesia's 
investment climate, but also acknowledged investor concerns 
over the need for a transparent and fair regulatory 
framework.  Minister of Finance Sri Mulyani assured 
investors that the National Committee for the Acceleration 
of Infrastructure Provision (KKPPI) would evaluate all 
Public-Private Partnership (PPP) projects in the 
infrastructure sector according to established, transparent 
criteria.  Coordinating Minister for the Economy Boediono 
announced separate risk guarantee, infrastructure 
investment, and revolving land acquisition funds to which 
the GOI plans initial contributions of Rp 4.7 trillion (USD 
503 million).  Unlike the 2005 Infrastructure Summit (Ref 
C), the GOI narrowed its focus to ten model projects across 
five sectors worth USD 4.4 billion, although none are yet 
ready for tender.  Ministers from infrastructure-related 
ministries were on hand to meet one-on-one with potential 
investors in five separate break-out sessions.  Energy 
sector projects attracted the most interest.  The World Bank 
and the Asian Development Bank (ADB) announced at the 
conference that they are expanding their support for the 
KKPPI with program and project loans as well as possible 
contributions to the proposed risk guarantee fund.  A senior 
official from the Japanese Bank of International Cooperation 
(JBIC) unveiled an "umbrella agreement" his organization has 
signed with the Ministry of Finace (MOF) that acts as an 
indirect GOI guarantee for power projects.  China and Japan 
continued their thinly-veiled competition over Indonesian 
infrastructure projects at the Forum, particularly in the 
power sector.  This report uses an exchange rate of Rp 
9130/USD for all transactions. End Summary. 
 
¶2. (U) Nearly two years after the January 2005 
Infrastructure Summit, The Indonesian Chamber of Commerce 
(KADIN) and the Coordinating Ministry for Economic Affairs 
co-sponsored a follow-up "Infrastructure Forum" from 
November 1-3 in Jakarta.  Over 1000 delegates from 300 
Indonesian companies and 100 foreign firms attended the 
Forum.  The Forum agenda underscored the GOI's more focused 
efforts under President Susilo Bambang Yudhoyono (SBY) to 
attract greater private investment into its USD 150 billion, 
5-year infrastructure plan. 
 
SBY Cites Positive Climate, Acknowledges Challenges 
--------------------------------------------- ------ 
 
¶3. (U) In his opening address, SBY touted improvements in 
Indonesia's investment climate and macroeconomic situation, 
including a successful transition to democracy, increased 
political stability, strengthened anti-corruption efforts, 
rising GDP growth, and a rising per capita income of USD 
1500 that now exceeds pre-crisis levels.  He cited the 
stable Rupiah, Jakarta's strong stock market, and reserves 
of over USD 40 billion as concrete signs of Indonesia's 
underlying economic health. 
 
¶4.  (U) The President candidly acknowledged significant 
economic challenges facing Indonesia and said that 
infrastructure development stands at the top of the list. 
During the years following the financial crisis the GOI 
virtually stopped funding infrastructure, a trend Yudhoyono 
said the country must reverse. (Note: Pre-crisis 
infrastructure spending stood at about 6% of GDP, almost 
three times the level in 2005). He appealed to private 
investors to participate as partners in the USD 22 billion 
annual investments needed for the energy sector, roads, 
ports, harbors, housing, water, and sanitation. 
 
¶5.  (SBU) SBY also addressed on-going investor concerns over 
substandard project feasibility studies, lack of 
transparency in the bidding process, and regulatory 
uncertainties.  He stressed that Presidential Regulation 
 
JAKARTA 00013237  002 OF 007 
 
 
67/2005 provides a more robust legal and regulatory 
framework for PPPs in infrastructure development, and said 
the KKPPI would ensure all projects meet international 
standards of transparency and fairness in the tender and 
bidding process "from start to finish."  Minister of Finance 
Sri Mulyani echoed the President's remarks, saying that the 
KKPPI is already working with sixteen line ministries and is 
evaluating the quality of all proposed PPP projects 
according to the standards of Presidential Regulation 
67/2005.  (Comment: "PPP Nodes", one of the key components 
of the KKPPI process, are not yet up and running in all 
infrastructure-related line ministries.  End Comment.) 
 
Funds for Guarantees, Projects, Land Acquisition 
--------------------------------------------- ------ 
 
¶6.  (SBU) Ministers Boediono and Mulyani provided detail on 
three, separate infrastructure-related funds the GOI has set 
up or proposed: 
 
-- The GOI has established a "Risk Guarantee Fund" with an 
initial, Rp 2.5 trillion (USD 274 million) contribution from 
the 2006 and 2007 national budgets.  In addition, the GOI 
has asked the World Bank, ADB and other institutions to 
support the Risk Guarantee Fund through partial credit 
guarantee or other risk management products.  In response to 
questions about whether investors in non-KKPPI projects 
would be able to take advantage of the Risk Guarantee Fund, 
the GOI has stated clearly in the Letter of Development 
Policy for its forthcoming, USD 400 million ADB 
"Infrastructure Reform Sector Development Program" loan that 
it only projects that fully comply with the KKPPI would be 
eligible for support through the Risk Guarantee Fund. 
 
--Mulyani announced the GOI would establish an 
"Infrastructure Investment Fund" with an initial 
contribution of Rp 1.5 trillion (USD 164 million, also from 
the 2006 and 2007 budgets.  This fund is intended to fund 
direct GOI participation in infrastructure projects, likely 
through Indonesian state-owned enterprises (SOEs). 
 
--Boediono stated the GOI would ask Parliament for funds to 
establish a Rp 600 billion (USD 66 million) revolving land 
acquisition fund.  The Ministry of Public Works will manage 
the fund, under guidelines the National Land Agency (BPN) 
will draft.  According to Boediono, the guidelines will 
ensure land acquisition is both "investor-friendly" and "not 
at the expense of vulnerable groups." 
 
¶7. (U) Once established, the land acquisition fund could 
play an important role in breaking the current deadlock over 
land acquisition for toll road and other infrastructure 
projects.  Presidential Regulation 65/2006 and other 
regulations limit the legal options available to property 
owners to challenge Government efforts to acquire land for 
infrastructure projects, an important consideration for land- 
intensive toll road development.  However, the GOI has been 
extremely reluctant to acquire land through eminent domain- 
type legal proceedings, and most current toll road projects 
have stalled as a result.  Observers believe few, if any, 
foreign investors will enter the toll road market in 
Indonesia without very strong assurances from the GOI on 
land acquisition.  Potential investors have long sought such 
a revolving fund to finance land acquisition to limit or 
remove this risk for investors. 
 
Clarification on Risk Sharing for Existing Projects 
--------------------------------------------- ------ 
 
¶8. (U) Finance Minister Sri Mulyani provided some 
clarification on the complex issue of the availability of 
government guarantees or support for various types of PPP 
projects, a threshold issue for most investors.  Under 
Finance Ministry Decree 38/2006 issued in May 2006, the 
government may consider sharing political, project 
performance, and demand risk.  Mulyani stated that a Risk 
Management Unit (RMU) within the MOF would review all 
requests for government guarantees for projects awarded 
 
JAKARTA 00013237  003 OF 007 
 
 
under Presidential Regulation 67/2005 based on the risk- 
sharing principles in MOF Decree 38/2006.  As in prior 
infrastructure meetings, Mulyani cautioned investors not to 
expect blanket guarantees.  However, she pledged that the 
GOI would evaluate guarantee proposals for high quality 
projects based on "a reasonable rate of return."  She added 
that the GOI needs to issue another Presidential Regulation 
to address guarantees for regional projects. 
 
¶9. (SBU) The GOI also clarified how it would approach 
requests for GOI financial or risk sharing support for 
projects that fall outside Presidential Regulation 67/2005 
and MOF Decree 38/2006.  Some of these projects were awarded 
during the Suharto era, but have been stalled since the 1997- 
98 financial crisis.  In Mulyani's remarks and its October 
24 ADB Letter of Development Policy, the GOI has outlined 
how it will treat infrastructure projects that fall outside 
the KKPPI system: 
 
--Projects to be Directly Executed by the Government or 
Contracting Agencies: The GOI plans to design and execute 
infrastructure projects using purely public sector 
resources.  The most noteworthy example of this type of 
project is the 10,000 megawatt "crash program" for 
electricity generation in which a number of Chinese 
companies and banks have expressed keen interest. 
 
--Projects Awarded Prior to Presidential Decree 67/2005 and 
MOF Decree 38/2006:  The MOF will review these pre-KKPPI 
projects already in the pipeline on a case-by-case basis, 
and if they do not meet the requirements of the two decrees, 
will "apply the principles of transparency, accountability, 
proper risk allocation and sharing, and fiscal prudence in 
determining fiscal support for such projects through the 
general budget allocation process."  (Comment: In 
conjunction with the pledge to use Risk Guarantee funds only 
for projects fully in compliance with the two regulations, 
this commitment appears to require investors in the large 
number of stalled infrastructure projects tendered or 
awarded by previous administrations to work through the 
Parliamentary budget process to obtain GOI support, likely a 
difficult endeavor. End Comment.) 
 
¶10. (SBU) In a statement likely directed toward developers 
of Jakarta's USD 650 million monorail project, Mulyani said 
that "if projects are tendered without a guarantee, they 
should not come back later" seeking one.  Her comments 
reflect a continuing dispute inside the GOI on whether to 
offer a GOI guarantee to the Dubai Islamic Bank which is 
financing the monorail.  (Comment:  The GOI may have 
resolved this dispute. An infrastructure expert at the Forum 
told us the MOF recently signed a "comfort letter" offering 
a modest ridership guarantee capped at USD 25 million 
annually to the stalled project.  The GOI has kept this 
comfort letter out of the media. End comment.) 
 
Model Projects Span Sectors 
--------------------------- 
 
¶11. (U) Unlike the 2005 Infrastructure Summit, this year the 
GOI focused its pitch to investors on a short-list of ten 
model projects worth USD 4.4 billion.  Coordinating Minister 
for Economic Affairs Boediono acknowledged the poor response 
of investors to the 91 projects announced at the 2005 Summit 
because "the projects were not properly and adequately 
prepared".  In contrast, the GOI considers the Forum's ten 
model projects, crossing the energy, transportation, public 
works, and telecommunications sectors, commercially viable 
and "bankable," Boediono said.  Each of the projects will go 
through the KKPPI and RMU review processes from start to 
finish.  Although the GOI provided information memoranda on 
several of the projects, no tender documents were ready at 
the Forum.  Participants noted that several of the model 
projects are still in the feasibility assessment stage, and 
encouraged the GOI to focus on moving an initial one or two 
model projects through the KKPPI and RMU review process to 
demonstrate to investors that the two institutions are fully 
functioning. 
 
JAKARTA 00013237  004 OF 007 
 
 
 
--------------------------------------------- --- 
Table 1: Infrastructure Forum: 10 Model Projects 
--------------------------------------------- --- 
                                         Estimated 
Project                                   Value(1) 
--------------------------------------------- ------ 
Telecommunications: 
Palapa Ring fiber optic network            1,500 
 
Power plants: 
2x600 MW coal-fired plant (Central Java)   1,200 
500 MW coal-oil fired plant (East Java)     275 
 
Toll roads: 
165 km Solo-Kertosono (Central Java)        928 
60 km Medan airport road (North Sumatra     142 
 
Sea ports: 
Surabaya Tanjung Perak expansion            280 
Margagiri-Ketapang ferry terminal 
(Java to Sumatra)                            97 
 
Water and sanitation projects: 
Dumai (Riau Province)                        44 
Tangerang, Banten (greater Jakarta)          37 
Bandung (Java)                               26 
 
(1) In USD millions. 
 
Note: Information memoranda are available on the KKPPI 
website (http://www.kkppi.go.id) for all projects except the 
Surabaya Tanjung Perak expansion. 
 
Ministers Pitch Projects in Break-Out Sessions 
--------------------------------------------- - 
 
¶12. (U) Forum organizers delivered on their pledge of 
offering full access to key infrastructure ministers. 
Highlights from individual breakout sessions follow: 
 
--Transportation: Minister of Transportation M. Hatta Rajasa 
promised investors that the Transportation Law amendments 
for air, land, sea, and rail, expected to pass Parliament by 
early 2007, would "revoke the state-owned enterprise 
monopoly" on transportation, permit longer concession 
periods, and allow foreign investors "free rein" to build 
and operate transportation infrastructure.  Investors 
representing existing port facility operators in Surabaya 
pressed Rajasa on the need for the Lamong Bay container port 
project in Surabaya, given the significant underutilization 
of current facilities.  Rajasa responded that Lamong Bay is 
a "long-term" project and planning for anticipated growth in 
2010 and beyond. 
 
--Water Resources:  Public Works Minister Djoko Kirmanto 
highlighted the three model municipal water supply and 
sanitation projects, noting that only 17% of all Indonesians 
have piped water into their homes, and only 8% in rural 
areas.  The model projects offer 25 year concession 
agreements to inject greater efficiency into the existing 
system where 63% of municipal water companies are 
essentially bankrupt.  The proposed water project in the 
Jakarta suburb of Tangerang would serve the most rapidly 
growing area in greater Jakarta with a current population of 
243,000.  Many consumers currently purchase potable water 
trucked into urban areas at much higher cost. 
 
--Telecommunications: Communications Minister Sofyan Djalil 
unveiled an ambitious agenda to transform Indonesia into a 
fully connected information society by 2015. Indonesia has 
one of the lowest rates of mobile and fixed line penetration 
in South East-Asia according to Arwin Rasyid, director of 
state-owned telecommunications company PT Telekom. Rasyid 
added this low level of penetration represents a tremendous 
(and lucrative) capacity for growth.  Telecom Minister 
Djalil presented GOI plans for an ambitious "Palapa Ring" 
project that would create a self-contained fiber optic ring 
 
JAKARTA 00013237  005 OF 007 
 
 
running through seven major Indonesian islands at a cost of 
USD 1.5 billion.  The Telecommunication Ministry estimates a 
21% internal rate of return on the projects and a five-year 
revenue stream of USD 2.9 billion.  However, some investors 
voiced doubts about the project's feasibility and questioned 
the need for a new, privately funded fiber optic ring when 
Telekom could use its existing networks and keep the project 
for itself. Investors also commented on the fact that 
interconnection rates in Indonesia are among the highest in 
the world and a major cost barrier for new entrants in the 
market.  Minister Djalil assured investors that the GOI is 
formulating regulations to reform lease line regulations. 
Investors tell us that unclear regulatory authority and GOI 
support for the Telekom/Indosat duopoly are major barriers 
to potential investment. 
 
--Toll Roads:  Minister Djoko Kirmanto told investors that 
from 2005-2009, Indonesia hopes to build 1,100 kilometers, 
of toll roads at a cost of Rp 80 trillion (USD 8.7 billion). 
More than 760 kilometers would be included in the "Trans 
Java" system, the GOI's top toll road priority.  According 
to Kirmanto, Presidential Regulation 65/2006 has streamlined 
the process of clearing land titles and increased the 
certainty of land acquisition.  The proposed revolving land 
acquisition fund should also give the GOI greater 
flexibility to acquire land before tendering projects. 
However, land titling and acquisition remain the greatest 
concerns for investors. 
 
Interest level Highest on Energy Projects 
------------------------------------------ 
 
¶13. (U) Interest among potential investors remains highest 
in Energy Sector projects, particularly in the electric 
power generation sub-sector.  The GOI offered two model 
projects in this sub-sector: 
 
--Central Java Coal-Fired Power Plant: A 1,200 MW coal-fired 
thermal plant developed on a build-own-operate basis at an 
estimated cost of USD 1.2 billion 
 
--Pasuruan Combined Cycle Power Plant, East Java: A 500 MW 
double chambered coal-fired plant developed on a build-own- 
operate basis at an estimated cost of USD 275 million. 
 
¶14. (U) Minister of Energy and Mineral Resources Purnomo 
Yusgiantoro said the GOI would strictly follow the KKPPI 
process for the two model electricity projects. The GOI has 
completed site studies and bidding documents for both 
projects, but potential investors must complete feasibility, 
environmental, and energy sourcing studies, according to 
Purnomo. Although Purnomo set a goal of getting the projects 
into KKPPI process by 2007, he was unable to give an exact 
timeline, noting much of the institutional structure of the 
KKPPI process is not yet fully functional. 
 
¶15. (SBU) Investors also focused their interest and 
questions on projects announced earlier in the year under 
the so-called 10,000 MW "crash program." The program aims to 
add 10,000 MW to the national grid by 2009.  To date, the 
GOI has identified 40 fast-track projects totaling more than 
8,750 MW. The largest project will be on the island of Java 
with planned operational dates of 2010. Purnomo said these 
projects must be transparent.  He also said GOI funding for 
these projects should not take precedence over those 
following the full KKPPI process. The two model electricity 
projects are former "crash" projects previously offered 
through direct bid.  Purnomo offered no explanation as to 
why the GOI had reclassified them as model projects. 
(Comment: A source at the ADB told us the bank had required 
the GOI to include two of the larger crash program power 
projects on the KKPPI as a condition for granting its $400 
million Infrastructure Reform Sector Development Program 
loan. End Comment.) 
 
Clarification on Public Service Obligations 
------------------------------------------- 
 
 
JAKARTA 00013237  006 OF 007 
 
 
¶16. (U) State electricity company PLN will be the first 
beneficiary of the 2003 GOI Public Service Obligation (PSO) 
compensation policy.  In the past, the GOI required State 
Owned Enterprises (SOE) to subsidize unprofitable basic 
services provided to the public through "hidden input 
subsidies," according to Finance Minister Sri Mulyani.  This 
opaque process hindered accountability as well as 
performance benchmarking of SOEs.  The GOI will now directly 
compensate the SOEs for the full cost of their PSOs.  PLN 
will receive direct compensation based on the difference 
between prevailing tariffs and the cost of supply. PLN may 
also seek reimbursement for costs such as electricity 
purchases and debt service.  The GOI included a Rp 35.5 
trillion (USD 3.8 billion) line item in the revised  2006 
budget to cover PLN's public service obligation. 
 
¶17. (U) The PSO policy also forms the basis for an indirect 
GOI guarantee for energy sector projects through an 
"umbrella agreement" between the Japanese Bank of 
International Cooperation (JBIC) and the GOI.  The agreement 
will allow JBIC financing of power projects without a GOI 
"comfort letter" or other blanket guarantee. According to a 
model project prospectus provided by the GOI, PSO subsidy 
funds may be used to meet any payment defaults by PLN.  The 
agreement apparently reiterates the GOI commitment to honor 
PSOs as provided for under Indonesian law.  The GOI has also 
stated its intent to use a similar, PSO-linked guarantee 
mechanism for power projects not funded by JBIC as well as 
projects in other sectors. 
 
¶18. (U) Investors in the forum expressed their frustration 
at the lack of deregulation in the electricity and mineral 
resources sectors.  Purnomo noted the GOI and Parliament are 
reviewing key energy deregulation laws, but decisions are 
not expected until 2007.  The key stumbling block to energy 
sector deregulation is the Indonesian Constitution which 
requires state ownership of sensitive industries. The 
Supreme Court struck down the 2002 electricity law as 
unconstitutional for this reason, and Purnomo offered no 
thoughts on how the GOI would craft a new law that meets the 
constitutional strictures while creating meaningful 
incentives for private investment. 
 
Development Banks Support, Japan and China Compete 
--------------------------------------------- ----- 
 
¶19. (U) Development lenders including the World Bank, the 
ADB, and JBIC signaled their strong commitment to support 
the GOI through program and project loans as well as 
financial support for the risk guarantee fund.  The ADB has 
completed negotiations on its USD 400 million infrastructure 
reform program loan and an associated USD 19 million project 
loan to support the establishment of an infrastructure 
"Project Development Facility."  The ADB and World Bank have 
signaled their willingness to contribute to the GOI's Risk 
Guarantee Fund.  Additionally, the World Bank has provided a 
USD 425,000 grant to build capacity at the RMU. 
 
¶20. (SBU) The Forum also highlighted continuing competition 
between Japan and China for Indonesian infrastructure 
projects, particularly in the power sector.  During SBY's 
late October trip to China, Energy and Mineral Resources 
Minister Purnomo signed agreements with Chinese companies 
for six coal-fired power projects worth USD 4.26 billion. 
Chinese companies have become major oil producers in 
Indonesia and are prominent on the list of firms competing 
for contracts under the 10,000 MW crash electricity building 
program.  Each of the Chinese bidders is allied with one or 
more Chinese banks offering export credits to finance the 
projects.  For its part, the Japanese government has 
aggressively used JBIC financing to win tenders, and JBIC 
financed the two large power plants in Java that came online 
in 2006.  Japan's Marubeni consortium recently won the 
rights for a 600 MW power plant in Cirebon. 
 
¶21. (SBU) If China has dominated in the electricity "crash 
program," Japan was the clear winner in the Infrastructure 
Forum.  Unlike the Infrastructure Summit of 2005 where 38 
 
JAKARTA 00013237  007 OF 007 
 
 
Chinese firms participated, the 2006 conference saw only 
four Chinese firms register. In contrast the forum featured 
a prominent role for Japanese presenters, including Fumio 
Hoshi, executive director of JBIC, and large numbers of 
attendees from Japanese companies. 
 
¶22.  (SBU) Comment. The Forum achieved one of its main goals 
-- reigniting interest in the GOI's infrastructure plan. 
Organizers presented a forum with significant access to top- 
level officials, and attracted broad participation by 
potential investors, suppliers, and service providers. 
Ministers Boediono and Mulyani were also convincing in their 
pledge to continue institutionalizing the KKPPI review 
process to gain the long-term confidence of private and 
international investors.  However, the Forum provided no 
major new announcements, and the paramount challenge over 
the next 6-9 months will be to begin moving projects to 
tender through the KKPPI process.  For all the GOI's good 
work, many investors remain skeptical, and overwhelmingly 
say they need to see at least one model project completed to 
convince them that infrastructure development in Indonesia 
will be transparent, fair, and competitive. 
End comment. 
 
PASCOE