Indonesia 2016 Construction Outlook - Infrastructure Opportunities with Relative Risk and Challenges

INDONESIA 2016 CONSTRUCTION OUTLOOK: INFRASTRUCTURE OPPORTUNITIES WITH RELATIVE RISK AND CHALLENGES

BRIKSTATS CONSULTING

www.brikstats.com

May 2016 Edition

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INDONESIA 2016 CONSTRUCTION OUTLOOK

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Table of Content 1-7 Preface 8-9 Indonesia Megaprojects Coverage in the 'BrikStats Megaprojects Database’ 10-11 1: South East Asia Economic Performance 12 1.1: Overall Regional Economic Performance 12

Figure 1: Share of South East Asia GDP in Total Asia GDP, 2005-2017 13 Figure 2: Gross Fixed Capital Formation in the South East Asia, 2010-2014 14

1.2: Country Level Economic Performance 15 Figure 3: GDP Growth by Countries in the South East Asia region, 2010-2014

15 Figure 4: Control of Corruption Rank by Country, 2010-2013 16

1.3: Relative Positioning of Indonesia in the South East Asia region 17 1.3. A: Growth opportunities in the Indonesia market 17-18

Figure 5: Indonesia Rank in Top Coal Producers - Share in Global Coal Production, 2013

19 Figure 6: Indonesia Coal Exports, Million tons, 2002-2013 20 Figure 7: Indonesia Coal Exports To Other Countries: Share by Country, 2013

21 Figure 8: Indonesia Economic Development (Including Infrastructure) Plans at 3 main levels

22 1.3. B: Indonesia Market Challenges 23 - 24

Figure 9: Impact of Change of Coal Prices on Indonesia’ GDP growth rate 25 Figure 10: Indonesia Poverty Rate and Corresponding Impact on the Economic Growth

26

2: South East Asia Construction Market Size: Infrastructure Megaprojects Investment by Country and Indonesia Highlights

27



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Figure 11: Planned and Upcoming Infrastructure Megaprojects Spend in the South East Region, By Country

28 Figure 12: South East Asia - Ongoing Projects by Country with Indonesia’s Share

29

3: Megaprojects Infrastructure Opportunities in Indonesia: Detailed View 30 3.1: Indonesia Overall Infrastructure Investment and Spend 30

Figure 13: Indonesia Total Infrastructure Megaprojects Spend and Project Size: By Project Status

31

3.2: Indonesia Infrastructure Investment and Spend – Sector View 32 3.2. A: Indonesia Infrastructure Investment and Spend – Historical Spend by Sector 32-33

Figure 14: Indonesia Historical Infrastructure Megaprojects Spend and Project Size: Detailed Sector View

34 3.2. B: Indonesia Infrastructure Investment and Spend – Upcoming or Planned Spend by Sector

35 Figure 15: Indonesia Master Plan - Infrastructure Investment Plans till 2025: Sector Spend

36 Figure 16: Indonesia Upcoming Infrastructure Megaprojects Spend and Project Size: Detailed Sector View

38 3.3: Indonesia Infrastructure Megaprojects By Provinces and Sectors: Development through Indonesia – The ‘6’ Economic Corridors

39

Figure 17: Indonesia Six Economic Corridors and Respective Capabilities 40 Figure 18: Indonesia Infrastructure Master Plan – Spend by ‘Six Economic Corridors ‘till 2025

41 Figure 19: Indonesia Historical and Upcoming Infrastructure Megaprojects Spend: By Province

43 Indonesia Sector Priorities By Different Provinces 44

Figure 20: Indonesia Historical and Upcoming Infrastructure Megaprojects Spend By Province: Sector Split

45



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4: Indonesia Infrastructure Megaprojects - Public and Private Sector Ownership: Detailed Analysis

46 4.1: Change in Infrastructure Ownership: Split by Public, Private and PPP 46

Figure 21: Indonesia Historical and Upcoming Infrastructure Megaprojects: Ownership by Public, Private and Public Private Partnership

47

4.2: Role of the Private Sector in Infrastructure Megaprojects and Operating Model

48 Figure 22: Indonesia Private Ownership in Infrastructure Megaprojects: Spend By Project Status and Operating Model (Joint venture / Partnership or Standalone)

49

4.3: Change in Infrastructure Ownership by Public and Private: Sector View 50

Figure 23: Indonesia Infrastructure Historical and Upcoming Megaprojects – Sector Spend by Private and Public Owned projects

51 5: Public Private Partnership (PPP) in Infrastructure Megaprojects in Indonesia

52

5.1: Growth of Public Private Partnerships (PPP) in Indonesia Infrastructure Megaprojects

52 5.2: Implementation Models of Public Private Partnerships (PPP) in Indonesia Infrastructure Megaprojects: Concession Types

53 Figure 24: Indonesia Public Private Partnership (PPP) Infrastructure Megaprojects Spend: By Project Status and Concession type

54

5.3: Role of Public Private Partnerships (PPP) in Indonesia Infrastructure Megaprojects: By Sectors

55 Figure 25: Upcoming PPP Infrastructure Megaprojects in Indonesia: By Sectors

56 Figure 26: Historical and Upcoming PPP Infrastructure Megaprojects Spend in Indonesia: By Sectors

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5.4: Effectiveness and Efficiency of PPPs in Indonesia: Compared to Other South East Asian Countries

58-59 Figure 27: Comparison of Upcoming Spend on PPP Infrastructure Megaprojects in South East Asia with PPP Readiness Index: By Countries

60 6: Assessing Project Risks in the Indonesia Infrastructure

61 6.1: Indonesia Infrastructure Megaprojects Time Overruns/ Variations

62 Figure 28: Indonesia Infrastructure Time Overrun: Share of Megaprojects Undergoing Time Overrun – Detailed Sector Level

63

6.2: Indonesia Infrastructure Megaprojects Time and Schedule Overruns/Variations: Contributing Factors / Reasons

64 Figure 29: Indonesia Infrastructure Time Overrun: Contributing Factors or Reasons for Delay and Corresponding Impact on Time Revisions

65 7: Recent and Strategic Trends in the Indonesia Infrastructure Megaprojects

66 7.1: Greenfield versus Brownfield Infrastructure Megaprojects Spend in Indonesia

66

Figure 30: Indonesia Infrastructure: Greenfield versus Brownfield Megaprojects Spend – By Project Status

67 7.2: Change in Average Project Size of Infrastructure Megaprojects: Sectors Comparison

68

Figure 31: Indonesia Infrastructure Megaprojects: Comparison of Average Project Size By Sectors with Regional Average

69 8: Indonesia Infrastructure Mega Project Financing

70

8.1: Sources of Indonesia Infrastructure Mega Project Financing: Foreign Direct Investment (FDI) Growth in Indonesia and Relevance to Megaprojects

70

Figure 32: Indonesia Total Foreign Direct Investment (FDI): 2010-2014 71



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Figure 33: Indonesia Total Foreign Direct Investment (FDI): By Province / Economic, 2010 - 2014

72 Figure 34: Indonesia Total Foreign Direct Investment (FDI) By Source Country, 2014

74

8.2: Sources of Indonesia Infrastructure Mega Project Financing: Official Development Assistance (ODA) Growth in Indonesia and Relevance to Megaprojects

75

Figure 35: Indonesia Total Official Development Assistance (ODA): By Top Donors, 2008-2013

76 Figure 36: List of Top Infrastructure Megaprojects Financed Using Official Development Assistance (ODA) - By Donor

77 8.3: Indonesia Infrastructure Mega Project Financing: Project Debt to Equity Ratio with a Sector View

78

Figure 37: Indonesia Infrastructure Mega Project Financing: Debt to Equity Ratio by Sector

79 9: Indonesia Infrastructure Megaprojects Return Analysis: Internal Rate of Return (IRR) at Sector level

80

Figure 38: Indonesia Infrastructure Mega Projects Average Internal Rate of Return (IRR): For Mining, Oil and Gas, Roads and Railways

81 10: Indonesia Infrastructure Megaprojects Growth, Opportunities and Challenges: Sector Deep Dives

82

10.1: Indonesia Infrastructure Megaprojects Sector Deep dive: Power Sector

82

10.1.A: Current Status of Power Infrastructure in Indonesia: Electricity - A Growing Concern

82 Figure 39: Indonesia Electricity Demand- Historical and Forecasted, 2013-2022

83 Figure 40: Indonesia Electrification Rate and Population without Electricity, Compared to Other South East Asian Countries, 2012

84 Figure 41: Indonesia Forecasted or Targeted Electrification Rate as per Master Plan, 2014-2022

85



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10.1.B: Indonesia Government Measures to Tackle the Growing Electricity Challenges

86 - 87 Figure 42: Indonesia Power Production by PT PLN and Independent Power Producers (IPPs), 2000-2011

88 10.1.C: Indonesia Power Generation by Fuel Sources: Historical and Forecasted - Production and Investment

89 Figure 43: Indonesia Forecasted Power Generation Capacity - Expansion Plans: By Fuel type, 2011-2020

90 Figure 44: Indonesia Forecasted Renewable Energy Capacity Expansion Plans: By Power Plant Type, 2011-2020

91 Indonesia Power Generation by Fuel Sources: Infrastructure Megaprojects Spend by Type of Power Plant

92 Figure 45: Indonesia Power Generation Infrastructure Megaprojects: By Type of Power Plant – By Project Status

93 Figure 46: Indonesia Infrastructure Megaprojects, Power Generation Capacity Supply: By Project Status

94 10.1-D: Indonesia Power Infrastructure Megaprojects: Trends in Ownership and Top Investors

95 Figure 47: PT PLN and Independent Power Producers (IPP)- Power Generation Share in Total Installed Capacity: 2011- 2020

96 Top Owners in Indonesia Power Megaprojects: By Investment and Capacity 97

Figure 48: Market Share of Top Power Projects Owners in Indonesia Generation Capacity: By Status - Historical and Upcoming

97 10.2: Indonesia Infrastructure Megaprojects Sector Deep dive: Process Industries Sector

98

Figure 49: Indonesia Steel Consumption from 2001-2014 and Impacts on Domestic Production and Steel Imports, 2012-2014

99 Figure 50: Indonesia Infrastructure Industrial Megaprojects Spend: By Project Status

100 10.3: Indonesia Infrastructure Megaprojects Sector Deep dive: Railway Sector 101 10.3.A: Indonesia Current and Planned Railway Network 101 10.3.B: Indonesia Key Owners and Operators in the Railway sector 102

Figure 51: Indonesia Railway Infrastructure Megaprojects: Overview of Key Owners and Projects

103



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10.3.C: Indonesia Railway Infrastructure Megaprojects Investment– Historically and Upcoming Spend

104 Figure 52: Indonesia Historical and Upcoming Railway Megaprojects Spend: Breakdown by Type of Rail

105 10.4: Indonesia Infrastructure Megaprojects Sector Deep dive: Roads Sector

106 - 107

Figure 53: Indonesia Infrastructure Road Megaproject Spend: By Project Status

108 Figure 54: Indonesia Ongoing and Upcoming Road Megaprojects- Market Share of Project Owners

109 Figure 55: Global Competitiveness – Quality of Roads in the South East Asia Region and Indonesia Progress Highlights

110 10.5: Indonesia Infrastructure Megaprojects Sector Deep dive: Oil and Gas Sector

111

10.5.A: Indonesia has Substantial Oil and Gas Reserves 111 Figure 56: Share of Indonesia in the Gas Production and Gas Reserves within the Asia Pacific Region, 2014

112 Figure 57: Comparison of Oil Reserves in Indonesia and Vietnam, 2001-2014 113

10.5.B: Risk of Low Oil Production and Multiplying Demand 114 Figure 58: Oil and Gas Production and Consumption in Indonesia, 2001-2014 115

10.5.C: Key Producers in Indonesia Oil and Gas Sector 116 Conclusion on the Indonesia Infrastructure Megaprojects 117 - 118



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3.3: Indonesia Infrastructure Megaprojects By Provinces and Sectors: Development through Indonesia – The ‘6’ Economic Corridors Around the globe, ‘Concentrated development’ has been observed with fallouts when planning country’s infrastructure. By concentrated development, we refer to partial development in terms of areas. So far in Indonesia, megaprojects are concentrated in a few provinces. Other remaining locations have trifling investments in ancillary infrastructure. Since Indonesia’s infrastructure has been more focused towards energy sector, most of the projects are circling the areas rich in natural resources. These areas are mainly Sumatra, Kalimantan and Java. Also under the Master plan launched in 2011 - MP3EI, an important decision was made that included the development of economic corridors in the country based on the capabilities and capacity of each region throughout the country. This was divided into 6 economic corridors wherein different potential of the corridors has been identified and accordingly investments are likely to flow in. Additionally, to help these regions harness their best potential, Government is likely to invest more money in getting best of connectivity.



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Figure 17: Indonesia Six Economic Corridors and Respective Capabilities



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Figure 19: Indonesia Historical and Upcoming Infrastructure Megaprojects Spend: By Province

PROJECT DISTRIBUTION ACROSS THE COUNTRY IS CONCENTRATED, WITH TOP 10 PROVINCES FORMING X% OF THE TOTAL INFRASTRUCTURE SPEND. MOST OF THESE LOCATIONS HAVE BEEN IDENTIFIED AS THE ‘ECONOMIC CORRIDORS’

Source: BrikStats Megaprojects Database, Team analysis



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4.1: Change in Infrastructure Ownership: Split by Public, Private and PPP Indonesia has been traditional in dealing with infrastructure investments in the past. Most of the funding was coming from the Government with very limited private participation. Where many countries are depending on private investment for the benefit of the country, mainstream investor in Indonesia was the public sector. In Indonesia, the Government has always played a key role in developing the country’s infrastructure with very limited private participation. This is also a result of lack of interest from private investors. Setting profitable vision in Indonesia’s infrastructure business has been an up stretched ask. This has been mainly due to difficulty in doing business in Indonesia due to non-conducive environment, high corruption, legal and political issues in the country. Hence Government or State owned entities had to steer most of the mega projects. Historically, Indonesia’s public sector involvement was much higher than most of its peers like Philippines, Vietnam or Malaysia. Government owned projects accounted for 60-70% of the historical projects in Indonesia, where Philippines had even less than 40% of Government owned projects. Additionally, the private companies in Indonesia were more attracted towards mining and oil and gas projects due to higher returns. For country’s fast and smooth growth, it was further getting essential to invite these private players for other sector development like transportation. Henceforth, efforts are being made to allure the private sector in these megaprojects. In fact, as per project pipeline, one of the most astounding numbers is the growth of PPP in the country. We anticipate 40% higher contracts to be awarded under PPP format across different sectors like high speed rails or airport projects.

Chapter 4: Indonesia Infrastructure Megaprojects - Public and Private Sector Ownership: Detailed Analysis



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Figure 21: Indonesia Historical and Upcoming Infrastructure Megaprojects: Ownership by Public, Private and Public Private Partnership

IN THE PAST, PUBLICLY OWNED ENTITIES WERE THE KEY OWNERS AWARDING LARGE PORTION OF MEGAPROJECTS, HOWEVER THIS MAY NOT BE THE SAME IN FUTURE WITH A PARADIGM SHIFT TOWARDS THE PPP MODEL




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Figure 25: Upcoming PPP Infrastructure Megaprojects in Indonesia: By Sectors

PUBLIC PRIVATE PARTNERSHIP IS LIMITED TO ONLY FEW SECTORS; HAS BEEN OBSERVED MORE IN THE RAILWAY AND OIL AND GAS PROJECTS




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providing risk management and act as the single processor and provider of infrastructure guarantees. It includes providing contingent support for the Government by guaranteeing any contractual risks in relation to government actions; improving the quality of PPP transactions; pushing for a fixed and accountable approach for PPP implementation

o PT Sarana Multi Infrastructure Persero (PT SMI) is a non-bank financial institution owned by the Ministry of Finance for funding of infrastructure projects

Indonesia is clearly progressing in terms of setting up the required PPP framework. Also with plans to close the financing gap through PPP, Indonesia already has announced strong PPP project pipeline. However, it is still not very well positioned in terms of its PPP operations. We observed that projects did fail in attracting investors and few projects where investors were found, could not achieve successful financial closure. With Government Guarantee program, we expect that this might get partially resolved in future. The country however is majorly stuck in another issue that holds back the completion or delivery of projects and this is – land acquisition. Many projects in Indonesia get stuck due to site clearances and land acquisition. It shows the unfinished designing of PPP further translating into inefficiency in project deliveries. Indonesia faces many important challenges and despite many investors willing to invest their money into PPP projects in the country, land acquisition or project operational hindrances along with legal fissures and high corruption results in fettering progress. To check Indonesia PPP maturity, we compared the current PPP implementation programs in Indonesia with few other Asian countries like Vietnam, the Philippines and Thailand.



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Figure 34: Indonesia Total Foreign Direct Investment (FDI) By Source Country, 2014

Source: Bureau of Statistics Indonesia



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Figure 38: Indonesia Infrastructure Mega Projects Average Internal Rate of Return (IRR): For Mining, Oil and Gas, Roads and Railways

INFRASTRUCTURE PROJECTS IN INDONESIA OFFERS AN AVERAGE IRR OF X%, LOWEST BEING IN THE TRANSPORT SECTOR




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Figure 45: Indonesia Power Generation Infrastructure Megaprojects: By Type of Power Plant – By Project Status

IN TERMS OF PROJECTS, HUGE INVESTMENT HAS ALREADY BEEN MADE INTO HYDRO PLANTS; PIPELINE HAS COAL PLANTS AND ALSO FEW HYDRO PLANTS




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Top Owners in Indonesia Power Megaprojects: By Investment and Capacity As per the BrikStats Megaprojects Database, we see similar trends with PT PLN controlling the maximum number of projects and highest capacity contribution with >X% of the capacity contribution Figure 48: Market Share of Top Power Projects Owners in Indonesia Generation Capacity: By Status - Historical and Upcoming

POWER SECTOR REMAINS CONSOLIDATED WITH ONLY A FEW PUBLICLY OWNED ENTITIES CONTROLLING LARGE PORTION OF THE MEGAPROJECTS. MOST OF THE PROJECTS OWNED BY PT PLN ARE BEING IMPLEMENTED IN PPP MODEL




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- 10,000 km of railway network, double-track, electrification of Java main lines - Railway share 11-13% for passenger and 15-17% for freight transport - 7 key projects drawn under the plan are as under. Most of these have been aligned

with the developments in the 6 economic corridors. The priority will be the ones important for the economic corridors.

o Sumatera Rail Network plan in 2030 to be 2,856 Km o Batam Island Rail Network Plan in 2030 to be 44 Km o Java Rail Network Plan in 2030 to be 6,324 Km o Bali Island Rail Network Plan in 2030 to be 326 Km o Kalimantan Rail Network Plan in 2030 to be 1,400 Km o Sulawesi Rail Network Plan in 2030 to be 500 Km o Papua Rail Network Plan in 2030 along 500 Km

10.3-B: Indonesia Key Owners and Operators in the Railway sector Ministry of Transportation in Indonesia is the main governing body in the railway sector and PT KAI as the primary operator of currently existing networks. Below chart depicts different companies currently involved in the country’s railway sector.



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Figure 52: Indonesia Historical and Upcoming Railway Megaprojects Spend: Breakdown by Type of Rail


Indonesia 2016 Construction Outlook - Infrastructure Opportunities with Relative Risk and Challenges

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