From Asia Times

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
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