Investing in Indonesian Infrastructure May 2005 15

Investing in Indonesian Infrastructure
A Guidebook for European Companies

EU – Asia-Invest
Consultants and Authors of this Report:

Mr François CHERER (SEMA, Belgium; [email protected])
Mr Bruno DERCON (PT Novaticon Indonesia, Indonesia; [email protected])
Mr S.V. DIVVAAKAR (Ace Global Private Limited, India; [email protected])
Mr Agus Ahadi DERADJAT (Ali Budiardjo, Nugroho, Reksodiputro, Indonesia; [email protected])
SEMA Belgium
Rue de Stalle / Stallestraat, B-1180 Brussels
Tel: +32-2-333-55-11 - Fax: +32-2-333-55-22
Email: [email protected]
Website: www.atosorigin.be
This report has been produced with the assistance of the European Union under the Asia-Invest programme. The
views expressed herein are those of the consultant and can therefore in no way be taken to reflect the views of
the European Union.
Foreword.
This Guidebook is the result of a study on infrastructure investment for European investors in Indonesia. The
Guidebook has been prepared under contract for the European Commission with funding for both the research
and production of the Guidebook financed by the Asia-Invest Programme of the EuropeAid Cooperation Office.
This Guidebook and the research behind it are the work of SEMA BELGIUM. In the course of their research, the
consultants held interviews with government officials and business executives in Indonesia and in several busi-
ness centres of the EU Member States in order to validate current financial and factual information, and to gain an
insight into the perceptions, motivations and experiences surrounding European investment in Indonesia from
both viewpoints.
The Guidebook attempts to deal with the various topics that are likely to be relevant to potential investors and also
includes useful internet and email addresses in order to allow investors to update their information.
The material in the Guidebook is solely provided for the guidance of those contemplating investment, but it is no
substitute for professional advice, which should be sought before taking any specific action. The information in
this document is believed to be correct as of April 2005 but no responsibility is taken for its accuracy.
This report has been produced with the assistance of the European Union under the Asia-Invest Pro-
gramme. The views expressed herein are those of the Consultants and can therefore in no way be taken
to reflect the views of the European Union.
page 2 Investor’s
Study on Infrastructure Investment in Indonesia
The Asia-Invest II Programme is an initiative of the European Commission to promote and

support business co-operation between the EU and Asia. The Programme provides assistance to
business organisations to facilitate mutually beneficial partnerships between companies, in
particular small and medium-sized enterprises (SMEs), in the EU and South and South-East Asia
and China; as well as to strengthen the business environment to increase trade and investment
flows between the two regions.
Asia-Invest Programme
European Commission
EuropeAid Co-operation Office
B-1049 Brussels, Belgium
Tel: +32-2-298 4873
Fax: +32-2-296 5833
Web site: www.europa.eu.int/comm/europeaid/projects/asia-invest
EUROPEAN UNION
Delegation of the European Commission to Indonesia, Brunei Darussalam and East Timor
Wisma Dharmala Sakti, 16th floor
Jalan Jenderal Sudirman 32
Jakarta 10220, Indonesia
Postal address : PO Box 6454 JKPDS, Jakarta 10064, Indonesia
Tel: (62 21) 570 6076
Fax: (62 21) 570 6075
Website: delidn.cec.eu.int/en
The European Business Chamber of Commerce in Indonesia (Eurocham) was established in

Jakarta on 11 May 2004 as an association to represent the views of the business community of
the member states of the European Union in Indonesia. The founding members consisted of 25
companies and 4 national chambers or business associations.
Eurocham’s principal objectives are to facilitate contact and communication within the European
business community in Indonesia and to commence and establish constructive dialogue with the
Indonesian authorities and the Indonesian business community in order to detect and nurture
business relationships.
For those interested to join and become a member of the Chamber, it will be obligatory for a
member to be or remain members of its respective bilateral organisation.
EUROCHAM - The European Business Chamber in Indonesia

World Trade Centre, 10th Floor
Jalan Jenderal Sudirman Kav 2931
Jakarta 12920, Indonesia
Tel: (62 21) 521 1650
Fax: (62 21) 521 1651
Website: www.eurobusiness.com
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EU – Asia-Invest
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page 4 Investor’s
I. Executive Summary.
From Recovery to Reconstruction.
2004 has been a threshold year for Indonesia, after the turbulent years that followed the
1997 financial crisis and the 1998 downfall of the Suharto regime. The first and flawless di-
rect presidential election and a GDP growth again above 5% are indications that a process of
painful political, social and economic recovery has seen the worst and that the gains of this
process – more democracy and a more robust economy – may now be consolidated. There
is indeed cause for optimism.
GDP per capita figures have recovered to 1995 levels, notwithstanding the fact that the
population grew by 20 million people and that unemployment among the labour force dou-
bled. Inflation is under control and the exchange rate has stabilised in a rough trading band.
This is remarkable if one considers the disastrous headline news from Indonesia in the past
five years, with regard to military violence in East Timor, civil violence in Aceh, Kalimantan,
Sulawesi, Ambon and Papua. Added to this came terrorist attacks and natural disasters, in-
cluding the massive impact of the Tsunami of 2006, which killed an estimated 285,000 peo-
ple and caused damage to the extent of US$ 4.5 billion.
With a new administration under President Susilo Bambang Yudhoyono, Indonesia’s policy
focus is now to move beyond economic recovery and towards reconstruction of its productive
economy. The new Government maintains the basic policy commitments of the previous
administration, based on three key goals: (1) maintaining macro-economic stability; (2) con-
tinuing the restructuring and reforming of the banking and financial sector, and (3) increasing
the level of investments, exports and employment creation. A strengthened Ministry of Fi-
nance and an independent Bank Indonesia have gained credibility in safeguarding the first
two goals – as reflected in the slow but steady upgrading of Indonesia’s sovereign rating
from CCC+ in 1998-’99 to B+ (S&P) in late 2004.
However, the starting base line for Indonesia’s economic reconstruction is a low one. In-
vestment halted as a result of the 1997 crisis, and got subsequently stifled by political, social
and legal bottlenecks. Meanwhile, Indonesia’s manufacturing competitiveness vis-à-vis other
low-income countries such as Vietnam and China declined considerably. Other constraints
include high public debts and budget pressures The Government faces a budget deficit in the
range of 4% of GDP. Due to the Tsunami, it has been granted a temporary moratorium on
debt repayments by the Paris Club. Budget shortages will be covered by new government
bonds and bank financing, by further privatisations and asset sales and by donor country as-
sistance, as approved in the January 2005 CGI meeting of donor countries and multilateral
agencies.
These financial constraints make government-led investment unlikely to grow in the next few
years. The Government has barely stabilised the banking system and still has substantial
amounts of money tied up in the sector. Government actions will be limited to easing invest-
ment bottlenecks and to re-allocate subsidies more productively. Re-channelling private sav-
ings, which includes savings in pension funds, towards longer-term investments with an
adequate risk-return profile is therefore a high priority. Infrastructure could become good can-
didates. Finally, another major constraint has been the weak investment environment due in
large part to serious flaws in the legal and regulatory framework and to unpredictable law en-
forcement.
Notwithstanding these obstacles, there have been areas of excellent performance in the In-
donesian economy, with many companies showing excellent results. A number of consumer
companies, car makers and plantation companies have done very well. Property investments
Guidebook page 5
EU – Asia-Invest
have resumed and the Jakarta Stock Exchange Index rose by 175% from early 2003 to Feb-
ruary 2005. Indonesia’s recovery has been supported not only by local consumption, but also
by local production.
Indonesia has also benefited from the economic boom in China in recent years, giving it a
trade surplus of US$ 1 bn in 2004. Rising commodity and energy prices have increased ex-
port earnings.
The 2005 – 2009 agenda.

The Government has set out three major objectives for the coming years: improving the in-
vestment climate, solving infrastructure bottlenecks, especially in electricity generation and
transportation, and developing a rural development strategy that will diversify agriculture into
higher-value added activities and stimulate growth in the rural non-farm economy.
Infrastructure investment
At the recent Infrastructure Summit, the Government presented a number of reasons for
pushing infrastructure development with the help of private investors: needs have been un-
der-serviced to due to under-investment since 1997, investment in major infrastructure pro-
jects will accelerate economic growth and employment.
Furthermore, the Government sees infrastructure as a key issue for improving the productive
structure of the economy.
The government had been trying since 2000 to revive infrastructure investment. The IMF-
funded austerity programme of 1997-1998 had obliged it first to put on hold and then cancel
twelve large infrastructure programmes, including large power generation and toll road pro-
jects. Later, terrorist attacks and political instability were among the reasons for further post-
ponement of infrastructure projects.
The Infrastructure Summit of January 2005 revived an ambitious agenda to implement policy
and regulatory changes to enhance Public-Private-Participation for infrastructure develop-
ment and funding. The Government also expressed a willingness in principle to look again
into possible government guarantees, albeit not in the form of new sovereign blanket guaran-
tees.
An analysis of the infrastructure “road-map” including a list of 91 projects presented by the
government leads to the following observations: 90% of the projects are located on Java and
the Jakarta-West Java region is the best market for infrastructure investments for private in-
vestors. Projects in other areas in Java are more time-sensitive and should avoid execution
delays during their pay-back period. Projects in other areas in Indonesia are less attractive
for private investors.
The legal and regulatory framework for investment in infrastructure

Since the 1990s, the government has strived to promote the participation of the private sec-
tor in the provision of infrastructure by creating an enabling policy, legal and regulatory
framework. The previous government had already taken significant steps in several areas: a
new telecommunications law had been enacted in 1999, paving the way for the introduction
of competition in the sector, and new laws had been passed in the oil and gas sector in 2001
and in the toll road sector in 2004.
In 2002, the Government had also issued a new law on electricity that allowed privatization
and competition in electricity supply. However this law was annulled by the Constitutional
Court who deemed electricity supply should remain a state monopoly. The government is
page 6 Investor’s
drafting a new law, the contents of which are not yet known. It will be important to see how it
will reconcile the Constitutional Court’s ruling and the government’s objective to introduce
competition in the power sector.
At the Infrastructure Summit, the government stated its policies and agenda to reform laws
and regulations affecting infrastructure investment. These include the establishment of inde-
pendent regulatory bodies to oversee the functioning of the different sectors, a move towards
competition between operators where there is scope for competition, or where there is a
natural monopoly, create competition for the business and the definition of clear tariff setting
rules.
The Government also plans to amend the existing Foreign Investment Law with the intention
of simplifying the existing licensing procedures and providing improved legal certainty to in-
vestors. One of the main objectives of the new law is to eliminate discrimination between for-
eign and domestic investors.
The new law will also reform the role and functions of BKPM from a licensing body to a regis-
tration body, in addition to its promotion role as an Investment Promotion Agency.
The effective implementation of this ambitious reform agenda will be a critical element of the
overall action plan towards revitalising investment in infrastructure. It will entail not only the
enactment of new laws but also the effective implementation of regulations.
Sector analysis
A detailed evaluation of sector size and growth potential for the power, telecommunications,
transportation, and water and sanitation sectors is provided in the report. The main conclu-
sions and issues relevant to investment decisions are the following:
Power
Demand growth is brisk for the coming 5 years, but not dramatic; With the previously shelved
and re-introduced IPPs to deliver about 7 GW and with a number of projects on PLN’s own
account added to this, large region-wide black-outs may be avoided; Pressure towards more
comprehensive energy reliability may remain weak in the coming years : the annulment of
the Electricity Law prohibits competition; demand can be just met with scheduled production
expansion; The planning of capacity expansion on Java which can accommodate new indus-
trial investments is absent; Capacity expansion outside Java is very urgent, as black-outs are
common. However, there is only limited pressure on PLN to divert attention away from its
core market of Java-Bali; The provision of integrated gas supply infrastructure is crucial for
energy reliability and supply stability; As long as the existing legal and regulatory framework
is in place, PLN will remain the sole buyer of power, and it will likely insist on being a partner
in all new IPPs; The current uncertainties in the institutional and regulatory environment are
likely to discourage potential investors.
Telecommunications
Demand growth is to remain strong for a long time to come, but the growth figures will be-
come increasingly manageable for the established companies; Deregulation and privatisation
have already been achieved to a large extent, making new entrants more likely to happen as
a result of buy-outs, strategic alliances and the introduction of patented substitute technolo-
gies; Deregulation is also achieving the construction of a more hybrid and reliable backbone
and gateway infrastructure; this is likely to result over time in better pricing for national long-
distance traffic; In effect, telecommunications investment is no longer decided by the Gov-
ernment alone but by a limited number of established companies; The regulatory infrastruc-
ture accompanying deregulation is still far from complete, leaving most industry initiatives in
the hands of established and dominant players which implies that they will have a strong
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EU – Asia-Invest
voice in setting new technological standards; Investments in new data technologies is on-
going on Java’s urban centres; better access to telecommunication services in remote / rural
areas may be expected over time due to technological advances in wireless technologies
and as a result of competing backbones traversing the larger main outer islands; rural access
is unlikely to benefit from substantial government investments; The Infrastructure Summit did
not substantially address the telecommunications sector by only proposing the Palapa O2
Ring Backbone project.
Transportation
Demand growth for transport infrastructure is strong and over time solid; Overall, the gov-
ernment reasonably projects a transportation growth of 17.2% p.a. if the economy achieves
to grow at 6.6%; Capacity extensions of terminal infrastructure is urgent, although efficiency
improvements may buy enough time for better planning; The planning of integrated and com-
plementary transportation networks, which should include the development of high-speed
inter-city and suburban amenities, is not carried out with sufficient thoroughness and sense
of priority.
At the Infrastructure Summit, the Government presented investment proposals which were
mostly projects that had been shelved during the crisis; The selective approach shows more
pragmatism than concerted planning, although the rates of return on these projects have not
drastically changed; The pay-back of most infrastructure investments on Java simply de-
pends on steady demand growth and unlikely on multipliers due to an increased inter-
connectivity of transportation networks; The longest pay-back is to be expected from inter-
city amenities, rates-of-return depending heavily on a late pay-back (e.g. within the last five
years of the concession period); State-owned Enterprises control most investment decisions;
Revenues of most of the projects are in local currency; Local-currency long-term investment
vehicles, such as a Transportation Fund, are non-existent as for now.
Water and sanitation

Demand growth is substantial, but demand elasticity is not always large, due to the availabil-
ity of supply alternatives; The Water Resources Law stresses a comprehensive approach to
water management, but it is not clear how this will impact municipal water management
which is presently fragmented; Most PDAMs are neither financially nor organisationally ready
or open even in principle for genuine public-private partnerships; Private-sector water provi-
sion is fraught with past failures, except for small packaged deals for industrial and up-
market residential developments; The pay-back of most water infrastructure investments is
very uncertain due to the financial condition of most PDAMs, but also due to the absence of
independent arbitration mechanisms in relation to tariff setting and for attributing responsibil-
ity in case of service failure; The present emphasis on private-sector participation is more
about the raising of construction finance and the securitisation of the repayment of this fi-
nancing, rather than about the injection of management expertise; due to the weak credit
worthiness of PDAMs but also of local administrations (which cannot give viable multi-year
commitments), the guarantees on repayments are likely to be more political than strictly fi-
nancial; All revenue is in local currency.
EU’s position in the Indonesian infrastructure sector.

The presence of EU companies in the four main infrastructure sectors (energy, telecom,
transportation and water) is significant.
In the oil and gas sector, EU companies like BP, Shell and Total are among the largest for-
eign investors in Indonesia. EU companies have been the dominant foreign investors in the
page 8 Investor’s
water supply sector, with Ondeo Services (formerly Lyonnaise des Eaux) and Thames Water
operating water distribution companies in Jakarta.
EU companies have had a significant presence in the telecom sector until 2002, but several
companies (France Telecom, KPN, Deutsche Telecom) have exited or reduced their pres-
ence in Indonesia. However EU companies still dominate the telecommunications equipment
market, with the strong presence of Alcatel, Ericsson, Nokia, Pirelli and Siemens.
In the power sector, EU companies have a significant share of the equipment and supplies
market, with firms like ABB, Alstom and Siemens.
Generally, he EU is highly regarded as a source of technology, best practices, capital goods
and investments in all infrastructure sectors. EU companies in Indonesia are present across
the spectrum of activities: investors/operators, equipment suppliers, technology solution pro-
viders, and consulting/engineering.
EU companies met in the study are generally optimistic about the market opportunities in In-
donesia over a ten-year horizon. Companies that are present in Indonesia remain positive
about their investment prospects in Indonesia. Companies that are providers of equipment
and services are more optimistic than operators. Some companies who did not state positive
intentions on investing in Indonesia attributed their low or reducing interest to their global
strategies, which saw a withdrawal from Asia, and concentration on other emerging markets
in Europe and Latin/South America.
Key issues in enhancing investment in infrastructure.

EU companies cite major risks in implementing infrastructure projects, arising from uncertain-
ties related to land acquisition, overlap and conflict among various implementing regulations
and laws issued by the central and regional government, non-market tariff setting by regula-
tors, the duality of the government’s role as an operator and as regulator.
EU companies also point to poor governance and corruption as important issues.
The most important concern of foreign investors including EU companies in Indonesia is the
lack of confidence in the judicial system to resolve disputes legally, under the provisions of
contracts.
Furthermore, EU companies engaged in infrastructure activities stress the following key is-
sues that are seen as major factors affecting investors’ adherence to the government’s re-
cent initiatives, as exposed at the recent Infrastructure Summit: Lack of an overall
government policy on the private provision of infrastructure; Lack of a comprehensive “Mas-
ter Plan” for each key sector of infrastructure with a clear indication of the private sector’s
role; Lack of a firm institutional framework for the implementation of infrastructure policies
and projects.
Recommendations for prospective EU investors.

Investing in infrastructure projects in Indonesia can be envisaged best by companies who
have prior experience in the country. The following options are recommended:
European companies with strengths in competitive sectors (mainly power and telecoms)
should actively build or strengthen alliances both with Asian investment companies and with
European financial institutions.
European companies with strengths in sectors which are dependent on donor finance and/or
heavily controlled by Indonesian State-owned Enterprises (i.e. transportation, including O&M
of terminals; water and sanitation) will unlikely identify a significant number of viable invest-
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EU – Asia-Invest
ment opportunities. It therefore implies the necessity for long-term aid-based engagements in
accessing immature market environments at municipal and sub-national levels in general. In
the short term, this may mean no more than small projects and/or feasibility study work.
Infrastructure investment will clearly lead to opportunities for studies, engineering services,
supply, construction and operations and maintenance. Supply contracts will be easier to a
access in sectors where competition is better established (power and telecoms). The proce-
dures for fairer tendering and for reasonable forms of dispute resolution are here better es-
tablished compared to sectors where competition is low (transportation and water).
Sectors which lower levels of competition may see foreign investment participation, but more
likely in packaged development schemes which will include large Indonesian companies, in-
cluding State-owned Enterprises. Participating in such foreign or foreign-local investment
set-ups may still be beneficial for European companies, as long as scale-advantages or rela-
tively risk-free sub-contracting modalities can be ascertained. Of special interest here are
future multi-year construction contracts, e.g. for gas pipelines and potentially in the rail sec-
tor.
With regard to business opportunities where know-how is more heavy on issues of opera-
tions and maintenance (municipal water, toll road management, but also the management of
air and sea terminals), investors need to be cautious and learn from past experiences. In
case of new turn-key investments with a B.O.T. component, it is advised to focus on new
ventures and not on ventures which need to receive revenue flows from existing operations.
All O&M operations where revenues are in Rupiah and/or defined by tariffs set by third-party
agencies are also high-risk.
page 10 Investor’s
II. Table of Contents.

Foreword ................................................................................................................................... 3
I. Executive Summary. ............................................................................................................ 5
II. Table of Contents ............................................................................................................... 11
III. List of Abbreviations and Acronyms ................................................................................... 13
Chapter 1. Indonesia’s Economy: Review and Outlook. ......................................................... 15

1. The 2005 Agenda : From Recovery to Reconstruction. ............................................................... 15
1.1. Strengthening Fundamentals................................................................................................... 15
1.2 Goals of the New Cabinet versus External Expectations. ....................................................... 16
1.3. A Weak Investment Climate..................................................................................................... 17
1.4. Bright Spots. ............................................................................................................................ 19
1.5. Present Budgetary and Monetary Conditions........................................................................... 21
2. The 2005-2009 Agenda: an Outlook............................................................................................... 23
2.1. The Government Programme. ................................................................................................. 23
2.2. Work Ahead: Improving Indonesia’s Fundamental Structure. .................................................. 24
Chapter 2. Infrastructure Investment in Indonesia. ................................................................. 27

1. Rationale for Private Investment in Infrastructure Development................................................ 27
1.1. Rationale of the Government of Indonesia............................................................................... 27
1.2. Rationale of Public Private Partnership in Infrastructure Investment........................................ 29
2. Rationale of The Government Infrastructure Policies.................................................................. 32
2.1. Background of the Summit Appeal for Private Investment. ...................................................... 32
2.2. The Infrastructure Agenda of the New Cabinet. ....................................................................... 32
2.3. The $ 145 bn Question : Matching Infrastructure and Financing Needs................................... 36
3. Micro-Economic Impact of the Government Policies................................................................... 39
3.1. A Sub-National Supply and Demand Analysis. ........................................................................ 39
3.2. Sub-National Risk Environment for Infrastructure Investments. ............................................... 45
Chapter 3. The Legal And Regulatory Framework, and the Financial Framework for Private
Participation in the Provision of Infrastructure. .................................................................. 47
1. Legal and regulatory framework.................................................................................................... 47
1.1. Overall framework.................................................................................................................... 47
1.2. Foreign direct investment in the infrastructure sector............................................................... 49
2. Financial framework. ...................................................................................................................... 54
2.1. Equity. ..................................................................................................................................... 55
2.2. Debt......................................................................................................................................... 56
2.3. EC Programmes ...................................................................................................................... 58
Chapter 4. Sector Profiles. ...................................................................................................... 59

1. Energy Sector.............................................................................................................................. 59
1.1. Size of the Sector, Growth Potential and Outlook. ................................................................... 59
1.2. Legal and regulatory framework .............................................................................................. 66
2. Telecommunications. ................................................................................................................. 71
2.2. Legal and regulatory framework. ............................................................................................. 75
3. Transportation Sector................................................................................................................. 78
4. Water and Sanitation Sector. ..................................................................................................... 92
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Chapter 5. Positioning of EU companies in the Infrastructure Sector. ................................. 101

1. A Review of EU Companies operating in Infrastructure Sectors. ............................................. 101
2. The positioning of European Companies. ................................................................................. 102
Chapter 6. Key Issues in Enhancing Investment in Infrastructure......................................... 105

1. Assessment of the Business Environment. ............................................................................... 105
2. EU investors’ Expectations. ...................................................................................................... 107
Chapter 7. Recommendations for Prospective European Investors. .................................... 109

1. Capabilities in Project Finance.................................................................................................. 109
2. Capabilities in Infrastructure Development,
but no particular strengths in Project Finance........................................................................... 110
3. Partnering. ................................................................................................................................ 112
Annex 1. Legal and regulatory framework............................................................................. 115

Foreign Investment in Indonesia ..................................................................................................... 115
The Foreign Investment Law ........................................................................................................ 115
Government Procurement Mechanism ......................................................................................... 120
Other Matters................................................................................................................................ 122
SCHEDULE 1 - NEGATIVE LIST ................................................................................................... 126
ANNEX A1: List of Business Fields Completely Closed to Investment ......................................... 126
ANNEX A2: List of Business Fields Closed to Investment for Companies
with Foreign Capital and/or Foreign Legal Entities. ..................................................................... 126
ANNEX B: List of Business Fields Open to Investment by Way of Joint Venture
between Foreign Capital and Domestic Capital........................................................................... 126
ANNEX C: List of Business Fields Open to Investment Under Certain Conditions........................ 127
ANNEX D: Sectors/Types of Business Reserved for Small-Scale Enterprises ............................. 127
ANNEX E: Sectors/Types of Business Open to Medium-Scale or Large-Scale Enterprises in
Cooperation with Small-Scale Enterprise under the Partnership System .................................... 127
SCHEDULE 2 – FIELD OF BUSINESS AVAILABLE
IN THE INFRASTRUCTURE SECTOR .......................................................................................... 128
SCHEDULE 3 – PMA COMPANY ESTABLISHMENT ................................................................... 132
ANNEX 1: Setting Up a PMA Company........................................................................................ 132
ANNEX 2: Form of Model I Application ......................................................................................... 136
SCHEDULE 4 – PROCUREMENT AND TENDERS....................................................................... 139
ANNEX A: Selection of Vendors for Procurement......................................................................... 139
ANNEX B: Tender Procedures for Infrastructure .......................................................................... 141
SCHEDULE 5 – COURT PROCEEDINGS IN INDONESIA ..................................................................
Annex 2. Directory of Major Indonesian Companies in the Infrastructure Sector.................. 148
Annex 3. Selected List of Consulted Persons, Companies and Institutions.......................... 154
Annex 4. Bibliography and Sources of Information. .............................................................. 158
III. List of Acronyms.

ADB Asian Development Bank
ASEAN Association of South East Asian Nations
BAPPENAS National Development Planning Agency
BKPM Investment Coordinating Board
BOO Build Operate Own
BOT Build Operate Transfer
BPJT Indonesian Toll Road Authority
BPS Indonesian Central Statistics Office
BUMD Regional Government-owned Enterprise
BUMN State-owned Enterprise
CGI Consultative Group on Indonesia
DPR House of Representatives
DPRD Local Council
EC European Commission
EIB European Investment Bank
EU European Union
FDI Foreign Direct Investment
GDP Gross domestic Product
GoI Government of Indonesia
GR Government Regulations
IBRA Indonesian Bank Restructuring Agency
IMF International Monetary Fund
IPP Independent Power Producer
JABOTABEK Jakarta-Bogor-Tangerang-Bekasi Region
KABUPATEN District Government
SMEs Small and Medium Enterprises
SOE State-owned Enterprise
IRRs Implementing Rules and Regulations
JAMALI Jawa, Madura, Bali
KADIN Indonesia’s Chamber of Commerce
KEPRES Presidential Decree
KKPPI Committee for the Acceleration of Infrastructure Development
KPK Anti Corruption Commission
LPG Liquefied Petroleum Gas
MOF Ministry of Finance
MOHA Ministry of Home Affairs
MSRI Ministry of Settlements and Regional Infrastructure
NBFI Non-bank Financial Institution
PDAL Waste water Utility Company
PDAM Local Water Company
PLN State Electricity Company
PPI Private Provision of Infrastructure
PPP Public-Private Partnership
PROPENAS National Development Plan
Rp Rupiah
TELKOM State-owned Telecommunications Company
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Chapter 1.
Indonesia’s Economy: Review and Outlook.
This chapter investigates the present economic environment of Indonesia and indicates key
social and political issues in relation to economic development. In the first part, a review is
presented on macro-economic fundamentals, country risks, micro-economic bottlenecks and
financial burdens. The second part briefly indicates the programme and the challenges
ahead of the newly elected President Susilo Bambang Yudhoyono and his Cabinet, which
will govern the country from 2005 to 2009.
However, many investments in infrastructure have longer time horizons than the time span of
a single cabinet. Decision-making, construction, operations management and cost recovery
can take time spans of 10 to 40 years. An economic analysis should therefore identify longer-
term developments and longer-term fundamentals. As a result, the following discussion looks
often back to the years before the 1997 crisis and, when necessary, even to the 1970’s and
1980’s.
1. The 2005 Agenda : From Recovery to Reconstruction.

1.1. Strengthening Fundamentals.
2004 has been a threshold year for Indonesia for overcoming the turbulence following the
1997 financial crisis and the 1998 downfall of the Suharto regime. The first and flawless di-
rect presidential election and a GDP growth again above 5% are indications that a process of
painful political, social and economic recovery has seen the worst and that the gains of this
process – more democracy and a more robust economy – may now be consolidated. There
is indeed cause for optimism.
Table 1-1 shows that GDP-levels per capita have recovered to 1995 levels, notwithstanding
the fact that the population grew with 20 million people and that unemployment among the
labour force doubled. The table also shows
Box 1-2. A painful political, social and that inflation is now relatively under control and
economic recovery. that the exchange rate has stabilised in a
In the past few years, a number of issues have rough trading band. That exchange rate has
found consolidation in Indonesia : actually proven itself more vulnerable to in-
Democracy: albeit in an often chaotic way, flows and outflows of foreign currency, as part
Indonesia has set into motion processes of de-
militarisation, democratisation and decentrali- of debt settlements or as a result of confidence
sation. For all of these processes, progress is issues. The pegging and soft-pegging policies
only half-way. Legal and institutional changes practiced by National Banks in other East
are still subject to numerous turf battles be- Asian export economies has not been a key
tween interest groups.
policy issue of Bank Indonesia. Nonetheless,
Financial stabilisation: the IMF-assisted res-
cue operation of the Indonesian financial sys- the indicators show that the Indonesian econ-
tem has stabilised the banking system. The omy has left the storms of the late 1990’s and
severe impact of this operation on inflation, in- arrived in slightly more predictable waters.
terest rates, government debt and the country’s This is remarkable if one considers the disas-
sovereign rating is slowly subsiding.
trous headline news from Indonesia in the past
Social-economic recovery: earlier poverty
alleviation programmes, set up during the peak five years, with regard to military violence in
crisis years with loans and grants of the major East Timor, civil violence in Aceh, Kalimantan,
multilateral lending agencies, averted an im- Sulawesi, Ambon and Papua. Added to this
plosion of local consumption. At present, the came terrorist attacks and natural disasters,
economy is characterised by strong consump-
tion levels which are supported by an im- including the massive impact of the Tsunami of
proved overall local confidence. A strong 2006, which killed an estimated 285,000 peo-
world commodity market in the past four years ple and caused damage to the extent of US$
has undoubtedly assisted this recovery.
4.5 bn.
Guidebook page 15
EU – Asia-Invest
Table 1-1. Macro-Economic Indicators. (various sources)

1992 1995 1998 2001 2004
GDP annual growth (%) 7.2% 8.2% -13.1% 3.5% 5.1%
GDP per capita (current US$) 754 1,043 487 675 1,178
Population (mio) 186 195 204 209 216
Unemployment rate (%) 4% 4.5% 6% 8% 9.5%
Consumer price inflation (%) 7.5% 9.4% 58.5% 11.5% 6.4%
US$-Rupiah average conversion rate 2,050 2,250 9,600 10,400 8,900
The 2004 increase in the GDP per capita is related to economic growth and a recovering exchange rate but
also to a re-basing and re-weighting of the GDP calculations. The latter has increased the GDP levels by up
to 17% compared to earlier calculations. At the previous weighting, GDP per capita (current US$) would have
hovered around US$ 1000 in 2004. The new measurements relate to new economic activities, such IT, but
also to under-measurements in the past. The relative resilience of the country during the acute crisis years
warranted such closer look. The re-basing has also lowered many other ratio’s, such as debt to GDP.
1.2 Goals of the New Cabinet versus External Expectations.

With the emergence of a new administration under President Susilo Bambang Yudhoyono,
Indonesia’s policy focus is now to move beyond economic recovery and towards reconstruc-
tion of its productive economy. The Cabinet includes strong pro-business ministers and pro-
claims a programme that heralds tackling corruption, improving legal certainty and
accelerating investment.
The new Government still underwrites the basic policy commitments of the previous admini-
stration, which were formulated in mid 2003 when the Extended IMF Fund Facility was about
to end. The Megawati Government published an Economic Policy Package, also known as
the White Paper, that contained measures focused on three key goals: (1) maintaining
macro-economic stability; (2) continuing the restructuring and reforming of the banking and
financial sector, so as to assure financial reliability and (3) increasing the level of invest-
ments, exports and employment creation. A strengthened Ministry of Finance and an inde-
pendent Bank Indonesia have already gained credibility in safeguarding the first two goals –
as for instance reflected in the slow but steady upgrading of Indonesia’s sovereign rating
from CCC+ in 1998-’99 to B+ (S&P) in late 2004. Nonetheless, as Figure 1-1 shows, Indone-
Figure 1-1. (Standard and Poor; OECD)
Regional Sovereign Credit Ratings and Country Risk

AA+ AA+ best
AA- AA- 1
Malaysia China
A- A- Malaysia 2
Korea
China
BBB+ BBB+ Thailand
India 3
BBB Thailand BBB
Investment Grade
India 4
BB BB
Philippines Vietnam
Vietnam Philippines 5
B+ B+
(S&P L/T Rating)
6
B- Indonesia B-
CCC CCC Indonesia 7

worst
2005
2000
2002
2001
2004
2003
1999
1998
1997
2005
21 Jan
sia sovereign ratings and country (political) risk remain very poor, even when compared to
most of the other Asian medium-low-income export economies. Moreover, concrete meas-
ures on investment and employment have remained weak or controversial. The starting base
line for economic reconstruction is thus a very low one.
Box 1-2. Long-term issues :

Stable development policies against a backdrop of a poor economic climate.
The working agenda of the new Cabinet actually builds upon a 30-year pre-crisis tradition of executing
fundamental (and often sound) development policies. This agenda has for long focused on the sustained
investments in relation to education, health and other basic services, especially in rural areas, on building
urban and rural infrastructure and on selectively removing investment barriers. The crisis caused both
budgets and centralised authority to vanish, but not necessarily the basic technical and managerial capabili-
ties to execute such programmes. At the financing side, the Government has set out with reallocating
poorly targeted fuel subsidies to rural and social investment programmes. At the policy side, it organised
the Infrastructure Summit to signal the start of a concerted administrative agenda, aimed at reverting or
halting the rolling out of previously decided business-unfriendly laws, working away institutional bottle-
necks to investment and channelling through a priority package of infrastructure investment valued at US$
22.5 bn.
Time is running fast, however. As the President, his Cabinet and the Parliament are facing new elections in
2009, the time frame for achieving progress is now less than 5 years. The risk spectre is moreover complex.
Table 1-2 indicates a number of a number of risk benchmarks and Indonesia’s relative position. In relation
to competitiveness, investment climate, governance, corruption and economic and political freedom, Indo-
nesia has only scored better in the last category, both compared to the past and relatively in relation to other
developing countries. The problems have not been overcome in the past years and sometimes become
worse. A single Cabinet term is unlikely to overcome all weaknesses.
Table 1-2. (EFIC 2005)
Organisation Indicator Indonesia's Score/Ranking
Institute for Management Competitiveness World competitiveness ranking in 2004 of 58 out of 60 countries. Down from
Development 57 in 2003.
UN World Investment Investment Cli- Investment climate ranking of 138 out of 164 countries.
Report/ mate
World Bank/ Governance Ranked in worst quartile of surveyed countries for political stability, rule of law
and control of corruption; second lowest quartile for democratic accountability
and government effectiveness.
Heritage Foundation/ Economic Free- Economic freedom rating in 2004 of 3.76 out of 5, meaning 'Mostly Unfree'.
dom Slightly worse than 3.43 score in 2003.
Transparency Interna- Corruption Corruption perceptions index in 2004 of 2.0 on a scale 10 ('highly clean') to 0
tional/ ('highly corrupt'). Corruption seen to be 'pervasive'. Corruption ranking is 133
out of 145 countries.
Freedom House/ Political Freedom Placed in the ‘Partly Free' category - ‘3' for political rights and ‘4' for civil liber-
ties on a scale of 1 (Free) to 7 (Not Free). Improvement evident since the down-
fall of Suharto in 1998, when Indonesia was classed ‘Not Free'.
Figure 1-2. (Various Sources)

1.3. A Weak Investment Climate. Indonesia : Macro-econom ic Indicators
A Consum ption Recovery
Investment in Indonesia halted as a result of
80%
the 1997 crisis, but got subsequently stifled
70%
by political, social and legal bottlenecks. In
60%
absence of much new investment, economic
50%
growth in general and demand and con-
40%
sumption growth in particular have been util-
30%
ising the existing infrastructure amenities 20%
and existing industrial production capacity.
10%
These have been at best replaced when 0%
needed due to aging but rarely added to. As 1992 1995 1998 2001 2004
shown in Figure 1-2, consumption has in- Consum ption as % of GDP
creased its share of GDP persistently in the Investm ent as % of GDP
past decade, while government consump- Governm ent Expenditures as % of GDP
Guidebook page 17
EU – Asia-Invest
tion and investment declined. Meanwhile, Indonesia’s manufacturing competitiveness vis-à-

vis other low-income countries such as Vietnam and China, has declined considerably as
well. While rural and informal sector wages are still 10% below pre-crisis levels, industrial
and service-sector wages have shot up 40% since (World Bank 2005).
Yet it is generally accepted that business impediments are well beyond relatively high wages.
In comparison to other countries competing in low-wage manufacturing, productivity is lag-
ging due to a long-list of issues. A business confidence survey conducted in 2004 indicates
bottom-of-league performance for Indonesia with regard to policy uncertainty, corruption and
labour regulations. Especially for large companies, these issues are serious compared to in-
vestment conditions in other East Asian countries, as Figure 1-3 shows. The compounded
effect of the crisis and the continued decline in terms of business attractiveness have made
large international companies either halting investments or in a few cases exiting.
These problems are obviously reflected in the foreign investment statistics. Even though
overall investment levels, as a contribution to GDP, did not decrease dramatically, FDI
dropped significantly in recent years, as indicated in Table 1-3. Moreover, the Investment
Board figures in Figure 1-4 point to a continuous decline of local and foreign investment ap-
provals in the manufacturing and non-financial service sector, both in terms of overall value
and in value per approved project.
Figure 1-3. (World Bank 2005)

Indonesia's Constraints to Investments
policy uncertainty
80
60
labour regulation corruption
40
20
0
Indonesia -
electricity tax rates large firms
Indonesia -
small firms
Indonesia - Figure 1-4. (BKPM 2005; figures are ap-
finance tax administration average provals and exclude divestments)
Local (PMDN) and Foreign (PMA) Investment
East Asia's Constraints to Investments 80
in Indonesia
80
(U S$ m io)
policy uncertainty PMA

(U S$ bn)
80 PMDN
70 70
PMA; average per approval
PMDN; average per approval
60 60 60
labour regulation corruption
40 50 50
20 40 40
0 30 30
China
electricity tax rates
20 20
Malaysia
10 10
Philippines 0 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
finance tax administration
Table 1-3. Investment Indicators. (Various Sources)

1992 1995 1998 2001 2004
Investment (current US$ bn) in GDP 27 49 13 30 48
FDI (current US$ bn) 11 40 14 15 10
Government debt / GDP (%) 25% 25% 73% 87% +55%*
FDI values are obtained from BKPM, the Investment Coordination Board, and exclude substantial in-
vestments in oil & gas, mining and the financial sector, both banking and insurance; that means that
large bank buy-outs by foreign groups are not included in the figures.
*See note under Table 1-1 on re-basing.
Box 1-3. Compounded problems.

Other factors aggravate the lack of manoeuvring space for Indonesian policy makers :
Debt. As Table 1-2 shows, Government debt ballooned during the crisis years, especially as a result of
the recapitalisation of the Indonesian banking system. This makes government-led investment unlikely
to grow in the next few years. Debt problems will be further highlighted in Section 1.5.
Legal Issues. Outdated, incomplete and often self-contradictory laws and regulations are common-
place, a problem likely aggravated by the recent splintering of the legislative chambers along multiple
party lines. The government has no parliamentary majority which can be taken for granted. The Minis-
try of Justice has become more prudent is scrutinising new proposed laws, but law reform is hampered
by the lack of resources and within the parliamentary administration.
Judicial Failures. The judicial system is often unreliable and corrupt and moreover increasingly inde-
pendent. It has often made a mockery of commercial cases, by declaring healthy foreign companies
bankrupt although on grounds of simple business disputes, by accepting bankruptcy petitions, by issu-
ing asset liens on surreptitious grounds and by negating elementary rules of jurisprudence. Although
the Supreme Court is slowly reforming itself, the lower courts have still a long way to go.
Decentralisation. The regulatory framework governing administrative and political decentralisation is
incomplete and still partly untested. It was introduced in a single swipe in 2001 and modified starting
2005. Power is now to be consolidated away from lower-level districts to the level of provinces. This is
balanced by introducing direct elections of local and provincial heads of administrations over the next
few years.
Budget Pressures. There are unexpected budgetary and organisational burdens due rising oil prices,
costing the government at least US$ 5 bn this year even after a first round of subsidy cut. The Govern-
ment promised to compensate cuts by pro-poor programmes, but these are difficult to organise. Of
course, the 2004 Tsunami requires reconstruction work to be paid for, estimated to require over US$ 1
bn of government funds over the next few years.
1.4. Bright Spots.

Notwithstanding these many obstacles, it must be noted that in recent years there have been
good and even star performers in the Indonesian economy, with many companies showing
excellent profit margins. A number of consumer companies, car makers and plantation com-
panies have done very well. New property investments, first in the retail sector and recently
also in the residential and office segments, are once again changing the skyline of Jakarta.
The Jakarta Stock Exchange Composite Index rose impressively from 400 in early 2003 to
close to 1100 by the end of February 2005, a rise of 175%. The sectoral indices give more-
over additional information. As Figure 1-5 shows, the infrastructure sector, which includes
telecommunications, performed slightly better than the overall composite index, while the
consumer index lagged. The real top-performer has been the mining index, containing also
oil and gas activities, although price surges here have been to a certain extent speculative,
anticipating supply shortages due to high international demand and to environmental restric-
tions curtailing future prospection.
In the short run, Indonesia has also been benefiting from the economic boom in China in re-
cent years, giving Indonesia a trade surplus of US$ 1 bn in 2004. Rising commodity prices,
for instance of steel, and rising energy prices, particularly of coal and gas, have increased
Guidebook page 19
EU – Asia-Invest
export earnings. Moreover, local consumption growth has taken advantage of a flood of
cheap Chinese imports. Overall though, the import-export balance shows that Indonesia’s
recovery has been supported not only by local consumption, but also by local production.
Figure 1-6 shows that Indonesia’s trade balance for goods and services (excluding oil and
gas) was negative in 1995 and 1996. This condition has been solidly reversed into a healthy
surplus for the past six years. The downside, of course, is that the severe decline in imports
is also related to an absence of capital investments, a situation further aggravated by the fact
that exports have hardly recovered from their peak in 1997, if measured in present-day US
dollars. Finally, net service payments have been unchanged over the past years, hovering
around US$ 15 bn p.a. Nonetheless, Indonesia’s current account (trade balance of goods
minus the negative net service balance) has still remained positive.
Figure 1-5. (IndoExchange.com; The Economist)
Jakarta Stock Exchange Indices

600%
Mining
500%
Infrastructure
Consumer
400%
Composite
300%
200%
100%
The price surge of listed commodity
0% stocks has been prevalent worldwide, as
the Indices above show. However, these
Q1-03
Q2-03
Q3-03
Q4-03
Q1-04
Q2-04
Q3-04
Q4-04
Q1-05
surges have been speculative, with regard

to possible supply shortages. Actual price
levels as tracked by The Economist (all
items) have not surged to the same extent.
Figure 1-6. (BPS 2004; constant US$ bn); pre-2003 values inflated by 3% p.a. with
2003=100. The calculation for the graph below applies a simple deflator related to the
US core inflation rate and not the trade-weighted deflator related to real Rupiah ex-
change rate. After the volatility of the late 1990’s, the Rupiah stabilised in 2000,
strengthened some 10% in the 2002, but lost again 10% to 15% since. (World Bank
2005))
Indonesia Export-Import Balance

80
other exports oil and gas exports
70 other im ports oil and gas im ports
60
50
40
30
20
10
(US$ bn)
-
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
1.5. Present Budgetary and Monetary Conditions.

The Government is still facing a budget deficit in the range of 4% of GDP, of which 1% is for
current financial expenses. Due to the Tsunami, it has been granted a temporary moratorium
on debt repayments by the Paris Club. Budget shortages will be covered by new government
bonds and bank financing (63%), by further privatisations and asset sales (7%) and by donor
country assistance, as approved in the January 2005 CGI meeting of donor countries and
multilateral agencies.
The combination of GDP growth of around 5% in 2004, grace periods on official government
debt and a continued non-expansionary budget policy explains the declining Government
debt position relative to GDP as shown earlier in Table 1-3. Official G-to-G and multilateral
borrowing has continued at a pace of about US$ 2 bn a year, but repayments have reached
a level between US$ 4 to 5 bn. Private sector debt repayments (and divestment) were heavy
in the years 1998-2001, but have turned around and there is now into a small trickle of new
inflows. As a result, Indonesia’s capital account (flows of official and private capital) has re-
mained negative. Or in simple words : by continuing to sell more than it buys, the country is
continuing to pay off external debts.
This then explains the severe difficulties for the Government to give sovereign guarantees in
the near future. The Government has now barely stabilised the banking system and has still
substantial amounts of money tied up in the sector – money which the Government itself is
liable is to foreign creditors. Therefore, it has almost no liberty to underwrite new large in-
vestment ventures.
Box 1-4. Government Debt versus Private-Sector Debt.

Present public debt is strongly related to the IMF operation is which the Indonesian Government rescued the
Indonesian banking system.
Outstanding external public debt was US$
Figure 1-7. In US$ bn. (Bank Indonesia, World Bank; out-flows have 135 bn in 2003. About one-third is private
been divestments, capital flight and write-offs.) debt and one-third is bilateral government
debt. The balance of the debt is due, in
roughly equal parts, to multilateral lenders
External Debt Positions and Flows.
and to short-term creditors (e.g. as a result
GoI Priv. of export credit facilities). Overall debt
service payments totalled US$ 21 bn in
1993
50 39 2003.
However, this apparent balanced picture is
17 45 the result of the rescue operation of the lo-
cal banking system set up in 1999 by the
1998 Government and the IMF. In effect, the
67 84 Government subsumed the liabilities of
collapsing banks in exchange for their
14 30 shares and for often rather worthless third-
party collaterals. As Figure 1-7 shows, the
2003
81 54 steady increase of Government debt
achieved in bringing private sector debt
again under control.
The Government has indeed tied up some US$ 70 bn in a variety of guarantee instruments and equity bonds in
order to rebuild the capital base of most local banks. The net impact to the Government is found in the interest
the Government pays on the bonds, benefiting bank income. The Government has been recouping around US$
2 bn a year through share auctions, but continues to pay US$ 4 bn on interest payments and will do so for
years ahead.
Guidebook page 21
EU – Asia-Invest
Finally, in the absence of expansionary policies from the Government, there has been a
steady strengthening of monetary indicators, with interest rates at an all time low. As earlier
indicated, economic growth and real earnings have fuelled consumption, with banks taking in
more deposits and extending more consumer credits. Bank deposits increased by 30% in the
past 4 years, while Bank Indonesia encouraged banks to issue bonds to further attract lend-
ing capital. However, liquidity was predominantly invested in either consumer credit, which,
for durables, rose by 350% in the same period, or in Bank Indonesia money certificates.
Lending towards investment and for working capital increased by less than 70%. The lack of
lending has therefore not created excessive liquidity, as the banks have been using income
from recap bonds and money certificates very cautiously. Table 1-4 shows that 2004 net ex-
cess liquidity is in the range of US$ 1.5 bn or 0.6% of GDP.
Table 1-4. (in US$ bn; World Bank 2005; based on data of September 2004; 1 US$ = Rp 9100)
Liabilities and Commitments Liquids Assets Available
Deposits (primary and secondary 15 Placement at BI (current account 21
reserves at BI) reserves, money certificates)
Committed (undisbursed loans) 14 Lending in the interbank markets 11
Others 3 Marketable securities (non- 1
government bonds)
Total 32 Total 33
Net Excess Liquidity 1
1.6. In Short: Which Boom Next ?

It is clear that future lending is unlikely to come from government sources nor can the Gov-
ernment underwrite extensive risks to near-term lending. Government actions will be limited
to easing investment bottlenecks and to re-allocate subsidies more productively. Re-
channelling private savings, which includes savings in pension funds, towards longer-term
investments with an adequate risk-return profile is therefore a high priority. Infrastructure
could become good candidates. But
the needs for longer-term invest-
ments by household and firm are high Figure 1-8. (Various sources. Past figures have been ad-
and moreover various : justed are inflation-corrected (2003=100), by a simple measure
of 3% p.a. reflecting US core inflation.)
• households are still re-investing
in new durables, such as cars, Indonesia : Which Boom Next ?
350%
and in homes, or are replacing
them; likewise firms will need to 300%
replace aging production facili-
ties and to add to it; 250%
• households and firms will also 200%
need to invest in education and 150%

training, as the crisis years re-
duced spending on educating 100%
the young, while experience of 50%

older workers has often is be-
coming obsolete; this contingent 0%
liability on human capital devel- 1992 1995 1998 2001 2004

opment is reflected well in the GDP per capita Government debt / GDP
youth unemployment numbers, Investment per capita FDI (US$ bn)
now measuring around 25%.
Long-term saving will undoubtedly increase, as Indonesia will see its baby-boom generation
arrive at early mid-age. Savings in fixed and other assets predictably then peaks in prepara-
tion of future retirement. In 2000, Indonesia had 53 million people aged between 30 and 50
which most often had to postpone saving as a result of the crisis. By 2010, BPS (2002) pro-
jects that there will be 70 million people in this age group. The long-term policy goal of any
democratically elected government would be to provide secure saving instruments to this de-
cisive group of voters. However, while the fundamentals are in place to start working at
these savings instruments, the new democratic institutions are less than ready to set up the
institutions assuring long-term asset security.
Admittedly, Indonesia has had good experiences with letting benign technocrats tinkering on
such issues. During the Suharto era, they excelled at keeping fundamental social-economic
policies on track (education, health, infrastructure and investment) while at the same time
they were able to overcome recurrent crises and shocks. They also made the country recep-
tive for the worldwide private investment boom in emerging countries of the 1990’s – albeit
they admittedly failed in setting up secure institutions. As Figure 1-8 summarises, the tech-
nocrats again achieved in recent years to overcome the debt crisis. Therefore, the question
comes up which new challenge they take up now. Setting up long-term savings and invest-
ments vehicles would be a plausible choice.
2. The 2005-2009 Agenda: an Outlook.

2.1. The Government Programme.
The Government is at present therefore facing two possibly contradictory challenges: to
swiftly provide the structural improvements in the investment environment of the country; and
to stimulate actual investments as soon as possible, in order to accelerate growth. Institution
building and growth acceleration should happen simultaneously. At the same time, the new
Administration promised pro-poor and rural growth.
Essential policies to achieve these the Government’s goals were formulated early 2005
(World Bank 2005) :
• improving the investment climate, especially of labour-intensive manufacturers;
• solving infrastructure bottlenecks, especially in electricity generation, efficient trans-
portation, and port facilities and procedures; and
• developing a rural development strategy that will diversify agriculture into higher-
value added activities and stimulate rapid growth in the rural non-farm economy.
Project average growth for 2005-2009 is set at 6.5%, development expenditures would dou-
ble to 6% of GDP by 2007, government debt decline to 35% by 2009 and the budget deficit
reduced by 75% to –0.5%. Unemployment would start to decline by 2007. Text Box 1-5 lists
a series of policy issues which are to be addressed.
Guidebook page 23
EU – Asia-Invest
Box 1-5.The Government Programme (2004-2009) (Bappenas 2005)
Improving Accelerating Infrastructure In- Support and Widen Rural Devel-

the Investment Climate. vestment. opment.
Introduce a new Investment Improve public management of Increase public expenditures on
Law, emphasising the principles infrastructure, with the central agricultural research and over-
of registration and protection of government moving from a ser- haul agricultural extension ap-
law and no longer of approval vice provider to a regulator role proaches
Enforce the accountability of Work out new and clearer roles Secure land ownership
tax and customs administrations among decentralised authorities
in managing infrastructure
Re-focus labour regulations Strengthen and reform the inter- Secure sustainable water re-
towards stimulating job creation governmental fiscal structure, sources management
with scope for sub-national bor-
rowing
Re-focus sector investment laws Tackle corruption in procure- Improve rural infrastructure
towards endorsing competition ment
and fair and transparent price
setting
Improve the local market effi- Restore private-sector participa- Increase rural access to infor-
ciency and curtailing add-on tion, through privatisation and mation and communication
costs set indiscriminately by lo- competition technologies
cal administrations
Further strengthen of the finan- Mobilise finance for infrastruc- Improve natural resource man-
cial sector, through supervision ture, by re-focusing government agement
and diversification (bond mar- spending and by mobilising
ket, institutional investments, domestic finance
microfinance)
Massively improve legal en- Develop risk and guarantee Provide microfinance to support
forcement and judicial prac- policies addressing long-term rural non-farm sources of em-
tices, especially in commercial investment risks ployment and income
law cases.
Improve overall coordination Create consistent regulatory Maintain food security through
between government agencies frameworks in relation to tariff openness
setting and arbitration.
2.2. Work Ahead: Improving Indonesia’s Fundamental Structure.

The question is now whether the above policy goals are consistent with the long-term fun-
damentals. The Indonesian Business Chamber KADIN produced a Road Map in mid 2004,
aimed at undoing the damage to business and investment which has accumulated in the
wake of the financial and political crisis as well as a result of the rapid decentralisation proc-
ess. One of the central tenets supporting these proposals was, as already mentioned before,
the perceived collapse of competitiveness of the Indonesian manufacturing vis-à-vis other
low-income countries. However, there are good reasons, as quoted in Text Box 1-6, to say
the suggested picture of a sudden loss is inadequate, and that Indonesia is experiencing
much an on-going and slow economic transformation, from a resource-based economy to a
more complex one in which consumption has become an important driver and trade linkages
more diverse and dynamic.
An important aspect of this transformation process is the consolidation of a three-pronged
spatial-economic structure which will remain important for many investment decisions to
come:
• The Greater Jakarta conurbation, which includes the whole of Western Java has
shown the resilience of a genuine cluster economy. Concentrations of capital, knowl-
edge and relatively advanced demand have helped it to outperform other areas of the
country in terms of investment and trade. It has, however, not achieved much with re-
gard to matching this private-sector performance with gains in the public realm, for in-
stance in the form of more sophisticated public services. These have remained
largely a pipe dream for now.
• Java has for now strengthened its function as industrial heartland of the archipelago.
It has kept the advantages of local market access and market knowledge and of the
economies of scale brought along with its own high population (61% of Indonesia). It
is, however, not well prepared to compete in an environment of decreasing trade bar-
riers and non-trade barriers, with relation to its ASEAN neighbours, with China and
within the globalised economy in general. For instance, Malaysia has also easy ac-
cess to and an historical bond with Sumatra and Kalimantan and will thus compete
with Java in order to satisfy consumption demand there.
• The resource-based economy has remained a strong economic engine, notwithstand-
ing the many environmentally unsustainable practices. The beneficiaries have been
Sumatra, Kalimantan, Sulawesi and Papua. Exploitative practices and outright
smuggling have left however a low wealth dividend with local populations, nor have
large exploitation companies fostered the growth of local administrations capable of
managing urban and SME economies.
The policy goals of the new Cabinet line well up against this structure and its respective
problems : Jabotabek’s entire economy would gain immediately from better public amenities
and a more market-responsive development and management of these amenities; Java is to
tap into Jabotabek’s economies of scale if it is connected rapidly by means of better infra-
structure; and islands outside Java require rural development and infrastructure supporting
the rural economy in order to counterbalance and eventually overshadow the profitable but
often destructive outcomes of the resources industries. The programme of the new Cabinet
has thus a sensible basis in line with long-term fundamentals of the country. The main chal-
lenges are the many institutional and budgetary obstacles. The main external risk would be
a significant worldwide economic slowdown. The main internal risk is a bungled execution,
for which there is a long-list of potential causes.
Text Box 1-6. The on-going transformation of the Indonesian economy.

Indonesia’s foremost long-term source of growth has not been in manufacturing. From 1970 to 1990,
Indonesia’s non-resource based manufactured export growth was below 1% p.a. The quoted growth rate
of all other Asian tigers, including Malaysia, Thailand, Korea and China, was however higher than 1%
p.a. (Radelet, Sachs & Wha Lee [1997]; tigers are defined as countries with a GDP per capita growth of
at least 3% p.a. from 1970 to 1990; out of 78 countries studied worldwide, only 13 were classified as ti-
gers). Recently and with the help of strong commodity prices, the resource-based industries have again
assisted Indonesia’s post-crisis recovery.
Indonesia’s manufacturing sector did show persistent high real growth rates of around 11% p.a. during
the 25 years preceding the 1997 crisis (World Bank 2005). This compared very favourably against
growth rates in agriculture (average 3.1%) and in other sectors (e.g. infrastructure, services, finance; av-
erage 7%). The growth rate of the manufacturing sector was however most affected by the crisis and
tumbled back to 5% in the period 2001-2003. Therefore, not the sector contracted, but the addiction to
expansion was forcibly curtailed. Worse even, the expansion drive lead to a long-standing neglecting of
efficiency and productivity within the manufacturing environment. The crisis provided the inevitable ex-
ternal shock to this poor productive structure, with most notably the labour intensive industries shedding
most capacity and jobs (700,000 jobs since 2000).
(continued)
Guidebook page 25
EU – Asia-Invest
(continuation)
The manufacturing sector as a whole has not shrunk over the past 10 years. The structure of GDP, com-
pared sector-wise, has remained largely unchanged between 1997 and 2003 (BPS 2004). However, the
supply chains have changed, with exports from Java decreasing but inter-island trade increasing. This is
evident in Figure 1-9. It
appears indeed that the
non-resource based manu- Figure 1-9. (BPS 2000, 2004; Jabotabek++ stands for the harbours of Jakarta, West Java
facturing sector, special- and Banten; “Other Java” includes Bali)
ised in the production of
consumables, has lost in- Java: national industrial heartland, again
ternational market share,
but has made up this loss Change in sea cargo 1999-2002 (ton)
by fulfilling new demand 150% inter-island
in Indonesia. This fits also
with the expressions of 100% export
fear for trade liberalisation import
with China, as the manu- 50%
facturing sector perceives
that it cannot meet the 0%
economies of scale and the
overall productivity levels Jabotabek++ Other Java Other
of its Chinese competitors, -50%
even when supplying to Indonesia
the local market. -100%
-150%
Chapter 2.
Infrastructure Investment in Indonesia.
In this chapter, a clearer understanding is sought on the justifications for new infrastructure
investments in Indonesia, including the justifications to seek the help of private investors. The
first section sets out the rationale to enlist private investors and operators in the provision of
infrastructure services and looks how Indonesia’s perspectives and international experiences
link up. The second section looks at the internal consistency of the infrastructure investment
proposals put out by the new Cabinet and takes a cold look at where private-sector interests
and private-sector capital might go. The third and final section elaborates on the micro-
economic consequences of accelerating infrastructure investment, especially with regard to
differential needs found in a large country such as Indonesia.
This chapter should therefore clarify to which extent the new Cabinet is offering a solid busi-
ness case : will supply and demand be better in balance, what about financial viability, in
terms of access to finance and financial risk, and will the social-economic impact be clearly
positive ? These questions are essential in order to appreciate the risk-return profiles of long-
term infrastructure investment in Indonesia.
1. Rationale for Private Investment in Infrastructure Development.

1.1. Rationale of the Government of Indonesia.
At the occasion of the 2005 Infrastructure Summit, the Government presented a number of
reasons for pushing infrastructure development with the help of private investors :
• Under-serviced needs and demands. Statistics show Indonesia to score markedly
lower in service provisions compared to other emerging economies, particularly those
in East Asia. Table 2-1. summarises these benchmarks :
Table 2-1. Indonesia’s Service Provisions Compared (World Bank 2005a)

Sector Unit Indonesia Malaysia China Phillipines
Tolls Roads km 562 1,127 4,735 168
Total Road Network Km/1000 1.7 2.9 1.1 2.6
people
Power (to households) % (pop.) 53 (85) 96 98 80
Telephone Lines % (pop.) 10 (18) 57 33 23
Improved Water % (pop.) 78 ? 75 86
Sanitation % (pop.) 55 ? 38 83
One should be careful, however, with accepting these statistics at face value. Espe-
cially the electrification rate of Indonesia, which reflects official statistics of PLN, the
State Electricity Company, does not tally with the Government Social-Economic Sur-
veys (Susenas), which lists 85% of households as having access to PLN power (BPS
2003). Also the teledensity data are too low, undercounting rapid growth of mobile
subscribers, of which Indonesia has now close to 30,000,000 (various company re-
ports). At the end of this chapter, estimates of real demand will be looked into, as real
demand is limited by spending power and thus always lower than needs. However,
demand also depends on relative user efficiencies, such as several low-income fami-
lies sharing one electricity meter or one telephone line. This behaviour increases real
access to amenities compared to what simple statistics such as “lines (meters) per
Guidebook page 27
EU – Asia-Invest
household” suggest. Especially in high-density areas, for instance in Java, such

take-up efficiencies are not be discounted and imply that the willingness to pay (de-
mand elasticity) for new connections is lower than what simple numbers would sug-
gest. Only significant wealth increases among low-income families would increase
demand for new fixed connections which have typically specific fixed costs.
• Supply gap due to under-investment since 1997. It is obvious that the economic
crisis halted infrastructure spending almost completely. In 2002, Central Government
spending on infrastructure, broadly defined (including housing and irrigation) and in
US$, was one fifth of the spending in 1994, as Table 2-2 indicates :
Table 2-2. Development Spending in Indonesia (World Bank 2005a)
1994 2002 2004*

Government US$ bn (nominal) 7.8 1.6 2.2
% of budget 57% 28% 30%
% of GDP (current) 3.9% (4.8%**) 0.9% (2.3%**) 1.0%
1994 2001
Private Sector US$ bn (nominal) 9.0 0.5
Public & Private US$ bn (nominal) 16.8 2.7
* approved budget; ** against GDP figures prior to re-basing
• Accelerating economic growth and employment. The present Cabinet is decided

to provide both macro-economic acceleration and micro-economic improvements
through infrastructure investment. Growth acceleration is to be achieved by again in-
creasing the contribution to GDP of investment in general to 30%-levels. Major vehi-
cles will be infrastructure provision and housing construction. Achieving 30%-levels
of the investment contribution to GDP is also vital in order to bring unemployment
rates down. The proclaimed target is to up infrastructure spending to 5% of GDP, as
was the case in the mid 1990’s. This increase is on top of spending for Operations
and Management (O&M) of existing infrastructure amenities. Achieving an increase
of 5% of GDP would require a contribution of approximately US$ 15 bn per year to a
constant GDP growing of 6.6% p.a. This equals to an output value (effective invest-
ment value) of at least US$ 30 bn per year.
Furthermore and as already acknowledged in the 2003 White Paper, the Government
sees infrastructure as a key issue for improving the productive structure. World Bank
figures suggest that the avoided costs and the increases in consumer surplus could
amount to almost 5% of GDP, for the combined sectors of power, water, roads and
telecoms. However, micro-economic reforms would then need to entail both construc-
tion of new infrastructure and the increase of tariffs for most users in line with real
costs. Only then would infrastructure contribute to making the productive structure of
the economy more efficient.
In short, if infrastructure investment can add, year-on-year until 2009, 4% to GDP and
can deliver efficiencies of up to 5% of GDP, then there would be a clear-cut case of
economic acceleration.
• Pushing private investment. First, Table 2-2 already indicated that private sector
spending on infrastructure virtually collapsed by 2001. Figure 2-1 shows selected
BKPM investment approvals from 1990 to 1997 for EU companies and for companies
worldwide thereafter. The figures concern proxy sectors related to infrastructure,
whereby the upshot in 2002-2003 in the transportation segment stands as an outlier –
it concerns the sell-off of assets, for instance of carmakers, to foreign shareholders,
as a result of debt-restructuring. The downtrend after 2000 is thus clear and this fact
alone justifies a policy focus on private investment. Furthermore, the need for contin-
ued budgetary and monetary stability is obvious, as was explained in the previous
chapter. Finally, potential foreign capital and foreign investors have been targeted at
the Summit, as domestic capital is considered insufficient and as local banks are still
structurally weak.
Figure 2-1. (BKPM)

Foreign Investment Approvals by All Foreign Investment Approvals
Proxy Sector from 14 EU Countries by Proxy Sector (and es tim ates for EU)
9.0 9.0
8.0 8.0
7.0 7.0
6.0 6.0
Transport,
5.0 5.0 Storage &
Communication
4.0 4.0
3.0 3.0 Construction
2.0 2.0
1.0 1.0
Electricity, Gas
(US$ bn)
(US$ bn)
- - & Water Supply

1990
1991
1992
1993
1994
1995
1996
1997
1997
1998
1999
2000
2001
2002
2003
2004
The 2005 Summit rather highlighted expectations for foreign capital contributions compared
to the need for structural improvements for public-private partnership in infrastructure in-
vestment, notwithstanding the fact that the run-up workshops held in August and December
2004 had emphasised structural reforms, i.e. deregulation, liberalisation and financial risk
management. It is not clear whether there has been a change of emphasis on behalf of the
new Government. Statements from sectoral Ministries and popular suspicions against both
the Vice-President and the Coordinating Minister for the Economy, who are said to favour
national business interests, would lead to conclusions that local companies are favoured.
But the public statements from these key politicians merely ask for a level playing field for
local companies. Moreover, policy documents from the Ministry of Finance and from Bap-
penas, such as the Infrastructure Roadmap (2005) indicate that structural reforms remain
high on the agenda. The fact that the Summit coincided which parallel funding appeals at
the CGI meeting of 19-20 January and the international donor conference for the Tsunami
response held in Jakarta may have lead to an over-emphasis on fund-raising concerns rather
of reform agendas. The jury on still out on this issue and the proof will be in the pudding.
1.2. Rationale of Public Private Partnership in Infrastructure Investment.

Private sector participation in general allows to mobilise fresh capital and to free up public
budget resources towards other and more targeted uses. Furthermore, international compa-
nies can deliver a breath of technological expertise as well as first-rate management know-
how which can directly benefit end-consumers of public infrastructure. By employing the
best companies directly to provide infrastructure, it is in principle possible to lessen the
transaction costs between producers and consumers to the benefit of consumers. Competi-
tion between service providers also allows the market to work out effective prices in relation
to acceptable services. Finally, financial investors benefit from competition to work out the
risk-return profiles of categories of projects and of project locations. All in all, private sector
Guidebook page 29
EU – Asia-Invest
participation in infrastructure development should benefit both the productive structure of a

country and the users-consumers of the amenities. The residual concerns for government
intervention are then to provide in public service obligations, that is infrastructure provision
not catered to by the market, and to set up institutional regulatory framework in order to
guarantee effective competition and fair pricing to the benefit of consumers. This is, in a nut-
shell, the theory of private-sector participation in the provision of public amenities.
The reality is of course that when markets are immature, also competition will be but imma-
ture. No government endorsed regulator can change such a market condition overnight.
Nonetheless, if supply and pricing are inefficient and unfair, then the regulator, and by exten-
sion, governments are blamed to be half-hearted about private participation in public ser-
vices, even though the root problems are in the immature market conditions. It is thus not
surprising that the recent experiences with public-private partnership in emerging economies
have been a bit of a roller coaster.
During the 1990’s, the private sector became increasingly involved in the provision of public
infrastructure. In Latin America, the dominant mode was through privatisations. In developing
Asia, the preference was for build-operate-transfer or build-operate-own concessions.
Worldwide, over US$ 900 bn has been invested up to date in about 2500 private infrastruc-
ture projects. From the years 1997 to 2001 about 50 projects were cancelled, representing a
lost value of about US$ 25 bn. These cancellations have been most prominent in the news,
but are small in relative and cumulative value. Indeed, as Figure 2-2 shows, for every few
disasters, there have been many good experiences. Moreover, the boom-and-bust curve
does not exclude the possibility of a first wave or a first trial with projects with happened to be
low-hanging fruit. The lessons-learned for future PPI, as listed by the World Bank (Baietti
2001), are indeed multiple and still in full digestion :
• Policy Lessons.
o The need for further deep reforms in relation to competition, financial disci-
pline; this includes provisions for accountability, transparency and for checks
and balances with regard to corporate governance;
o Further development of the modalities of private participation so as to clarify
risk-return expectations; this needs building on sector-specific experiences
and it requires finding balances between the respective needs for economies
of scale in privately managed networks, widely upheld standard procedures
and adequate decentralised oversight; and
o Further development of the modalities of private participation with regard to
the separate roles and functions for private development management, private
operational management and private financing.
• Lessons for Investors.
o The need to close the financing gap, brought about by the sudden collapse of
confidence in PPI around 1998, and to re-open diverse funding channels;
o The need to set up alternative cost-sharing modalities, especially in the initial
stages of project development;
o The need to bring in again credit insurers into the financing market;
o The need to mix local and foreign financing adequately; and
o The need to develop local credit insurance for sub-national government risks.
While the hurdles look impressive, investor confidence towards private participation in infra-
structure development is growing again, as Table 2-3 shows. Especially East Asian firms are
eager to take up again the challenge. This bodes well for the future, in the sense that multi-
ple initiatives, especially in the Asian region as a whole, will refresh experiences and poten-
tially re-institute public and investor confidence.
Table 2-3. Firm Expectations on Future Stakes in Infrastructure Investment.

(Baird 2005, from 2004 World Bank-JIBC-ADB Survey)
Global Firms East Asian Firms

Increase stakes 67% 88%
Sustain stakes 24% 8%
Decrease stakes 10% 4%
Text Box 2-1. The ups and down of PPI (Private Participation in Infrastructure).
Figure 2-2 shows some salient facts on Figure 2-2. (Harris 2003; Baird 2005; World Bank PPI data)
the PPI experience worldwide.
Private Participation in
• PPI peaked in 1997 and by 2003 fell Infrastructure Projects 1990-2003
back to 33% of its historical peak. 135
This is true worldwide and for the PPI-Worldwide
Asian region. 120 PPI in As ia
Cancelled PPI-Worldwide
• The decline of PPI has been more 105
Cancelled PPI in As ia
outspoken in Asia compared to other 90
regions. PPI in Asia fell back to 28%
of its peak level, while PPI in other 75
regions only by to 43%. Nonetheless,
60
PPI in Asia fell immediately back to a
base level of between US$ 10 bn and 45
US$ 15 per year. PPI elsewhere had
30
(constant US$ bn)
not stopped falling back in 2003.

• Toll roads in Mexico are the largest 15
single package of cancellations, in 0
1997. But the cancellations in Asia,
albeit only totalling US$ 9 bn, have -15
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
been a more recent and a more pro-
tracted process.
The numbers for Figure 2-2 are to interpreted with care. The World Bank lists 6 cancellations for Indonesia
in 1998, totalling US$ 2.3 bn and thus excludes a number of projects such as power plants which were then
cancelled and now revived, e.g. Tanjung Jati C. Nevertheless, the figure shows well that private investment in
infrastructure in Asia, and not only in Indonesia, is not yet back to old strengths.
The reasons for the strong decline of PPI in Asia are various. First, the crisis cut down real (dollar-
denominated) spending power. Secondly, PPI projects in Asia were greenfield projects and had no positive
cash-flow allowing owners and operators to give a second thought to the changed market environment. Latin
American privatisations offered such a time frame, making many international operators sticking to their in-
vestments. But, in the end, interest here went also south. Thirdly, government bureaucracies and state-owned
enterprises saw the fall-back as a vindication that the market could not overcome shocks or even deliver in
general. Fourth, regulating institutions had no time to develop the necessary skills to manage adverse condi-
tions. They often proved themselves de facto receptive to political intervention. Fifth, many market environ-
ments were in fact still immature when privatisation started and, with investment lagging, remained immature
longer than expected. And finally, international and high-quality producers-suppliers in several infrastructure
segments, such as power, telecoms, water and EPC provision for civil works effectively reacted on all these
adversities through M&A’s or just exited, making the market increasingly oligopolistic. With less but larger
suppliers around, the likelihood for competition decreased. Not surprisingly, a perception, true or not,
emerged in developing countries that the prospect of paying less transaction costs as a result of private par-
ticipation had been replaced with the likelihood of paying increasing agency costs for the technology and the
finance access controlled by larger companies. Of course, privatisation debacles such as Railtrack in Britain
and Yukos in Russia have galvanised the public perception that the promises of better service delivery
through private-sector ownership and management of public amenities are in fact empty promises and that in
reality mismanagement and asset-milking prevail.
Guidebook page 31
EU – Asia-Invest
2. Rationale of The Government Infrastructure Policies.

2.1. Background of the Summit Appeal for Private Investment.
Indonesian Government agencies have been trying since 2000 to revive infrastructure in-
vestment. The IMF-funded austerity programme of 1997-1998 had obliged the Indonesian
Government first to put on hold and then cancel twelve large infrastructure programmes, in-
cluding large power generation and toll road projects. Two years later, pre-crisis estimations
by Bappenas for infrastructure needs in the range of US$ 150 bn were put back on the long-
term agenda and the expectation was revived for the private sector to finance 70% to 80% of
this amount (Jakarta Post, 23 March 2000). Bombings of the Jakarta Stock Exchange (2000)
and in Bali (2002) and the demotion of a President Abdurachman Wahid were but some of
the many reasons putting these intentions again on ice for a few years.
The Infrastructure Summit of January 2005 revived the agenda. The Coordinating Ministry for
Economic Affairs presented the Infrastructure Investment Demand and Source of Funds for
2005-2009 as shown in Figure 2-3. The old plans, the old numbers and to a good extent the
old projects were put again on the table.
Figure 2-3. (Coordinating Ministry for Economic Affairs 2005)

Infrastructure Demand 2005-2009 Proposed Source of Funds
US$ 4 bn Aceh reconstruction demand (World Bank 2005)
US$ 25 bn National State Budget
US$ 30 bn Domestic Funding Sources (incl. National Banks)

US$ 10 bn Multilateral and Bilateral Donors
US$
145 bn US$ Private Sector – Batch 1 (“91 Projects”)
US$ 90 bn 22.5 bn with 36 priority projects for 2005 tendering worth US$ 6.5 bn
US$ 80 bn
US$ Private Sector – Next Batch
57.5 bn
2.2. The Infrastructure Agenda of the New Cabinet.

The incoming Government assured to make infrastructure investment a key policy goal. It
proclaimed a 100-day programme, with following objectives in relation to infrastructure de-
velopment (Infrastruktur 2004) :
• Implement basic policy changes to enhance Public-Private-Participation for infrastruc-
ture development and funding, through a concerted revision of 14 laws and regula-
tions identified as bottlenecks;
• Build upon the 2000-2004 development plans, as for instance outlined in the White
Paper, and accelerate tender procedures;
• Revive and strengthen the Inter-Ministerial Committee for Infrastructure Development
Acceleration Policies (“KKPPI”);
• Establish a national public-private sector working group;
• Establish a more detailed agenda of priorities and commitments for Mid-Term Devel-
opment within 3 months.
During the Summit, the Government also expressed its willingness in principle to look again
into possible government guarantees, albeit not in the form of new sovereign blanket guaran-
tees.
At the time of writing this report, there has been merely fragmentary progress on the above
issues. Admittedly, Central Government agencies have been working around the clock on
responding to the Tsunami impact in Aceh, where the administrations of the Province and of
the capital city Banda Aceh had been practically wiped out. The Inter-Ministerial Committee
announced that most regulations are in their final drafting stages, although newspapers com-
mentators strongly doubt such progress. The reform of the Committee has also not yet been
achieved.
It should also be noted that the administration did not propose a new central Authority to
carry out tender and contract tasks in a streamlined, one-stop fashion. Line ministries re-
main fully responsible for their respective sectors and have indeed been putting out new ten-
Text Box 2-2. The Infrastructure Roadmap of Bappenas.

The State Ministry of National Development Planning, Bappenas, published the Infrastructure Roadmap
which gives details on intended regulatory and policy changes. These are summarised in Table 2-4.
Table 2-4. (Bappenas2005)

Guarantee Framework for re- Entry policies reducing regula- Reliability in procedures and
ducing uncertainty. tory obstacles and facilitating institutional frameworks for
fair competition. price determination.
Offer policy certainty, guaran- Unbundle service delivery into Simplify procedures for tariff
tee a stable macro-economic manageable components and setting, by rationalising and de-
environment and achieve a de- liberalise access to infrastruc- politicising price-setting proc-
creased country risk, rather than ture provision esses
negotiating short-term blanket Build on recently approved Promote comprehensive plans
comfort letters to cover invest- laws allowing the gradual intro- to achieve effective cost-
ment risk duction of competition (Tele- recovery
Ensure predictability in rules communications Law of 1999; Establish regulatory bodies
and policies, including with re- Oil and Gas Law of 2002; Road overseeing fair processes of tar-
gard to tariffs and market ar- Law of 2004; and an upcoming iff determination
rangements re-edited Electricity Law re-
Introduce selective risk sharing placing the one nullified by the
for essential investments, Supreme Court)
through selective subsidies, in- Introduce fair competition for
centives, public-private land entry and for price determina-
sharing, etc. tion, through deregulation, BOT
Introduce government endorsed formats and concession / dele-
enforceable contract formats gated management models
Strengthen the rule of law, im-
prove on good governance and
combat corruption
Strengthen inter-ministerial
coordination in order to provide
overall fair standards and to
share understanding of individ-
ual sector risks
Strengthen inter-agency coop-
eration and clarify individual
authorities of agencies in order
to smoothen policy formulation
and implementation
Additional policies announced by Bappenas are the establishment of an Infrastructure Development Fund and
a public-private sector stakeholder forum (“Consolidate Indonesia Infrastructure Forum”). Finally, the Infra-
structure Summit ended with a Government pledge to hold a follow-up conference by November 2005, in
order to measure progress and to announce new initiatives.
Guidebook page 33
EU – Asia-Invest
der announcements. In absence of solid progress on any of above policy objectives, the Co-
ordinating Ministry for the Economy has put out simple directives in order to keep the upcom-
ing tender processes minimally transparent.
Figure 2-3. (KKPPI 2005) Out of the departments has recently
emerged, in a matter-of-fact way
91 Infrastructure Projects (phasing) and most often due to earlier on-
12.0
Rest of Batch 1 ("US$ 22.5") going programming, a priority list of
Priority 2 15 first-stage and 21 second-stage
10.0 Priority 1
projects, worth US$ 6.5 bn. Tender
8.0 processes have started in February
2005 and would continue in pack-
6.0 ages throughout most of the year.
Figure 2-3 shows the different pro-
4.0 ject sectors which are targeted. Ta-
ble 2-5, on next page, shows the
2.0 full project list, which contains two
newly announced projects with a
(US$ bn)
- combined value of approximately

Ports
coms
Roads
Supply
Tele-
US$ 800 mio.
Gas
Power
Water
Toll
Text Box 2-3. Tender Information.

The present status of the tender procedures can be checked on the website of the PPKKI, the Committee on
Policy for the Acceleration of Infrastructure Development. The status of the priority tenders and the approxi-
mate calendar schedule of respective priority tenders are accessible, in English, on :
• www.kkppi.go.id/projlistfeb2005.php?pgstate=Y&enid=&langsel=I&subid=&secid=
• www.kkppi.go.id/toCD/image/tendersched.jpg
The status report on the first website contains also contact addresses of the executing agencies.
The general website of PPKKI, in English, is :
• www.kkppi.go.id/index.php?pgstate=Y&enid=&langsel=E&subid=&secid=
The first weblink above indicates that the project list was not updated since February 2005, when the priority
projects were announced.
Table 2-5. First-Batch and Priority Projects. (KKPPI 2005)

No Project Sector Est. Investment (million US$)
Priority 1 Priority 2 Rest Batch 1
1 Duri - Dumai - Medan Phase I Gas 393
2 Duri - Dumai - Medan Phase II Gas 225
2b Semarang-Cirebon-Tuban transmission Oil 81
3 East Kalimantan - Central Java Gas 1,476
4 East Java - West Java Gas 348 190
5 Kepodang - Tambak Lorok Gas 105
6 Sengkang - Makasar Gas 110
7 PLTU Tanjung Jati A Power 1,311
8 PLTU Serang Power 500
9 PLTU Tanjung Jati C Power 1,311
10 PLTGU Pasuruan Power 556
11 PLTU Cilegon Power 444
12 PLTU Paiton 3 - 4 Power 889
13 PLTU Sibolga Power 91
14 PLTU Amurang Power 109
15 West Java LNG Terminal (PLN) Gas for Power 251
16 Sumatra - Jawa Interconnection Power 217
17 PLTU Parit Baru Power 109
18 Mine mouth PLTU Kalsel Power 110
19 Ciranjang - Padalarang Toll Roads 199
20 Bekasi - Cawang - Kampung Melayu Toll Roads 396
21 Waru - Wonokromo - Tj Perak Toll Roads 340
22 Waru - Tj Perak Stage 1 (Waru - Juanda) Toll Roads 86
23 Gempol - Pandaan Toll Roads 735
24 Jakarta Outer RR W1 Toll Roads 89
25 Ciawi-Sukabumi Toll Roads 420
26 Cikampek-Cirebon Toll Roads 812
27 Surabaya-Mojokerto Toll Roads 197
28 Kanci-Pejagan Toll Roads 148
29 Pejagan-Pemalang Toll Roads 275
30 Pemalang-Batang Toll Roads 164
31 Batang-Semarang Toll Roads 355
32 Kertosono-Mojokerto Toll Roads 181
33 Pasuruan-Probolinggo Toll Roads 192
34 Pandaan-Malang Toll Roads 172
35 Gempol-Pasuruan Toll Roads 167
36 Semarang-Solo Toll Roads 427
36b Yogyakarta-Bawean Toll Roads 544
37 Bogor Ring Road Toll Roads 154
38 Medan-Binjai Toll Roads 107
39 Depok-Antasari Toll Roads 237
40 Cinere-Jagorawi Toll Roads 167
41 Cikarang-Tanjung Priok Toll Roads 372
42 Cileunyi-Sumedang-Dawuan Toll Roads 413
43 Makasar Seksi IV Toll Roads 49
44 Cilegon-Bojanegara Toll Roads 44
45 Pasir Koja-Soreang Toll Roads 56
46 Sukabumi-Ciranjang Toll Roads 165
47 Semarang-Demak Toll Roads 93
48 Jogja-Solo Toll Roads 219
49 Solo-Mantingan Toll Roads 317
50 Mantingan-Ngawi Toll Roads 122
51 Ngawi-Kertosono Toll Roads 403
52 Palembang-Indralaya Toll Roads 55
53 SS Waru-Tj. Perak II Toll Roads 83
54 Probolinggo-Banyuwangi Toll Roads 676
55 Jakarta Outer RR-2 Toll Roads 983
56 Jakarta Outer RR W2 North Toll Roads -
57 Manggarai - Soekarno Hatta Railway Ports 77 5
58 Bojonegoro Seaport Ports 212
59 East Ancol Seaport Ports 487
60 Kali Lamong Surabaya Seaport Ports 1,047
61 Balikpapan Seaport Ports 72
62 Kualanamu Medan Airport (new) Ports 250
63 Soekarno Hatta Airport Terminal (extension) Ports 178
64 Cargo Processing Area and Industrial Bonded Zone Ports 48
65 Hasanuddin Makassar Airport (extension) Ports 94
66 Lombok Airport (new) Ports 139
67 Uprating WTP Kali Garang Semarang *) Water Supply 5
68 Cirebon Bulk & Water Supply *) Water Supply 5
69 Jatinangor Water Supply (Kabupaten Sumedang) Water Supply 4
70 Cikarang Water Supply (Kabupaten Bekasi) Water Supply 8
71 Pondok Gede Water Supply (Kota Bekasi) Water Supply 9
72 Sepatan Water Supply (Kabupaten Tangerang) Water Supply 12
73 Ciparens Tangerang Water Supply Water Supply 50
74 Water Supply Tangerang City Water Supply 25
75 Cileduk Water Supply (Tangerang City) Water Supply 13
76 Tanjung Pinang Water Supply Water Supply 5
77 Dumai Water Supply Water Supply 4
78 Duri Water Supply (Kabupaten Bengkalis) Water Supply 15
79 Manado Bulk Treated Water Supply *) Water Supply 5
80 Samarinda Bulk Treated Water Supply Water Supply 5
81 Banjarmasin Bulk Treated Water Supply *) Water Supply 5
82 Umbulan Bulk Water Supply Water Supply 90
83 Karang Pilang IV Bulk Treated Water Supply *) Water Supply 25
84 Menganti Water Supply (Kabupaten Gresik) Water Supply 4
85 Greater Yogyakarta & Magelang Bulk Water Supply Water Supply 45
86 Surakarta-Sukoharjo Bulk Treated Water Supply Water Supply 5
87 Tegal Water Supply Water Supply 3
88 Bulk Treated WS to Regency & City of Semarang Water Supply 15
89 East Semarang New Water Supply Water Supply 15
90 Semarang Raw Water Supply Water Supply 15
91 B-1 Palapa O2 Ring (Backbone Network Development) Telecommunications 900
2,627 3,830 16,877

Priority 1 Priority 2 Rest of Batch
Gas 429 - 2,499
Power 444 - 5,453
Toll Roads 1,401 3,775 5,438
Ports 303 - 2,306
Water Supply 50 55 281
Tele- coms - - 900
Guidebook page 35
EU – Asia-Invest
2.3. The $ 145 bn Question : Matching Infrastructure and Financing Needs.

It was earlier noted that the Government’s estimation for investment needs and its dollar fig-
ure appeal for private sector involvement has remained largely unchanged in the past seven
years. Also the basic reasoning appears the same, that is “to sustain economic growth of six
percent” (Jakarta Post, 23 March 2000). Real infrastructure needs remain of course real
needs and a seven year investment hiatus should only add demand. However, there are few
consistent sources justifying the demand for US$ 145 bn investments in the next five years,
although an approximate count can be made.
A recent Bappenas study provides a first but incomplete picture. It puts up an estimate of
infrastructure needs amounting US$ 72 bn for the period 2005-2009. This is shown in Table
2-6.
Table 2-6. Indonesia’s primary infrastructure needs. (Bappenas ca. 2004)

Sector Quantity Cost (US$ bn)
Road construction (national, provincial, local) 93,700 km 20.8
Power Generation 21,900 MW 28.4
Fixed Phone Line Capacity Extension 11,000,000 fixed lines 11.0
Mobile Phone Line Capacity Extension 18,700,000 subscribers 7.5
Drinker Water Supply 30,500,000 people 2.2
Sanitation / Sewerage 46,900,000 people 2.2
Subtotal 72.1
Other infrastructure requirements making up the total budget envelope of US$ 145 bn can
then be approximated as follows :
• Sea ports and airports; in absence of data, Riau Province’s requirements of US$ 700
mio for 2005-2009 can be extrapolated to a national budget of between US$ 20 bn
and US$ 30 bn;
• Housing, with a backlog of 6 million units and new year-on-year demand of 4 million
units, would require funding in the range US$ 30 bn for the period 2005-2009 (assum-
ing that the backlog is worked away during these years);
• Other infrastructure works, such as dams, irrigation, sea bridges,… would then haven
then to be covered with a nominal budget of approximately US$ 20 bn.
Not all of these needs will obviously be financed by private investment and many of the
above obligations are basic public service obligations, e.g. local roads and small ports. As
such, a rough assumption can made in order to make sense of the budget envelope of Fig-
ure 2-3. The key issue is to differentiate key stakeholder group each involved in infrastructure
development : the Government, private households and the private sector. Simply put, the
Government is to build local roads, remote power, water for the poor, small ports, housing for
the poor and irrigation. Households initiate most housing development. Private-sector in-
vestment are to take on toll roads, power IPP’s, most telecoms investment, water treatment,
large port development and apartment development. Table 2-7 lays out the estimates on who
would be taking charge of which kind of infrastructure :
Table 2-7. Funding of Indonesia’s primary infrastructure needs. (own estimations)

US$ bn Water &
Roads Power Telecoms Sanitation Ports Housing Others Totals
Government 10 7 2 4 12 5 18 58
Households - 1 - - - 20 - 21
Private Invest. 11 20 17 1 10 5 2 66
Totals 21 28 19 5 22 30 20 145
The totals in this table are derived from Table 2-6 and the additional estimated budgets in the bullets below
the table. The differentiations as to whom is willing to build what is simply approximate and relates to the
specifics of each sector. For instance, most telecoms investment are private-sector investments nowadays,
most water supply investment still public. Large ports and airports may attract private investors and opera-
tors, but the majority of ports are small and publicly funded, even though in practice this may be done by
Government-owned enterprises. Most housing is developed by households, as most housing in Indonesia is
either owner-occupied or developed for the private rental market.
Next, a balance between investment needs and sources of funding can be extrapolated. The
main limiting factors in this balance are (1) the Government’s funding limits (current budget
plus new debt), estimated in the same Bappenas study at US$ 40 bn, (2) the likely limits on
FDI and domestic capital investment, here optimistically assumed to be U$ 45 bn or two
thirds of their 1995-1996 peak and (3) a limited mobilisation of funds of local banks and
funds, which have assets now amounting to approximately US$ 140 bn. Table 2-8 shows
how a variety of funds sources can then be matched with the funding needs of respectively
the Government, households and private investors.
Table 2-8. Fund sources for Indonesia’s infrastructure needs. (own estimations)
US$ bn Realloc. Other Domestic Foreign
Fuel State Donor Domestic Domestic Private Private
Subsidy Budget Loans Funds Banks Investm. Investm.
Government 15 5 10 2 - 4 4 40
Households - - - 3 13 4 1 21
Private Investm. - - - 2 10 32* 44
Totals 20 10 30 45 105
The overall assumptions are again a rough estimation.
Funding totals are first of all derived from the Government figures as contained in Figure 2-3. However, increasing oil
prices is limiting the Government budgets, even after the March fuel price increases. Available Government funds are thus
assumed to be rather US$ 20 bn compared to the US$ 25 bn as stated in Figure 2-3.
Domestic funds are assumed to channel 5% of their assets into infrastructure investments. These funds can however bor-
row to all market segments, especially to households if they are allowed to take up early their investment in their own
provident funds. The balance of domestic funds is therefore to be delivered by banks, mostly in the form of mortgage
loans to households and project funds to private investors. Mortgage lending will thereby prevail over project funding, as
the lending risks are less.
Finally, private investment (foreign and local) will be mainly direct project investment. Considering Indonesia’s open fi-
nance markets and the intense financial links to Singapore and Hong Kong, there is no meaningful difference between
local and foreign sources of funds when it concerns private investment. However, private funds can also be absorbed in
government infrastructure bonds (if they materialise). Finally, households are also putting equity in home purchases, for
instance as their own share on top of mortgage loans.
The above estimations indicate a number of issues to bear in mind :

• a reasonable starting point for further considerations is to assume that both the Gov-
ernment and the Private Sector will only be able to fulfil about two-thirds of infrastruc-
ture needs. The Government can finance US$ 40 bn but not US$ 58 bn as Table 2-7
indicates. Likewise, the private-sector is likely to mobilise US$ 44 bn and not US$ 66
bn;
Guidebook page 37
EU – Asia-Invest
• apart from fixing the investment climate in general and setting adequate infrastructure
institutions, the Government will be confronted by shortages of funds and will thus
need to make political choices on what to do itself and in which direction to stimulate
the private sector;
• the “first batch” of 91 projects valued at US$ 22.5 bn may already represent about
50% of all upcoming investment opportunities in the medium term, due to funding
limitations;
• foreign and domestic capital investment are by no means to flow exclusively into
physical private-sector investment projects and may well target safer (but not neces-
sarily more efficient) government infrastructure spending. Government bonds for in-
frastructure development could become more in favour, if issued, than direct private-
sector investment; and
• domestic bank funding and non-bank funding are more likely to flow towards housing
and into mortgages for households than into more risky private sector investments;
sufficient liquidity by means of a secondary mortgage market is moreover more easy
to achieve compared to liquid infrastructure investments, as infrastructure invest-
ments are fewer.
In short, the persistent flight to safety which has characterized the Indonesian financial envi-
ronment in the past few years, will not be that easily reversed into a run towards apparently
lower risk, because long-term, private infrastructure investments. Such a reversal would only
start to happen if the risks of these investments are lower as a result of solid expectations
that they deliver steady and guaranteed returns – a condition obviously dependent on more
favourable investment conditions compared to what Indonesia can offer today.
Furthermore, there is potent vicious circle hidden in this all : private capital may eschew pri-
vate-sector initiatives as the effectiveness of these initiatives is often undermined as a result
of insufficient concurrent public-sector investments. To put this simple : privately developed
toll roads become risky if there is no certainty that the Government will build the feeder
roads. The better option for private-sector funding would then be to provide restricted financ-
ing for the more predictable public infrastructure programmes and only to invest directly in
smaller and self-contained private projects, such as airport terminals. The end-result would
then be more funds for the Government but no real progress on the policy goal of the im-
provement of the productive structure of the economy.
Finally, further practical short-term to medium-term impediments are likely to be encountered
in the lack of preparedness of the national banking system, which has at present few ade-
quate swap and hedge facilities. The restrictive bank lending policies of Bank Indonesia is
likely to limit foreign private investment to simple but risky direct investment for the first few
years to come. For this simple reason alone it may be very difficult to bring private invest-
ment levels close to US$ 32 bn as was suggested in Table 2-8.
3. Micro-Economic Impact of the Government Policies.

3.1. A Sub-National Supply and Demand Analysis.
The projects proposed at the Infrastructure Summit 2005 are predominantly to be built on
Java. Figure 2-4 shows the respective locations, differentiated by three regions : first,
Greater Jakarta (“Jabotabek++”, which includes DKI Jakarta, West Java Province and Ban-
ten Province), “Other Java” (which includes in this analysis Bali) and finally all other prov-
inces (“Other Indonesia”).
Figure 2-4.
Locations of 91 “Summit” Projects

12,000 water
10,000 ports (air/sea)
roads
8,000 power
6,000 gas
US$ mio
4,000 telecoms
2,000
-
Jabotabek++ Other Java Other Indonesia
The dominance of the Jabotabek++ and Other Java areas has important consequences in
terms of overall development policy. By pushing investment to the order of US$ 20 bn into
the economy of Java, a significant economic rebound can be achieved here. This should
bring clear benefits, for instance infrastructure efficiencies and savings for the manufacturing
sector.
Yet , the low share for Other Indonesia implies a political risk. The benefits for Java must
therefore be beyond doubt. A number of valid arguments could be contemplated in order to
justify the predominance of Java : (1) perhaps Java historically dominated infrastructure
spending ; (2) per capita GDP may be stronger in Java compared to other areas; (3) spend-
ing power may be higher on Java; (4) Java may require infrastructure supporting the export
sector; (5) Java’s transport infrastructure needs urgent investments; and (6) Java needs
more power and water. These arguments will be briefly evaluated here. Argument (1) deals
with supply issues, while arguments (2) until (6) basically represent a demand analysis.
Java historically dominates infrastructure spending ?

Figure 2-5 summarises an analysis of construction spending in various infrastructure sectors,
whether financed by the government, the private sector or households (except for self-
building). The figures are derived from output statistics of the contracting sector and are ob-
viously indicative and not exhaustive. Nonetheless, they give a good representation of what
has been spent since 1995 on infrastructure. The graph also contains a projection. On top of
output projections based on present spending, increasing at 9% per year, the value of the 91
projects has been added. All numbers are split up in function of the past and future location
of the projects.
Figure 2-5 highlights a number of important issues. First, Other Indonesia had a much larger
share in infrastructure spending prior to the crisis. Secondly, infrastructure spending appears
to have started declining prior to the crisis – an issue that may point to declining returns on
new investments. Thirdly, during the crisis, infrastructure spending collapsed more in Java
compared to areas outside Java. And fourth, the 91 projects would increase infrastructure
Guidebook page 39
EU – Asia-Invest
Figure 2-5. (BPS 2000, 2000a, 2001, 2003, 2004; figures concern public and private investment)
Infrastructure Realisation and Projected Values

from 1995 to 2003 (inflation - adjusted (2004=100))
60 6%
50 5%
DKI Jakarta +
40 4% West Java
30 3% Other Java +
Bali
20 2%
Other
10 1%
Indonesia
Rp trillion
as percentage
0 0%
of GDP
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Road sector : 1995-1996 figures are much higher than government figures (see World Bank 2005a, p.192). This is probably
due to private sector building (real estate); e.g. the 1995 statistics list almost Rp 10 trillion, while government figures quote Rp
4 trillion. For the road sector, the statistics are thus more comprehensive.
Power Sector : the BPS statistics list only US$ 3 trillion list, which is not in line with the 5000 MW that came on line in the
period. In this sector, the statistics may thus give an underestimation.
Basis for the 2005-2010 projections : the assumed GDP y.o.y. increase 2005-2010 : 6.6%; a 9% increase p.a. is assumed for
routine development spending on infrastructure. All deflator calculations are done based on the old GDP baseline of BPS.
The slow-down in infrastructure spending in 1996-1997 is perhaps surprising, but could reflect a saturation in actual spending
and actual investment reached prior to the crisis. There was indeed evidence that the inflow of funds could not be matched
any longer with financially and technically viable projects. For instance, hurdles related to land acquisition issues had become
notorious and widespread in the years 1996-1997 and required partnering with e.g. the presidential family to be overcome.
spending almost to 1995 levels. Although spending as a proportion of GDP would still be half
in 2010 compared to what it had been in 1995, it is highly questionable whether such an ex-
pansion of spending can be organisationally and logistically achieved. For instance, how
easy will land expropriation be ? Or can the cement sector and other material manufacturers
supply enough raw materials ? In short, Figure 2-5 shows that building the 91 projects,
which were presented as a first batch only, will be substantial in terms of their supply-side
impact, moreover so as many of these projects are to be concentrated in Java.
The collection of data in Figure 2-6 give some more indirect evidence. The various FDI and
domestic investment statistics show that the almost exclusive focus of the 91 projects on
Java has never been common. Certain countries may have shown specific FDI profiles (spe-
cific locations, specific sectors), but overall there has never been an exclusive concentration
of investment in Java.
In short, the said predominance raises questions. It could be argued that the clear lack of in-
vestments on Java during the crisis years justifies a correction by means of an explicit policy.
Yet, the supply bottlenecks are worrisome. Moreover, there is no indication yet which justifies
that this said policy correction should be achieved through private-sector investment.
Figure 2-6. (derived from BKPM data)

Foreign Investment Approvals by All Foreign Investment Approvals
Location - 14 EU Countries by Location
35.0 35.0
30.0 30.0
25.0 25.0
Other Indonesia
20.0 20.0
15.0 15.0
Other Java and
10.0 10.0 Bali
5.0 5.0
Jakarta, West
Java, Banten
(US$ bn)
(US$ bn)
- -
1990
1991
1992
1993
1994
1995
1996
1997
1997
1998
1999
2000
2001
2002
2003
2004
Foreign Investment Approvals (1990-1997) Foreign Investment Approvals (1990-1997)
by Location - 14 EU Countries by Proxy Sector - 14 EU Countries
20.0 6.0
18.0
5.0
16.0
14.0 Other 4.0 Transportation,
12.0 Indonesia Storage and
10.0 3.0 Communication
8.0
Other Java, 2.0 Construction
6.0 Bali
4.0
1.0
2.0
- Jakarta (DKI), - Electricity, Gas
West Java, and Water
(US$ bn)
(US$ bn)
Banten
All Foreign Investment Approvals and Domestic Investment Approvals

by Proxy Sector (Rp 10 bn = approx. US$ 1 bn)
All EU Investment Approvals by Country 18
33
16 16
14
Transport,
12
Storage &
14 Communication
10
8 Construction
12 6
4
Electricity, Gas
2 & Water Supply
10
(Rp bn)
-
Other EU
1997
1998
1999
2000
2001
2002
2003
2004
UK
8 Sweden Domestic Investment Approvals
Spain by Location (Rp 10 bn = approx. US$ 1 bn)
Netherlands 120
6 Luxemburg
100 Other Indonesia
Italy
Ireland 80
4
Germany Other Java and
60 Bali
France
2
Denmark 40 Jakarta, West
Belgium Java, Banten
Austria 20
(US$ bn)
- World
(Rp bn)
-
1997
1998
1999
2000
2001
2002
2003
2004
1997
1998
1999
2000
2001
2002
2003
2004
Guidebook page 41
EU – Asia-Invest
Figure 2-7. (BPS 2001a, 2003) Is Per Capita GPD in Java

stronger compared to areas
GRDP at constant prices outside Java ?
(without oil and gas) (1993=100)
160 Figure 2-7 summarises regional
140 GDP’s and GDP per capita levels.
Overall GDP growth has been
120
Jakarta + poorer in Other Java compared to
100 Banten + Jabotabek++ and Other Indone-
West Java sia. Furthermore, per capita GDP
80
is 66% higher in Jabotabek++
60
Other Java + compared to other areas, includ-
Bali
ing other Java. Greater Jakarta
40
and the surrounding cities are in-
20 Other deed the only real cluster econ-
Indonesia omy of any significant scale in
Rp bn
0
1999 2000 2001 2002 2003 Indonesia. Infrastructure invest-
ment linking up Java with this in-
Per Capita GRDP at constant prices tegrated cluster economy of
(without oil and gas) (1993=100) Jabotabek may lead to the grad-
3.0 ual expansion of shared micro-
economic efficiencies now present
2.5
only in Jabotabek++. Yet Other
Java has a long way to go, both in
2.0 Jakarta + absolute economic clout and in
Banten +
1.5 West Java per capita spending prowess.
This is further clarified in the next
1.0
Other Java + paragraphs.
Bali
0.5
Other Is spending power higher on
Rp mio
0.0 Indonesia Java ?

1999 2000 2001 2002 2003
Figure 2-8 (next page) gives indi-
cations on the buying power of households. Roughly speaking, the market for privately fi-
nanced infrastructure may be limited to urban households with a sufficient elastic spending
capacity towards additional non-food expenditures. The top graph shows the geographic
spread of urban households and their spending prowess. It is evident that only Jabotabek++
has concentrated buying power, even though this buying power has limited excess capacity
for spending on transportation and home services (water, sanitation, power and broadband
services). The latter is evident from the lower graph in Figure 2-8. Yet only 10 mio house-
holds in Jabotabek++ have incomes of more than Rp 1,200,000 (US$ 130) per month. An-
other 10 mio households with similar spending capacities are spread out over Other Java
and a third group of 10 mio households are spread out over Other Indonesia. In other words
: infrastructure investment outside Jabotabek++ will be hard to finance commercially. The
users are too thinly spread out and feasibility studies would typically have to rely on assump-
tions of future concentrated spending power in Other Java and in urban centres in Other In-
donesia.
Java requires infrastructure to support exports ?

The on-going changes in the economic structure have been discussed briefly in Chapter 1.
Figure 1-8 indicated that exports from Other Java decreased significantly in the past years. If
therefore Other Java can gain in competitiveness by improving its harbours and road infra-
structure, then the dominance of Java in the Government’s infrastructure programme may be
Figure 2-8. (BPS 2004b and 2004b) fully justified. It should be

noted, however, that the re-
Urban Household Income per month
cent pressure on Java’s infra-
(URBAN: approx. 100 mio people ) (Rp/month)
40 structure is not caused by
>2,000,000 pressures from export, but by
the volume of the existing in-
30 <2,000,000 ter-island trade, including
<1,200,000 trade on Java itself. To which
20 extent these domestic trade
<600,000 flows can pay for an extensive
Million People
infrastructure programme has

10 not been clarified by the Gov-
ernment.
-
Indonesia
Banten+West
Other Java +
Java’s transport infrastruc-

Other
Jakarta +
Java
Bali
ture needs urgent invest-

ment.
Car sales in Indonesia have
Urban Monthly Household Expenditures shot up in recent years, creat-
(by consumer group) ing a straightforward problem
3.5 14 of insufficient road capacity in
3.0 12 function of the number of ve-
hicles. Yet also here, regional
2.5 10 differentiation needs to be
2.0 8 considered. Figure 2-9 gives
some primary indications that
Millions (Households)
1.5 6
food the increase of motor vehicles
expenditure
1.0 4
other non-food
is most outspoken in Jabota-
Rp Millions
0.5 2 bek++. In Other Java, the

transport
increase of registrations is
- - home services much more dominated by the
,000 , 0 00 ,0 00 ,0 00 segment of motorcycles. The
< 60
0 2 00 0 00 0 00 urban
< 1, <2, > 2, households construction of an elaborate
toll road programme through-
out Java is thus not yet about accommodating huge numbers of new vehicles. This issue is
only crucial in Jabotabek.
A World Bank (2005a) study
Figure 2-9. (BPS 2003 and 2003c)
confirms this outlook. Most
Number of registered vehicles (dots) and four-lane road construction
motorcycles (bars) 2000-2002 programmes in Indonesia,
6 18
Jakarta + including the Trans-Java pro-
West Java gramme, is financially viable
5 15 only starting 2015 and thus
Other Java not today. Road betterment
4 12 and upgrading programmes
+ Bali
M illions of M otorcycles
are however crucial. Figure

3 9
Other 2-9 clarifies that this would
Indonesia benefit also large numbers of
M illions of Cars
2 6
motorcycle users.
1 3 It is worthwhile to note that
planners South Sulawesi are
0 0
picking this lesson : they want
2000 2001 2002
Guidebook page 43
EU – Asia-Invest
to extent the toll road from Makassar to the airport by a two-lane toll road complemented by a
toll tracks for motor cycles. Earlier, these concepts had been outlawed, as two-lane toll
roads were outlawed on Java due to the many initial road accidents. These two-lane road
were typically the first two lanes of a future four-lane toll road and had thus no median divider
in-between the two initial lanes. As a result of their bad reputation, they were outlawed in
Public Works regulations, making the four-lane toll road layout as the mandatory minimum
option. Nonetheless, areas in Other Indonesia which seem now to be willing to experiment
with intermediate options. Toll road development on Java, however, seems to be stuck with
the options of either four lanes or none.
Java needs more water and power.

There is no point in denying that water and energy are used in urban Java in environmentally
and often economically unsustainable manners, while at the same time large numbers of
low-income households are deprived from easy access to clean water. Yet this chapter al-
ready pointed to suspicious statistics, for instance in relation to electrification. Overall,
household surveys give a reasonable indication that the willingness to pay for water and
power services is often much lower than the demographic needs in theory would suggest.
Figure 2-10 highlights this discrepancy. The number of people having at least basic access
to water (piped, pumped, or through protected wells) is highest on Java and much more
problematic outside Java, where areas with difficult water resources conditions are much
more common. With regard to access to power (measured here as having electrical lighting
in the house), areas outside Java are even more clearly lagging behind. Again, the figures do
not say that Java does not need more water and power, on the contrary. What is indicated is
that the willingness to pay for water and power is not necessarily highest on Java, especially
in areas where economic growth is slow.
Furthermore, there is a common assumption that Java has more non-residential demand for
water and power. Yet also here, the willingness to pay is not always evident. An indication
hereof is the sluggish demand for serviced industrial estate land in recent years. Industrial
estates were indeed developed with the promise that high-quality services could be set off
against higher than common user service charges. Yet already in the mid 1990’s and thus
before the crash of 1997, it became obvious that industrial operations willing to pay for better
services were finite. Many industrial estates are still left with stock of land developed in the
mid 1990’s. In short, also industrial operations have shown less elastic demand for infrastruc-
ture and services than what is often expected.
Figure 2-10. (BPS 2004e)

Access to Water - 2003 Access to Power - 2003
100% 100%
80% 80%
Other
60% 60% Other
Protected Spring
40% Protected Well 40%

Generated
Pump Electricity
20% 20%
Pipe Electricity
0% 0%
Indonesia
Indonesia
Banten+West
Other Java +
Banten+West
Other Java +
Other
Jakarta +
Other
Jakarta +
Bali
Java
Bali
Java
Above observations can be summarised as follows :

• With 90% of the Summit projects being concentrated on Java, the expectation of
general micro-economic efficiencies need to be seen against specific risks.
• The locational risks of concentration are obvious. This risk is not just about physical
“crowding” and the lack of spread-out options. A more important risk relates to the
Government agenda to enhance regulatory efficiency : many of the proposed policies
with regard to deregularisation (e.g. private investment in toll road development) and
operational fast-tracking (e.g. overcoming land acquisition delays) will lead to national
institutions and national regulations which are practically benefiting infrastructure in-
vestment on Java only. Other regions may therefore want to delay changes, as they
see no benefit in changing the status quo.
• Financial risks are not equal. Jabotabek++ is clearly the best market for infrastructure
investments. Other Indonesia is the most difficult area and will often need subsidies
for most infrastructure development. Yet infrastructure on Java outside Jabotabek
poses a different challenge : while the rate of return should often be better compared
to projects outside Java, pay-back may still require a long time. Projects in Other Java
are thus more time-sensitive and should thus avoid execution delays as well as be
guaranteed of policy stability during their pay-back period.
3.2. Sub-National Risk Environment for Infrastructure Investments.

The above characterisation leads to three specific profiles of sub-national political risks for
infrastructure investments :
• The lower risks related to infrastructure investments in Jabotabek++ could invite
cherry-picking by State Owned Enterprises, as well as protectionist attitudes in favour
of domestic companies.
• The time risks related to infrastructure investments in Other Java make these invest-
ments very sensitive to policy changes. Good political leverage would thus be essen-
tial for infrastructure investors and operators. This is a commodity which foreign
investors usually have less of compared to local investors.
• The lack of commercial viability of many infrastructure projects outside Java will re-
quire continued concessional financing from multilateral and bilateral sources. The
interests of private-sector infrastructure investors will thus be linked to tied-aid poli-
cies of donor-countries.
This risk profiling is of course only indicative. Niche clients, especially in the commodity-rich
areas outside Java, could offer specific opportunities for commercial infrastructure invest-
ment. But niche clients are fickle and the costs of continued business representation in order
to access them is potentially high. Furthermore, the market structure will also evolve with
the industry environment – which in the case of infrastructure investment is strongly defined
by a limited number of producers and suppliers, whether State Owned Enterprises or multi-
national groups. This supply structure is however strongly sector specific and will therefore
be further highlighted in Chapter 4.
Guidebook page 45
EU – Asia-Invest
- empty page -
Chapter 3.
The Legal And Regulatory Framework, and
the Financial Framework for Private Participa-
tion in the Provision of Infrastructure.
This chapter consists in two sections. The first one presents the overall policy, legal and insti-
tutional framework that governs private investment in Indonesia, with a specific focus on in-
frastructure. The second section addresses the different public-private partnership schemes
and reviews the main sources of financing that are available for such schemes. It also de-
scribes the main programmes designed by the European Commission to foster EU-Asia co-
operation in trade and investment.
1. Legal and regulatory framework.

1.1. Overall framework.
In his keynote speech at the Indonesian Infrastructure Summit, President Susilo Bambang
Yudhoyono stated the following:
“To improve and increase the supply of infrastructure, we are developing a stable and clear
policy framework where the private sector can engage in effective partnership with the gov-
ernment, secure in the knowledge that the charges and tolls that generate income will be free
of arbitrary political interference. And as we proceed to implement a number of infrastructure
programs, my Government is committed to provide the private sector with a healthy environ-
ment and firm project-by-project support as per tendered contracts, to implement supporting
investments. Indeed, the most recent deregulations serve as clear examples of our determina-
tion to attract, enable and safeguard private sector investment. The international and domestic
private sectors are now encouraged to invest on almost equal terms in new companies and
projects in all of the industry. For the medium-term, my Government is enacting programs to
support greater private sector involvement through public-private partnership in infrastructure
services and by removing all bureaucratic bottlenecks which currently inhibit private sector in-
volvement.”
Since the 1990s, successive Indonesian governments have strived to promote the participa-
tion of the private sector in the provision of infrastructure by creating an enabling policy, legal
and regulatory framework. At the recent Infrastructure Summit, the present Government
stated its policy do so again more effectively than in was done in the past years (see Text
Box 3-1), notably on the following key issues for the infrastructure sector :
• Regulatory issues: to separate regulation from operations and to establish independ-
ent regulatory bodies.
• Competition: to create competition between operators where there is scope for com-
petition, or where there is a natural monopoly, create competition for the business.
• Tariff setting: indexation of tariffs and charges, based on cost recovery principle,
should be provided for as part of the tender and contract process. Tariff adjustment to
be based on contract, for legal certainty.
• Land procurement: Presidential Decree No 55/1993 on land acquisition will be re-
vised to allow more efficient and timely land purchase procedures.
• Decentralisation laws: conflicting laws and regulations between the central govern-
ment and sub-national governments will be revised.
Guidebook page 47
EU – Asia-Invest
Text Box 3-1. Reform measures in the post-Soeharto years.

The previous government and the Parliament had already taken significant steps in several areas: a new tele-
communications law had been enacted in 1999, paving the way for the introduction of competition in the sec-
tor, and new laws had been passed in the oil and gas sector in 2001 and in the toll road sector in 2004.
The Government had also issued a new law on electricity, enacted by Parliament in 2002 (Law No. 20 of
2002), that allowed privatization and competition in the electricity supply industry. However this law was
annulled by the Constitutional Court on the ground that electricity is deemed to be an area of production that
is essential for the State as it is vital for the life of the people, and therefore it should be controlled by the
State in accordance with Article 33 of the Constitution. The present Government is drafting a new law, the
contents of which are not yet known. It will be important to see how it will reconcile the Constitutional
Court’s ruling and the government’s objective to introduce competition in the power sector.
The first laws and regulations governing private participation in infrastructure projects were enacted in 1998.
At the start of the 1998 economic crisis, a Presidential Decree (Kepres 7/1998) on Cooperation between the
Government and Private Companies in the Development and or Management of Infrastructures was issued.
This decree was followed by Decision of the State Minister of National Development Planning/Chairman of
the National Development Planning Board (KEP-319/KET/10/1998) on Implementation of Cooperation be-
tween the Government and Private Enterprises in the Construction and or Management of Infrastructures.
These rules were intended to provide basic guidelines in a business area which had seen a number of projects
being completed in the previous years in a legal vacuum.
The rules required that all projects proposed for private participation be subject to thorough technical, eco-
nomic and financial studies. It also required that private participation solicited on a competitive basis. Deci-
sion-making roles in the procurement process were accorded to a government’s Procurement Evaluation
Team (TEP) for national project and to provincial governors for regional projects.
Following the crisis, a new Presidential Decree (Kepres 81/2001) revoked certain provisions under Presiden-
tial Decree 7/1998 and stipulated, among others, the formation of a Committee for the Acceleration of Infra-
structure Development Policy (KKPPI) that was tasked to recommend policies on the development of
infrastructure projects and to amend Presidential Decree 7/1998. The possible extension of KKPPI’s role as a
centralized body with decision making powers on projects in the infrastructure sector will also require change
in the existing regulations. However progress has been delayed due to the proposed draft’s inconsistency with
existing sector laws.
Further, the government announced an agenda of reforms in the laws and regulations of the
different sectors, which are detailed under the sector profiles (Chapter 4).
As part of its reform agenda, the government listed 14 laws and regulations that would be
issued in the near future. So far, the following 10 laws and regulations have been drafted:
1. Draft Government Regulation on Airport;
2. Draft Amendment to Government Regulation on Inland Water Transportation;
3. Draft Government Regulation on Air Transport;
4. Draft Government Regulation on Railways Infrastructures and Facilities;
5. Draft Law on Navigation;
6. Draft Law on Air Transport Liability;
7. Draft Law on Traffic and Road Transport;
8. Draft Law on Railways;
9. Draft Law on Aviation;
10. Draft Presidential Regulation on Land Procurement.
In addition, the following laws and regulations are being prepared:
1. Draft Law on Investment;
2. New Draft on Electricity;
3. Draft Revised Law on Oil and Gas;
4. Draft Government Regulations on the Establishment of Toll Road Regulatory Body;
5. Draft New Law on Maritime.

The effective implementation of this ambitious reform agenda will be a critical element of the
overall action plan towards revitalising investment in infrastructure. It will entail not only the
enactment of new laws but also the effective implementation of regulations.
1.2. Foreign direct investment in the infrastructure sector.

The power, transportation, water and sanitation, and telecommunications sub-sectors of the
infrastructure sector are open to foreign direct investment. Investment in these sub-sectors is
also subject to the provisions of the Negative List and the IPU as described in the detailed
information on foreign investment regulations below.
The fields of business that are open to foreign direct investment in the infrastructure sector,
as set out in the IPU, are the following:
• Energy sector: Power Generation, transmission and distribution; Power support ser-
vices; Oil and Gas.
• Transportation sector: Railways, special railways; harbours, airport transportation
support services, toll roads.
• Telecommunications sector: Telecommunications networks; telecommunications
services.
• Water and Sanitation sector: Development and operations of clear water, waste
management, waste water management.
The Foreign Investment Law

Foreign direct investment in Indonesia is governed by Law Number 1 of 1967 concerning
Foreign Capital Investment, which was subsequently amended by Law Number 11 of 1970
as implemented by a number of regulations issued thereafter. The government institution in
charge of matters that pertain to foreign equity investment is the Investment Coordinating
Board (Badan Koordinasi Penanaman Modal or “BKPM”), which has been given comprehen-
sive authority by virtue of a Presidential Decree.
The main features of the investment law are described hereunder. More detailed provisions
are provided in Annex 1.
Sectors open to Foreign Direct Investment

The Foreign Investment Law stipulates the following:
• The Government determines the fields of business that are open to foreign direct in-
vestment and sets forth special conditions on such investment.
• The Government has determined that certain business fields are closed to foreign di-
rect investment.
• Those business fields that are vital to the State and essential to the livelihood of the
people are completely closed to foreign investment, and cannot be undertaken by
foreign investors without the participation of Indonesian businesses. These business
fields are as follows: harbours; production, transmission and distribution of electric
power for the public, shipping, telecommunications, aviations, drinking water, public
railways, development of atomic energy; and mass media. Industries performing a vi-
tal function in national defence such as the production of arms, ammunition, explo-
sives, and war equipment are also absolutely closed to foreign direct investment.
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Based on the above caveats, the Indonesian Government has from time to time issued a list
of the business fields which are either open or closed to foreign direct investment. The list is
known as the ‘Negative List’ and is issued by way of a Presidential Decree. The most recent
Negative List is that in Presidential Decree No. 96 of 2000 as amended by Presidential De-
cree No. 118 of 2000.
In practical terms, and based on the recent liberalization in the investment sector, all busi-
ness sectors are open to foreign direct investment, with the following exceptions and qualifi-
cations:
• fields of business which are absolutely closed to foreign investment as listed in the
Negative List (see Schedule 1 Annex 1);
• fields of activities that referred to as "strategic activities", which are significant for the
State; the maximum foreign shareholding is 95% (these include, among others, pub-
lic harbours, transmission and distribution of electric power for public use, telecom-
munications, shipping, aviation, public drinking water, public railways nuclear power
generation, etc.);
• fields of business open to foreign investment with the requirement of a joint venture
with domestic capital (Indonesian shareholder(s)), (please see Schedule 1 Annex 2);
• fields of business open to foreign investment under certain conditions, as listed in the
Negative List (please see Schedule 1 Annex 3).
Repatriation
Text Box 3-2. Expected Changes in the Invest-
ment Law. One important feature of the Foreign
Investment Law is the guarantee that
The Government plans to amend the existing Foreign In- the Government will not nationalize a
vestment Law with the intention of simplifying the existing
foreign investment or revoke rights to
licensing procedures and providing improved legal certainty
to investors. The main objectives in amending the law are: control a foreign investment. The ex-
ception to the foregoing is where it is
the need to eliminate discrimination in the treatment of declared by law to be in the national
foreign direct investment and domestic investment;
the need to simplify and expedite the establishment of a
interest to do such nationalization
PMA Company; and then only upon payment of mu-
the need to extend the duration or eliminate the time limit tually agreeable compensation de-
for the duration of a foreign direct investment (currently, a termined in accordance with
PMA company’s period is limited to 30 years as of its principles of international law. The
commercial production or commencement of its activities,
but can be further extended subject to obtaining a license Foreign Investment Law also assures
for expansion of its investment). that the foreign investor shall have
the authority to appoint the manage-
The new law would also reform the role and functions of
BKPM from a licensing body to a registration body, in addi- ment of the investment company and
tion to its promotion role as an Investment Promotion the right to repatriate capital in the
Agency. form of after-tax profits, reimburse-
ments for expenses of expatriate
The new (or amended) law will need to take into account
manpower, depreciation of fixed as-
existing regulations, such as the Indonesian Company Law
and the Law on Mandatory Company Registration. Under sets, etc.
the current laws and regulations, there are four general steps
in process of establishment of a PMA Company: (i) the Disputes on Foreign Investment
processing of the license from BKPM (ii) the processing of The Foreign Investment Law provides
the approval from the Minister of Law and Human Rights of
for arbitration of investment disputes.
the company’s deed of establishment; (iii) the registration of
the deed of establishment with the Company Registration
By virtue of Law Number 5 of 1968,
Office (iv) the processing of other ancillary licenses from Indonesia ratified the Convention on
several government institutions, including another license the Settlement of Investment Dis-
from the BKPM – the permanent operating license. putes between States and Nationals
of other States (known as “ICSID”),
thus allowing for such disputes to be submitted to international arbitration under the ICSID
rules.
Other matters concerning the legal and regulatory framework for investing and doing busi-
ness in Indonesia are detailed in Annex 1. They include sections on labour laws, competition,
anti-corruption laws, land and security issues, government procurement procedures, and
regulations on establishing a company.
Government Guarantees
The Government is considering the possibility of giving limited guarantees to certain projects,
which may either be in the form of pre-defined risks for private financiers or commitment to
provide contingent support to state-owned companies/contracting counterparties for failure to
pay upon certain triggering events covering specific risks.
However, the implementation of such guarantees would be difficult as the following regula-
tions currently prevent the Government from issuing guarantees for projects:
Restrictions under Presidential Decree No. 59 of 1972 – Restrictions that Apply to all
Sectors
There is a general restriction under this Presidential Decree for the Indonesian Government
to provide a guarantee for offshore loans obtained by State-owned or private companies in
Indonesia. A government guarantee for projects can be interpreted to be in violation of this
Presidential Decree. If this is the case, a new Presidential Decree (or a specific Law which is
higher in hierarchy than a Presidential Decree) needs to be issued to remove said restric-
tions.
Restrictions under Presidential Decree No. 37 of 1992 – Specific Restrictions for the
Electricity Sector
The issuance of a government guarantee for Independent Private Power Projects is prohib-
ited under Presidential Decree No. 37 of 1992. If the Government decides that it will give a
guarantee (in whatever form; limited, specific circumstances, etc), a new Presidential Decree
must be issued to allow the Government to do so in deviation to the restrictions under Presi-
dential Decree No. 37 of 1992. Alternatively, the prohibitions under Presidential Decree No.
37 of 1992 should be revoked entirely.
World Bank Negative Pledge

The World Bank Negative pledge refers to the restrictions for the Government in the creation
of security interests over public assets. As under Indonesian law, all of a person’s assets
serve as objects of enforcement of that person’s obligations, and this includes the Govern-
ment, it is irrelevant whether or not a governmental guarantee directly relates to the assets
as meant under the World Bank Negative Pledge. If it is considered by the Government to
issue guarantees for projects, although the World Bank Negative Pledge specifically refers to
‘public assets’, it may be possible for a broad interpretation of the provisions in the World
Bank Negative Pledge. For this purpose, confirmation should be asked from the Government
and the World Bank whether such guarantee would not violate the World Bank Negative
Pledge (or whether specific waivers must be obtained from the World Bank for purposes of
creating a government guarantee).
Competition Law
Indonesia has a law on competition, but its development and implementation remain unde-
veloped. Law No. 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair
Business Competition (the “Competition Law”) was only put into effect in March 2000, and as
yet, is not supported by adequate implementing regulations or cases. As an example, the
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Competition Law does not generally provide clear thresholds, or definition of practices that
would fall into the category of anti-competitive practices. For example, Article 17 and Article
25 of the Competition Law actually deal with the same subject, i.e., monopoly and dominant
position, but from the provisions we only know that monopoly and dominant position both
acts of acquiring major control over a certain market, and it is not easy to differentiate be-
tween the acts. It is not clear whether or not the Competition Law permits the application of
both articles jointly.
As stated above, no specific implementing has been issued, as the fact is with the regula-
tions on competition that pertain to mergers, consolidations and acquisitions, an important
part of the competition policy. The Competition Law states that these will be provided in the
form of a Government Regulation to be issued sometime in the future.
The Competition Law, nevertheless, recognizes agreements as an important issue of the
competition policy, as reflected in the fact that it is covered extensively in the Competition
Law, by defining each possible anti-competitive practice. However, due to the complex na-
ture of the business activities and the vagueness of the articles in the Competition Law, it is
doubtful that any single business activity will be covered by any single article. Such issues
remain to be resolved as in anticipation of the continued development of the fledgling compe-
tition law regime in Indonesia.
An implementing regulation, however, has been issued for the establishment of the Competi-
tion Commission. This Commission is established to handle complaints and reports and is-
sues decisions regarding antimonopoly and unfair business competition. Due to the absence
of the implementing regulations, the judgments issued by the Commission have been based
on broad fact findings and broad interpretations.
As with the issue of market control, the Competition Law stipulates that a single company
controlling at least 50% of a certain market or 75% jointly with another company (or compa-
nies) is deemed to have control or a dominant position in the concerned market. Article 27 of
the Competition Law provides further that the above thresholds (50% and 75%) also apply to
shareholdings. Under the Competition Law, a business actor (individual or company) is not
allowed to have a shareholding which results in the control of more than 50% by one busi-
ness actor, or 75% by two or three business actors, of a business engaging in one certain
product or service. Except for Article 17 on Monopoly, these thresholds are not supported by
criteria for determining the market area. The Competition Law stipulates further, in connec-
tion with agreements, that an investigation of unfair oligopoly or oligopsony (Article 4 and Ar-
ticle 13) issues may arise if an agreement results in the acquisition of 75% market share of a
certain product or service.
As is the general case with most competition and anti-trust laws, unless it is specifically men-
tioned, an excess over the above thresholds does not necessarily mean that the relevant
company/party has violated the Competition Law. Further investigation, based on either the
Commission’s own observations or a complaint from another party is necessary.
Laws on decentralisation and regional autonomy

In 1999, Laws on Regional Governance and on Fiscal Balance between Central and Re-
gional Governments were enacted and supporting regulations were implemented. Law 22
provided for autonomous regions to be responsible for government functions in all sectors
except for foreign affairs, defence and security, justice, monetary and fiscal affairs and relig-
ion. The law also conferred responsibility to the regencies (Kabupatens) and municipalities
(Kotas) for eleven sectors including public works (including roads) and communications (air,
land and sea transport, telecommunications).
Government Regulation No 25 of 2000 concerning Government Authority and the Provincial
Authority as an Autonomous Region (“GR 25/2000”) elaborated the provisions of Law 22 by
defining the functions assigned to the centre and to the provinces, all the other functions be-
ing deemed to belong to the regencies and municipalities.
Law No. 32 of 2004 Regarding the Regional Administration, promulgated on 15 October
2004 (“Regional Government Law”), further elaborated on the centre/regions relationship. It
is the current basis for regional administration in Indonesia.
The territory of Indonesia is divided into provinces, which are further subdivided into regen-
cies and municipalities. The regencies and municipalities within a province are autonomous
and are therefore not subservient to the province.
The Regional Government Law provides that certain powers remain with the central Gov-
ernment, while certain powers must or may be exercised by regions (a province, regency or
municipality) autonomously. Government Regulation No. 25/2000 (“GR 25/2000”) remains
the implementing regulation for the Regional Government Law.
The basic provisions of Law 22/1999 were confirmed with regard to the overall distribution of
functions between the centre and the regions: the central Government governs foreign af-
fairs, security and defence, judicial, fiscal, monetary, religious matters and other powers
which in nature are intended to support powers granted to the regional governments. Hence
regency or municipality governments have the power to govern all matters except those
vested in the central Government. Where the power has not been or is not exercised by the
regency government or the municipal government, or where the relevant area of activity
spans across more than one regency or municipality, the provincial government has the au-
thority to exercise governmental powers in respect of the relevant activity. GR 25/2000 speci-
fies the range of other powers retained by the provincial government.
The Regional Government Law provides that, as an autonomous region, a province, regency
or municipality may pass its own regional regulation. A regional regulation is issued by the
head of the regions (a governor, head of regency (bupati) or mayor (walikota), as the case
may be) with the approval of the local legislature. The legislative body may introduce a re-
gional bill that may become a regulation if approved by the head of the region. A regional
regulation cannot contradict or be inconsistent with another regional regulation or higher-
ranking legislation or regulation.
Although this will take time to materialize, the application of the Regional Government Law
will change the legal framework for investment activities in Indonesia from a centrally-
administered system of regulation to a regionally-administered system. For instance regional
governments are allowed to grant incentives and concessions to investors In order to attract
investment. In the provisions concerning the division of governmental affairs, the Regional
Government Law states that capital investment administration services including inter dis-
tricts/cities is under the authority of the regional government of the province and the regency.
Land Acquisition
Land acquisition/procurement has been a major bottleneck in infrastructure projects. The
Government will soon issue a revision to the Presidential Decree No. 55 of 1993 (on the
Land Acquisition for Development Activities for Public Interest, “Presidential Decree 55”) to
improve the implementation of land acquisition procedures. The draft Presidential Regulation
on Land Acquisition for Public Interest Developments stipulates the following:
• The time limit for an amicable settlement between the land owners and the committee
for land acquisition;
• The development activities which are for public interest no longer refer to ‘not for
profit’;
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• The infrastructure sector that is governed by the Draft Regulation has been ex-
panded, to include, among others, the development of toll roads.
It is interesting to note that the Draft Regulation concerns land acquisition for public interest
development carried out by the Government, and does not stipulate acquisition of land for
infrastructure projects by the private sector.
2. Financial framework.
Private sector participation in infrastructure projects may take a variety of forms:
• Management contract: Under a management contract, a private firm manages the
operations of a state-owned business without committing investment capital or ac-
cepting commercial risks.
• Lease: Under a lease, a private firm operates and maintains a state-owned business
as its own commercial risk, with income being derived directly from tariffs. The private
firm (lessee) is not required to commit investment capital, except for maintenance re-
quirements. Other more complex forms of lease contracts are DBL (Design, Build,
Lease), DBGO (Design, Build, Finance, Operate) or BLT (Build, Lease, Transfer)
• Upstream BOT/BOO/Concession: Under an upstream contract, a private firm takes
commercial risk and accepts investment obligations to build or rehabilitate a facility as
part of an agreement to supply to a downstream off-taker. Under a BOT (Build-
Operate-Transfer) scheme, the private owner of the facility owns it for the concession
period but is required to transfer the asset to the off-taker (or another government
agency) at the end of the concession period. Under a BOO (Build-Operate-Own)
scheme, the private owner of the project retains ownership of the asset beyond the
concession period.
• Downstream BOT/BOO/Concession: Under a downstream contract, a private op-
erator takes commercial risk and accepts investment obligations in buildings or reha-
bilitating a facility as part of an agreement to supply a service directly to end-users.
• Privatisation: It involves the sale of government’s shares in a State-owned enterprise
to private investors/operators.
Obviously, the risk profile for private investors is very different from one form of PPP scheme
to another. In this study, our focus is on the PPP schemes that require private companies to
commit substantial capital resources in building and operating infrastructure facilities. This is
primarily the case of concessions under BOT or BOO schemes.
In the boom times of the 90s, most PPPs were financed through project finance techniques.
Project finance is a concept of financing for a particular project, usually structured as an ad
hoc company being formed to undertake the project, with equity being contributed by the pro-
ject promoters, usually companies/operators specialised in the particular sector of interven-
tion, and loans provided by banks who look to the project cash flows as the source of funds
for debt repayment and the assets of the project as the main collateral. The rationale is to
limit lenders’ recourse to the capital of the project company.
At the peak time of private sector investment in infrastructure in Indonesia, before the crisis
(1997), the main actors and elements of a typical project financial package were:
• The project company, that was required to put up a substantial amount of equity capi-
tal of 30 to 40% of project costs, and to undertake a number of commitments in terms
of completion and performance guarantees and compliance with financial covenants.
• The concession authority, usually a government body (for instance Jasa Marga in the
toll road sector) legally empowered to award a concession to build (or rehabilitate) a
piece of infrastructure and operate it for a period of time. The concession terms in-
cluded provisions on the length of concession, the extent of the monopoly defined
and prices (tariff) that would be charged to the customers, including revision mecha-
nisms, in the case of a downstream concession. In an upstream concession, the leg-
islation set the conditions under which the state-owned body (for instance PLN in the
electricity sector) would purchase the output of the power plant to be set up by the
project company (off-take contract),
• The government itself, usually through the Ministry of Finance, who would sign sup-
port letters compelling the state-owned companies to honour their off-take contracts,
• The lenders who would provide a combination of long term export credits and com-
mercial loans usually denominated in US Dollars. The lenders were primarily the large
international banks, from the USA, Europe and Japan who had a strong presence in
Indonesia and the Asian region.
Today, conditions have changed dramatically, due to the crisis that has affected some of the
Asian countries, Indonesia in particular, and also due to a number of other events and evolu-
tions in the international economic scene.
As has been amply demonstrated in numerous surveys, including our own analysis of EU
companies’ perceptions and strategies in the framework of this study, the current situation is
characterised by a fundamental reluctance by most of the key potential actors to consider
new investments/loans to large infrastructure-type of projects in emerging countries.
Most of the big companies that have the financial capacity and technical expertise to invest in
large PP projects have been hurt by the crises of the 90s. They are under strong pressure
from their shareholders to retrench from risky countries and projects and concentrate on
more developed markets. In addition the new IAS accounting norms that will be enforced in
2006 (?) are likely to have a negative impact on their risk assessment by financial markets.
As a result, they are increasingly hesitant to engage substantial levels of equity funds in high
risk projects in the foreseeable future.
Similarly many of the international banks, be it in the USA, Japan or Europe have gone
through an intense period of restructuring and concentration over the last ten years. The new
banks are generally stronger and well equipped to undertake large and sophisticated project
financing. Yet they are facing less pressure from competitors whilst they are under increased
scrutiny from their shareholders and financial markets. Furthermore banks are mulling the
consequences of new prudential rules on their own capital base and risk policies with the
planned enforcement of the “Basle II” guidelines, in the near future.
International Financial Institutions (IFIs) themselves have not been unharmed by the crises,
inasmuch as they have also participated in the financing euphoria of the 90s. They are now
re-assessing their missions and strategies, by endeavouring to better correlate their role of
advisors and facilitators with the role of provider of funds. With regard to the private sector,
they emphasize their role as helping the creation of an enabling environment through a range
of technical assistance programmes aimed at enhancing the capacity of governments and
public bodies.
In the present Indonesian context, what are possible sources of funds for potential private
promoters of infrastructure projects?
2.1. Equity.
With regard to equity capital, private promoters of projects who would be searching for risk
capital to complement their own equity contribution would have a number of options.
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In Indonesia itself, the financial markets are still at an early stage of development. There are
large amounts of funds placed in pension funds and life insurance institutions, estimated to
exceed 100 trillion Rupiah (about USD 11 billion) at end 2003. However, the existing legal
framework limits the possibility of investing these funds in long term securities such as infra-
structure projects’ equities. Furthermore, the public sentiment is till cautious about the whole
financial system following the recent crisis, and management capacity needs to be built
within the pension funds and insurance companies, and at the regulatory and supervisory
level.
The indexes of the Jakarta and Surabaya stock exchanges have recorded impressive growth
recently, which is a positive indication of renewed interest and confidence by investors, in-
cluding foreign portfolio managers. Yet, this inflow of money could easily be reversed. What
is required is a steady mobilisation of funds into long term investments, including in infra-
structure projects.
A first important step in mobilising domestic savings into infrastructure investments could be
achieved if a proposal to set up an Infrastructure Development Fund (IDF), currently under
consideration by the Indonesian government, becomes a reality. One of the main objectives
of the IDF would be to contribute to the re-capitalisation of state-owned enterprises such as
PLN. It is conceivable that it could also invest in PPP projects.
Outside Indonesia, there are possible sources of equity capital.
As a general observation, European banks, which are now for most of them in the private
sector, do not invest in the share capital of risky projects in emerging countries.
This specialised field of intervention is more the domain of the IFIs such as the World
Bank/IFC Group and the Asian Development Bank (ADB) who are potential investors in pri-
vate projects, including PPP infrastructure projects.
Several European public institutions are also potential investors in the share capital of private
projects, usually as minority partners alongside the project promoters/operators: DEG from
Germany, FMO from the Netherlands, PROPARCO from France, CDC from the UK. Each
institution has its specific mode of intervention. As a whole these institutions no longer tie
their support to the project sponsors’ nationality.
Some of these institutions are reported to consider setting up a specialised fund that would
invest in small to medium size power generation projects.
Private investment funds: a firm called Emerging Markets Partnership (EMP) manages pri-
vate funds that provide equity and equity-related capital to companies in infrastructure pro-
jects in emerging economies, including Asia. The shareholders of these funds are
international financial institutions, government institutions, insurance companies, banks and
private investors. EMP has announced its intention of setting-up a specific fund dedicated to
infrastructure projects in Indonesia.
There may be other initiatives of this kind in the future.
Lastly, an important source of investment may prove to be regional private investors such as
Malaysian, Singaporean, Thai or Chinese companies that will seek partnerships with other
foreign companies for the purpose of jointly setting up infrastructure projects in Indonesia.
The potential of such joint-ventures between European providers of technical expertise and
Asian providers of capital and local business experience should be explored.
2.2. Debt.
The Indonesian banking system is still recovering from the crisis started in 1997. With mas-
sive government support, it has improved significantly over the recent past, and it is now in a
position to again play a meaningful role in supporting the Indonesian economy. Bank Indone-
sia has recently issued regulations aimed at enabling banks to commit larger amounts to in-
frastructure and other investment projects.
However it will take some time before Indonesian banks can provide meaningful funding to
infrastructure projects that are by nature quite risky. At present, only 2% of bank loans have
maturities in excess of two years.
In addition to bank loans, well-established Indonesian companies, both state-owned and pri-
vate, have access to the domestic bond market. Institutional investors have shown a strong
demand for bonds over recent months. For instance a private toll road operator recently is-
sued bonds for an amount of Rp 800 billion to finance the construction of a project in Sura-
baya.
Foreign banks are present and active in Indonesia, albeit in a smaller number than in the
90s. European banks are well established, with major institutions such as HSBC, BNP
Paribas, Deutsche Bank, Calyon, ABN AMRO and Standard Chartered operating branches
or representative offices in Jakarta.
When they are conducting onshore banking business, either as branches or subsidiaries,
banks are mostly involved in short term rupiah lending to corporate clients and to servicing
the needs of private clients.
With regard to the financing of infrastructure projects, European banks present in Indonesia
would be able to offer a full range of foreign currency lending services such as project financ-
ing, either from units based in Jakarta and/or from units based in regional financial centres
such as Singapore or Hong-Kong. However, the overall attitude of foreign banks on long
term lending to the Indonesian corporate sector or to individual projects remains cautious
(except in cases where projects are securely structured with reputed companies involved,
both in constructing and operating a facility, and in committing long term purchase contracts
for the facility’s output).
European banks are also active in providing export credits to Indonesian buyers of equip-
ment, both from the public and private sector. They coordinate the setting up of elaborate
financial packages for public promoters of large projects (such as the main State-owned En-
terprises), which usually involve a combination of soft loans in the framework of bilateral aid
and export credits with insurance coverage by institutions like COFACE, ECGD, HERMES or
SACE. Since 1976, the terms of intervention of these Export Credit Agencies (ECAs) have
been coordinated and harmonised on an international basis in the framework of the “OECD
Consensus” and within the guidelines set forth in the EU by the EC through the directive on
harmonisation of provisions related to medium-term export credit insurance that was adopted
in 1998. The current position of European ECAs with regard to Indonesia is one of renewed
openness. There have been recent cases of export credits being set up with durations of
more than 10 years, in favour of public borrowers, i.e. on the basis of an Indonesian sover-
eign risk. The ECAs’ attitude on corporate borrowers, or PPP projects, remains cautious.
Other possible sources of term loans are the IFIs, including the World Bank Group and the
ADB.
Further to extending straight loans, the ADB has recently announced a new initiative that ap-
pears to provide an effective answer to the crucial risks of un-hedged exchange exposure
and tenor mismatch.
The initiative involves ADB undertaking a local currency swap with a developing member
country, and using the local currency proceeds to provide long-term lending to private sector
financial intermediaries for on-lending to local borrowers. ADB has concluded a first transac-
tion for the Philippines, by undertaking a $200 million swap for 15 years, and it anticipates
doing similar transactions in other Asian countries.
The European financial institutions mentioned earlier (DEG, AFD/PROPARCO, FMO,..) con-
stitute alternative sources of foreign currency term loans. DEG, for instance, has had a per-
Guidebook page 57
EU – Asia-Invest
manent presence in Indonesia for more than 30 years, and has financed a large number of
projects, mostly in industry and services. It would be keen to finance well-structured infra-
structure projects. Another major European institution, the European Investment Bank (EIB)
would also be a possible provider of term loans (for projects of a total cost higher than 50 mil-
lion euros). EIB’s mandate is to support projects that have a European feature, either in their
shareholding or in their management structure (or even as a long-term off-taker of the con-
cerned project’s output). The EIB however would require a bank or a corporate guarantee for
its loan.
Export credits are again being offered by European banks to Indonesian companies/projects
with the insurance coverage of the above-mentioned institutions, for durations that may be
up to seven years or more. However there has been no test case, in particular because of
the guarantee issue. It must be noted that new competitors have entered the export finance
market in a forceful way. This is particularly true of China, who is aggressively supporting its
equipment exporters with attractive export credits.
2.3. EC Programmes
The European Commission offers a range of programmes through which it is financially sup-
porting initiatives from European and Asian organisations towards fostering trade, investment
and technology linkages.
The Asia-Invest II Programme aims to promote and support business co-operation between
the EU and Asia. The Programme provides financial assistance to business intermediary or-
ganisations to facilitate partnerships between European and Asian companies, in particular
small and medium-sized enterprises, and to strengthen the business environment to increase
trade and investment flows between the two regions.
The EU-Indonesia Small Projects Facility in Economic Co-operation (SPF) aims to promote
economic co-operation between Indonesia and the EU and to support the on-going reform
process of the Indonesian economy and systems of governance. It provides financial assis-
tance to projects by Indonesian and EU organisations that are based in Indonesia in areas
like business dialogue, economic policy, reform, public administration and governance.
The EU-ASEAN Energy Facility (EAEF) is a co-operation programme between the EU and
ASEAN that aims to facilitate partnerships between organisations in the two regions for the
joint development of projects in the energy sector.
The Asia Pro Eco II Programme supports projects that address issues of protection and
remediation of the urban environment in Asia. It results from the merger of two previous pro-
grammes, the Asia Pro Eco I Programme and the Asia Urbs Programme. In response to the
destructions caused by the Tsunami, the EC has launched a specific Asia Pro Eco II B –
Post Tsunami Programme to support projects towards the reconstruction of the affected ar-
eas.
Chapter 4.
Sector Profiles.
Chapter 4 provides an exhaustive sector-based review, i.e. on energy (power production and
gas supply), telecommunications, transportations (including terminals such airports and sea-
ports) and water and sanitation. The sections each look at existing and required amenities.
They then comment at the question whether the Infrastructure Summit addressed the appar-
ent service gaps. Next, they give recommendations relevant to investment decisions. Finally,
a selection of regulatory conditions and limitations are highlighted.
1. Energy Sector.
1.1. Size of the Sector, Growth Potential and Outlook.
a. Present Condition of the Network.
Indonesia’s energy network is only partially integrated. As Table 4.1-1 indicates, Java domi-
nates power production and is indeed provided with an integrated production, transmission
and distribution net. Bali (and in the near future also Madura) is part of this integrated net-
work. The Java-Bali network is organised around two PLN-owned companies, Indonesia
Power and Jawa-Bali Genco, which both generate power. PLN also buys from IPP’s, that is
independent producers. In the past few years, networks respectively in Northern and South-
ern Sumatra have been slowly integrated as well. One of the projects proposed at the Infra-
structure Summit provides a Java-Sumatra connection. In a few years, PLN would thus have
an integrated network covering Sumatra, Java, Madura and Bali and could add to demand
through new mine-mouth coal-fired power generation and possibly gas-fired generation near
one the many gas fields, for instance in South Sumatra. Finally, there is a considerable
amount of captive power generation in Indonesia, especially from self-generation by indus-
tries. A part of this generation capacity was built in the past due the absence of (cheaper)
PLN power, but in the commodity industries, some large captive power installations are part
and parcel of highly efficient integrated production processes.
Table 4.1-1. Electricity Production. (BPS 2003, PEUI 2004, website PLN)
Network Capacity & Sector Size Remarks
Production Java-Bali Other
Installed Capacity 19.5 GW 5.7 GW • peak load is max. 85% of installed
PLN
capacity (rating); but more often
only 75%
• 2005 data show installed capacity
in Java-Bali of only 18.4 GW and
available capacity of 14.6 GW
(http://ubos.pln-jawa-bali.co.id/)
Captive Main Installed Capacity 1.5 GW 3 GW • data in kVA; assuming power fac-
(self- tor of 0.8
generation) Reserved Installed Capacity 3.3 GW 1.5 GW • back-up power
Total Installed Capacity 21.0 GW 8.7 GW • excluding back-up power
Note : statistics on captive power vary. The Ministry of Energy estimated an installed capacity of 12.4 GW in 1998, to
increase to 15 GW in 2003, “generating about 44000 GWh” (World Bank 2005a); this assumes a capacity factor of
33%. PEUI (2004), however, notes a year-on-year decline of captive power capacity from 2000 to 2002. This could
be related to the reduction of fuel subsidies, making diesel-generated captive power no longer economic. The in-
stalled main capacity of captive power would therefore deliver some 26,000 GWh, of which 17,000 GWh outside
Java – for instance for oil drilling, mining, paper and pulp, fertiliser production and other commodity-related indus-
tries. (A capacity factor of 66% on main installed capacity is assumed, as many production processes are continu-
ous.) This means that areas outside Java still depend to a large extent on captive power and not on net distribution.
Cases of captive power selling to the net and of dual-purpose production are rare.
Guidebook page 59
EU – Asia-Invest
PLN and its subsidiary companies had 4,766 power plants in 2002, the majority being small
diesels for local production. Table 4.1-2 shows the installed production, by type of fuel and
separately for IPP’s as a whole. The main share of the 3250 MW produced by IPP’s in Java
is derived from the coal-fired Paiton I and Tanjung Jati B, with respective capacities of 1220
MW and 1320 MW. All other plants are small, that is varying between 60 to 200 MW, and rely
on oil, gas or geothermal steam.
Table 4.1-2. Power Production by Energy Type. (website PLN)

Power Plant Java-Bali Other Total %
Combined Cycle – Gas Fired 3,268 876 4,144 27%
Combined Cycle – Oil Fired 2,717 - 2,717
Steam – Gas Fired 1,000 - 1,000
Steam – Oil Fired 800 310 1,110 27%
Steam – Coal 4,200 590 4,790
Gas Turbine 1416 646 2,062 8%
Diesel 109 2441 2,550 10%
Geothermal 360 20 380 2%
Hydro 2,391 624 3,015 12%
IPP’s 3,255 195 3,450 14%
Total 19,516 5,702 25,218 100%
The growth of demand for

Text Box 4.1-1. The IPP saga continued. power has been brisk in the
In the early 1990’s, the Government had started contracting new IPP’s past years, notwithstanding
with a total production capacity of almost 11,000 MW. As the table the economic crisis. How-
shows, only a few plants with a cumulative capacity of 3,255 MW were ever, the planning of pro-
built, while other contracts were postponed or cancelled in 1998. PLN duction expansion has been
lists all 27 IPP schemes still on its website as well as a status report on somewhat of a roller-coaster
the progress of negotiations :
in the past 15 years. In the
http://www.pln.co.id/english/company_profile_iip.asp early 1990’s, projections for
http://www.pln.co.id/english/company_profile_prog_ipp.asp strong demand increases
The latter report is rather opaque, as it looks like that all schemes are from the industrial sector
still open, with the exception of Kahara Bodas, a geothermal project were excessively extrapo-
that became the subject of a bitter court battle for compensation fought lated and translated into IPP
in Indonesia and in the US. PLN labels 14 postponed projects as al- contracts, leading to a fear
ready renegotiated and under cover of a “long-term agreement”. This of excess production capac-
basically implies that PLN still has relationships with or still recognises ity a few years later. This
license claims on these IPP’s from the past stakeholders – mostly Indo- resulted in the abrupt can-
nesian business groups. PLN lists 5 IPP’s, all of them geothermal, as cellation of many of the pro-
“acquired”, meaning that PLN may want to execute them itself.
jects in 1998. By 2000-
Finally, another 7 IPP’s are identified as “renegotiated, closed-out”: 2001, a sudden demand
Tangung Jati A, Tanjung Jati C, Cilacap, Serang, Pasuruan, Cilegon expansion from the residen-
and Kamojang. With the exception of Kamojang, which is a geothermal tial sector became evident,
site already under operation by PLN and Pertamina, all other project are raising the spectre of sys-
big and are the real upcoming IPP projects. All except Kamojang and
tematic black-outs in Java.
Cilacap are in the list of 91 projects. However, only Cilegon is in Prior-
ity List 1 and none in List 2. The readiness of PLN to offload these old The fear was aggravated as
projects again in the market for private is thus not that clear. Some there were no new plants in
projects are already wraps with joint venture projects, such as Kepco in the immediate pipeline.
Serang. Nonetheless and notwith-
standing the fact that resi-
dential black-outs are common outside Java, they have not materialised in Java on a grand
scale – although peak demand is very close to peak capacity on dry hot days. The integrated
net has thus shown its virtues in managing peak demand.
Table 4.1-3 sheds insight into the sectoral demand levels and the growth of demand in the
respective sectors. Hereby a differentiation is made between total energy demand (including
oil, gas and derived fuels) and electricity demand. When considering the overall size of en-
ergy consumption, then industrial demand outstrips all other sectors today, including demand
for fuels from the transportation sector. However, when looking at growth figures, a different
picture emerges. Growth in energy demand in general has been strongest in the industrial
sector and recovered in a particular brisk way after the economic crisis, i.e. by 9% p.a.
However, growth in electricity demand has been persistently stronger in the residential sec-
tor. The econometric energy model of the University of Indonesia predicts however that
these increases in demand will slide back to amounts lower than historical ones, except in
case of sustained future very strong economic growth. Moreover, in line with experiences in
economically more advanced countries, demand for electric power would systematically grow
faster than demand for other forms of energy. This is related, among others, to the expan-
sion of the service sector and to non-industrial urbanisation in general. Furthermore, growth
for electrical power is then again modulated by energy saving programmes, alternative en-
ergy production, etc.
Table 4.1-3. Energy/Electricity Consumption in 2003, and Growth (PEUI 2004, BPS 2003)
Sector Consumption Sub-Sectors Key Segment
Commer- Residen- Social/
Industrial Transport
cial tial Public
All Energy 218 29 83 177 Industry
Size (2003)
(Barrels of Oil Electricity 55 8 21 3 Industry
Equivalent, mio)
All Energy 7.7% 6.2% 3.8% 5.9% Industry
Medium-
Electricity 4.7% 4.7% 11.3% 5.5% Residential
Term Growth
(199..-2003)
Growth
Electricity 5.5% 8.1% 8.2% 5.3% Residential
Recovery
(1999-2003)
Long-Term
Electricity 6.0% 5.6% 7.0% - Residential
Growth
(1992-2020)
Size in BOE, with 1 MWh = 0.613 BOE; Medium-Term Growth : of energy consumption from 1992, of electricity
consumption from 1996.
Long-term growth assumes a GDP growth of 4.5% to 5% in the main scenario of the model, whereby the growth
of energy consumption declines from 6% p.a. to 3.4%. (Based on the InoSyd dynamic modelling system of PEUI
(University of Indonesia)).
“All Energy” does not include biomass energy. It includes petroleum fuels, gas, coal, LPG and electricity. Biomass
energy provides another 275 MBOE to the energy balance, but only a fraction is for electricity production (hydro,
geothermal and limited applications of organic materials as fuel, e.g. bark for pulp and paper plants).
Although the longer-term growth numbers for power are lower than the historical ones, the
need for more power generation capacity is still impressive in all forecasts. PEUI is here only
slightly more aggressive in its predictions compared to the World Bank, as is clear in Table
4.1-4 (next page) :
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EU – Asia-Invest
Table 4.1-4. Investment Requirements for Power Generation, Transmission and Distri-
bution. Including Requirements for Gas Supply to Power Stations
(PEUI 2004 : InoSyd Model with GDP growth of 4.5 to 5% per year)
Period PEUI (2004) model World Bank (2005c)

Transmission Transmission Domestic Gas
Capacity Generation & Distribution Generation & Distribution Rural Power Supply
(GW) (US$ bn) (US$ bn) (US$ bn) (US$ bn) (US$ bn) (US$ bn)
2001-2003 + 12 +5 +1
2004-2008 + 15 + 10 +2
+ 10-12 + 4-7 + 5-7 + 3-4
2009-2012 + 17 +9 +3
2013-2020 + 18 + 11 +3
PEUI’s model includes captive power, which is assumed at about 14 MW in 2003.
PEUI predicts an investment requirement of US$ 24 bn for the period 2004-2012, a forecast
not taking into account that the capacity extension for 2001-2004 did not reach 12 MW but
only about 4 MW. The World Bank’s prediction is slightly lower : around US$ 23 bn, exclud-
ing gas supply investments but including rural power expansion (micropower). These invest-
ments would provide 350 GWh of power, compared to 150 GWh now (including captive
power), with industry and the residential sector taking up each 40% of the supply in 2020 and
the balance used by the commercial sector and by public services.
These numbers are clearly impressive. However, before looking to the question whether the
Infrastructure Summit addressed these needs, it is necessary to see to which extent there is
clarity in terms of a national energy strategy.
b. Indonesia’s Energy Strategy.

In retrospect, it now looks foolish that private contracts leading to 7 GW of new generation
capacity were cancelled in 1998. The projects were adding a substantial amount of new ca-
pacity compared to the 15 GW which PLN had ready by 1996, but they are small compared
to future needs. Getting cold feet when dealing with long-term power production seems to
be counterproductive.
The immediate reason for the cancellation was related to temporarily untenable blanket
guarantees issued by the Government at contract signing. Yet the problems of the IPP pol-
icy was not only about sovereign guarantees and payment capacity. Indeed, there were
other strategic problems with the PLN-IPP set-up. The IPP projects were technologically and
environmentally advanced but expensive and relied mostly on two sources of energy only :
coal and geothermal steam. The 1990’s outlook for electricity production was indeed one in
which coal would dominate future supply, while geothermal steam would be the main source
of renewable energy, even if it would only give a small contribution to the overall supply.
Over time it became clearer that a strategy of relying primarily on coal would never have
been sufficiently reliable in the longer run, due to the risks of over-reliance to one source of
energy and also because of the risk of relying on a limited set of potential suppliers and tech-
nologies. Pricing power could have shifted to new IPP’s. Table 4.1-5 (next page) shows the
imbalance of coal use versus the use of gas in the national energy supply : although abun-
dant in potential supply, demand for coal for local electricity production would have been a
dominating factor in the market.
Table 4.1-5. Ratio of coal consumption versus gas consumption. (PEUI 2004, figures for 2003)
Coal Gas
Total Production 114 MT 2900 TCF
Domestic Consumption 29 MT (25%) 1131 (39%)
Domestic Consumption for Electricity Generation 21.2 MT (19%) 114 MT (4%)
Reserves to Production Ratio in 2020 85 years 26 years
Coal in million Ton; gas in Terra Cubic Feet
This imbalance has been now been recognized by the Ministry of Energy. The present strat-
egy is characterized by a higher degree of flexibility, or at least by an intent in that direction :
• Primary energy sources will be more diverse and power production shall no longer
rely on coal and oil only. The major issue is here the development of a domestic gas
supply system, consisting of pipelines and LNG terminals for re-gasification. The lat-
ter are more expensive, but more flexible and the first tender for a plant in Cilegon,
which will supply a joint PLN-Kepco (Korea) power plant which is under construction,
is now underway. Extensive gas pipeline networks will anyway take time to build. The
State Gas Company PGN has a monopoly and has made little progress so far, even
though its sales of gas have increased by 14% p.a. since 1999. Where possible, in-
dustries have already substituted oil for gas.
• The use of renewable energy sources will further be encouraged by the Government,
e.g. by means of allowing negotiated bids (without tender) and through the promotion
of the benefits under the Clean Development Mechanism (CDM). The Indonesian
Government has signed the Kyoto Protocol and will try to take advantage of carbon
trading in order to promote clean energy projects. The potential of geothermal energy
is estimated to be from 10 GW to 20 GW, although the locations are often remote.
• For rural electrification, the Government continues to look into microhydro energy, so-
lar energy and biomass energy. Progress on these issues is however very lacklustre.
• There is no policy yet with regard to micro-generation in general. The existing captive
power installations are often aged, making their integration into the net unviable. It is
predictable, however, that at locations where gas will be available, micro-generation
by businesses can become integrated into the PLN net, through highly improved
technologies for micro-generation sharing. This could become a reliable strategy for
certain businesses, off-setting the losses now made due to the use of less-subsidised
diesel used in their captive gen-sets.
A key building block in the strategy for more reliable electricity production had been of course
the issuance of the 2002 Electricity Law which allowed competition in supply, i.e. power trad-
ing. Due to its cancellation by the Supreme Court in late 2004, PLN has again become the
sole buyer of net power. However, the Electricity Blue Print of the Government, published by
the Ministry of Energy and Mineral Resources in 2003, is said still to be valid, notwithstand-
ing the fact that at the core of the strategy are power trading, the establishment of an Elec-
tricity Market Supervisory Board and the resumption of the responsibility for the Public
Service Obligation by the Government and no longer PLN.
However, it should be underlined again that precise forecasting remains very hard. It is clear
that power trading by multiple suppliers would deliver strong advantages if the overall power
demand would more than double in the next 7 years, as said from 150 GWh to 350 GWh.
The additional 40 GW of production capacity would create a real market of power. Nonethe-
less, such projections remain hypothetical. Table 4.1-6 (next page) clarifies the sensitivity of
the projections to growth assumptions and base-lining :
Guidebook page 63
EU – Asia-Invest
Table 4.1-6. Re-based Forecast for Power Generation (GW).

Year Real Capacity till 2005 Escalation from 1999
+ 5% p.a. + 7% p.a. + 9% p.a. + 9 % p.a.
1999 20 20 20 1999 20
2001 21 21 21 2001e 24
2003 21 21 21 2003e 28
2005 26 26 26 2005e 34
2007e 29 30 30 2007e 40
2009e 32 34 35 2009e 47
2011e 35 39 41 2011e 56
2012e 37 42 45 2012e 61
2005-2009 +6 +8 +9 + 14
2005-2012 + 11 + 16 + 19 + 28
Power demand on the Java-Bali grid rose by 7.1% between mid-January 2004 and mid-January
2003 and by only 2% from mid-January 2003 to mid-January 2004. The 7% p.a. benchmark
forecasted by PEUI (2004) is therefore reasonable. The need for new power generation until
2009 may thus well be no more than 8 GW.
Table 4.1-6 shows that a capacity of 40 GW is only required in case of 9% p.a. growth start-
ing in the year 2000. Due the absence of capacity expansions in the past years, that baseline
has now become irrelevant. Even if demand had been potential and thus merely postponed,
it did not materialise or it did not lead to massive black-outs. Lacking economic growth, ris-
ing electricity prices and a stop on the expansion of the rural network may explain why
growth remained depressed. Yet this does not need to be the case in the future. Neverthe-
less, a very reasonable projection, from a producer’s point of view, would be a need of an
additional 8 GW until 2009 and another 8 GW until 2012. The question then becomes
whether adding 16 GW brings along the advantages of power trading both to producers and
consumers. For producers, this may be unlikely, as supply will match demand that closely so
that lesser productive power generating companies will not be punished.
c. Infrastructure Investment Priorities Addressed at the Infrastructure Summit.

At the occasion of the Infrastructure Summit, the Government put centre-stage again the pre-
viously cancelled IPP projects. However, also the first new projects which relate to the strat-
egy above in terms of adding gas as a key source of energy and to promote inter-
connectivity were added. Table 4.1-7 (next page) lists what has been put on the table.
The most salient fact of this overview is the fact that the Government only puts out 7 GW as
investment opportunities. This is remarkably close to the earlier projection of Table 4.1-6,
which set out a need for 8 GW as a reasonable level, from a producer’s point of view. PLN,
as sole buyer, is here clearly not interested in opening up too many new sources of supply.
It is conceivable that it is aware that too many new sources of supply would compete unfa-
vourably with its own plants.
Table 4.1-7.
Sub-sector Key Development Aim Key Bottle-necks. P*
Primary Energy Gas supply through pipe- • Several pipelines proposed, but relationship (Y)
lines with PGN unclear
Gas supply through re- • Not proposed in 91 projects, but meanwhile (Y)
gasification at terminals put out for tender by PLN-Kepco (“existing
project”)
Mine-mouth generation • One small project proposed in Kalimantan; 0
not yet related to concept to use mine-mouth
generated power in Sumatra for delivery on to
an integrated net
Power Genera- IPP’s • 8 projects proposed (earlier cancelled); 6 in Y
tion Java (7 GW; 6.7 GW in Java and 0.3 GW out-
side Java)
• On-going PLN partnerships for new plants
upcoming hardly mentioned (e.g. with Kepco)
Net integration Java-Sumatra inter- • Proposed Y
connection
Transmission & • done with World Bank and G-to-G financing N
Distribution
Micro-Power • partially addressed through G-to-G financing N
(including grants) for rural development
P = Programmed; that is part of the package of 91 projects proposed at the Infrastructure Summit : Y=yes;
(Y)=yes, but questions on readiness for private investment; 0=only selective projects but no comprehensive in-
vestment priorities; N=no.
d. Main issues relevant to investment decisions.

The following issues are relevant to investment decisions :
• Demand growth is brisk for the coming 5 years, but not dramatic;
• With new supply coming from the previously shelved and at the Summit reintroduced
IPP’s, which are to deliver about 7 GW, and from a number of new projects on PLN’s
own account, large region-wide black-outs may be avoided, just;
• Pressure towards a more comprehensive energy reliability may remain (unjustifiably)
weak in the coming years : the cancellation of the Electricity Law prohibits competi-
tion; demand can be (just) met with the scheduled production expansion; PLN may
feel secure if it can continue to avoid black-outs in large cities and the political havoc
related to such black-outs; and the expectation of insufficient access to power may
reduce economic growth in general;
• The planning of enough capacity expansion on Java to accommodate new industrial
investments in the future, is absent;
• Capacity expansion outside Java is very urgent, as black-outs are common; however,
there is only limited pressure on PLN to divert attention away from its core market of
Java-Bali;
• The provision of integrated gas supply infrastructure is crucial for energy reliability
and supply stability, but it may take 5 years or more before any real progress be-
comes visible;
• Over-reliance on coal and possible supply hick-ups of coal (due to real or manipu-
lated shortages) could still substantiate;
Guidebook page 65
EU – Asia-Invest
• As stated earlier in Chapter 2, the pay-back of most power infrastructure investments

is more uncertain for areas outside Java; however, for Sumatra, this issue will be-
come slowly less relevant when it becomes interconnected with the Java-Bali grid;
• As long as the existing legal and regulatory framework is in place, PLN will remain the
sole buyer of power, and it will likely insist on being a partner in all new IPPs.
• The current uncertainties in the institutional and regulatory environment are likely to
discourage many potential investors, particularly the European and US companies
who do not operate with the “consortium” approach that is the mark of their Japanese
competitors. However there may be interesting opportunities for the consideration of
investors/operators who would accept a higher degree of risk, provided that they
would ensure well-structured contractual arrangements with PLN, with the possible
support of undertakings from the Ministry of Finance or under other financing
schemes that could be suited to medium size projects.
1.2. Legal and regulatory framework
Electricity.
Relevant Authorities in the Electricity Sector.
Based on Presidential Regulation 9/2005, the general responsibility for coordinating infrastructure projects falls
under the Coordinating Ministry for Economic Affairs. The coordinating minister acts through his deputy for en-
ergy, mineral resources and forestry who has the responsibility to prepare planning and policy making as well as
synchronizing policy implementation in the energy and mineral resources and forestry.
Under the coordinating minister of economic affairs, the key central government actor in the development of elec-
tricity is the Ministry of Energy and Mineral Resources, through its Directorate General of Electricity and Energy
Utilization (Direktorat Jenderal Listrik dan Pemanfaatan Energi, DGLPE). DGLPE has primary responsibility in the
formulation and the implementation policies and in the electricity and energy utilization. Licensing for the electric-
ity industry is granted by the Minister of Energy and Mineral Resources.
The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to regional governments and its
role in supporting the implementation of regional autonomy.
I. General
The current basis for electricity in Indonesia is Law No. 15 of 1985 (“Law No. 15”) which was declared as the ap-
plicable law due to the reason that Law No. 20 of 2002 on Electricity (“Law No. 20”), which had previously re-
placed Law No. 15, was annulled by the Constitutional Court on 15 December 2004. The Constitutional Court
ruled that Law No. 20 was in contradiction with the Constitution of the Republic of Indonesia as it allowed privati-
sation and competition in electricity supply. Particularly, the Court stated that electricity is considered as an area
of production that is essential for the State as it is vital for the life of the people, and therefore, it should be con-
trolled by the State in accordance with Article 33 of the Constitution.
II. Law No. 15 as the Applicable Law in the Electricity Sector
Under Law No. 15, the following general matters are regulated: (i) electricity development basis and goal, (ii) en-
ergy sources for electricity, (iii) electricity general planning, (iv) electricity business, (v) relationship between the
Holder of the Electricity Business Authority and the Holder of Electricity Business License for the Public Interest,
(vi) electricity supply and utilization, (vii) development and control, (viii) investigation, etc.
The important features under Law No. 15 presented here are mainly related to the electricity supply business. The
electricity business activities are divided into two main activities, namely:
(a) The electric power supply business activities, which include: (i) electric power generation, (ii) electric
power transmission and (iii) electric power distribution.
(b) The electric power support business activities, which include: (i) consultation services relating to elec-
tricity matters, (ii) construction and installation of electrical equipment, (iii) maintenance of electrical
equipment, and (iv) development of equipment technology to support the electricity supply.
The electric power supply business activities are conducted by the Indonesian Government and are operated by
the state-owned company PT. Perusahaan Listrik Negara (Persero) PLN as the Holder of the Electricity Business
Authority (Pemegang Kuasa Usaha Ketenagalistrikan or “PKUK”). However, for the purpose of meeting public
demand for electricity, the Government may grant licenses to cooperatives (Koperasi) and other business entities.
As implementation of the above, the Government has issued Presidential Decree number 37 of 1992 (as
amended by Presidential Decree number 38 of 1998) regarding Electricity Power Supply Business Activities by
the Private Sector (“PD 37/1992”).
Based on PD 37/1992 (1) PLN as PKUK has established PT. Pembangkitan Jawa-Bali I (which was later re-
named to become PT. Indonesia Power) and PT. Pembangkitan Jawa-Bali II (collectively, the “PJBs”) (2) Private
companies have established Independent Power Producers (IPPs). The PJBs and IPPs are acting as power
generating companies which sell the electricity to PLN as the PKUK. PLN as PKUK then distributes the electricity
to end users.
With respect to transmission and distribution, although the law and regulations allow the involvement of the pri-
vate sector, in practice, no licenses have been given to the private sector.
Law No. 15 also provides that the price of electricity shall be determined by the Government.
III. Implementation of Law No. 15
Law No. 15 is implemented by Government Regulation No. 10 of 1989 with respect to the Supply and Utilization
of Electricity (“GR No. 10”), which has been partly amended by Government Regulation No. 3 of 2005 (“GR No.
3”).
The main features of GR No. 10 as amended by GR No. 3 are as follows:
General features
1. The Minister of Energy and Mineral Resources ("Minister") determines the National General Planning of Elec-
tricity.
2. The central Government and/or regional Governments provide development funds for electricity infrastructure
in the undeveloped areas, remote areas, state borders and villages, and for the poor society.
Licensing
The supply of electricity by the State is done through PLN as the PKUK. The Minister has the authority to deter-
mine the business operating areas and/or lines of business of PLN as the PKUK. Under the prevailing govern-
ment regulations, PLN has been appointed as the PKUK for the entire Indonesian territory.
The government may grant Electricity Business Licenses (“Electricity Business License”) to cooperatives and
other business entities to conduct the supply of electric power, in so far it is not detrimental to the interests of the
State. Electricity Business Licenses may be issued by the Head of Regency/Head of Municipality, Governor and
the Minister, depending on the location of the plant and facilities or their connection to the national grid. The Min-
ister has the authority to issue the Electricity Business Licenses for power supply connected to the national grid.
In general terms, an Electricity Business License can be given for power generation, transmission and distribu-
tion. However, in practice, Electricity Business Licenses have so far been given only for power generation.
Business plan
The holder of an Electricity Business License which has a business operating area is required to make and im-
plement a Plan for Electricity Supply to be approved by the Minister, Governor, Head of Regency/Head of Munici-
pality, as applicable.
Tender requirement
The purchase of electricity by PLN from the holder of the Electricity Business License must be done through a
tender, except when:
(a) the purchase of electricity by PLN is done from a power plant which uses renewable energy, marginal gas,
coal from the coal mine mouth, and other local energy;
(b) the purchase is from excess electricity;
(c) the local electricity system is in a critical supply of electricity condition (as determined by the Minis-
ter/Governor/Head of Regency, in which case it can be done through direct appointment.
Electricity price
The price of electricity supplied by PLN to consumers is determined by the President upon a proposal from the
Minister. The electricity price under a PPA (power purchase agreement) should be stated in Rupiah. However, it
will be based on the cost element as agreed in the relevant PPA.
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The electricity support business activities are regulated under Government Regulation No. 25 of 1995 (“GR No.
1
25”). Under this regulation, potential investors must obtain a business license from the Minister . This business
license can be given for more than one supporting business classification. In order to obtain the business license,
an application needs to be submitted to the Minister together with all required supporting documents. Once the
business license has been obtained, the holder of electricity supporting business license must report its activities
to the Minister regularly. The Minister may revoke the business license upon the occurrence of, among others,
non-compliance with the requirements under the prevailing electricity laws and regulations.
IV. Conditions for Foreign Participation
In principle, the electric power supply industry is open to foreign investment in Indonesia. Under the current Nega-
tive List and the IPU, it requires a joint venture with Indonesian partner(s). The maximum share percentage of the
foreign shareholder(s) is 95%, the remaining 5% must be owned by Indonesian shareholder(s). However, in the
electric power support services industry, foreign shareholders may have fully-owned companies, subject to fulfil-
ment of certain requirements.
V. New developments
As mentioned above, Law No. 15 is currently the applicable law with respect to electricity matters. However the
Government is planning to:
1. Draft a new Presidential Decree to accommodate the cooperation between state-owned company as the
Holder of the Electricity Business Authority and private companies as replacement of Presidential Decree No.
37/1992 and Presidential Decree No. 7 of 1998 on Cooperation between Private and Government on Infra-
structure Projects;
2. Draft a new law on electricity.
Oil and Gas.

I. Relevant Authorities in the Oil and Gas Sector
The general responsibility for coordinating infrastructure projects in Oil and Gas falls under the coordinating minis-
try for the economic affairs. The coordinating minister acts through his deputy of energy, mineral resources and
forestry which has the general responsibility to prepare planning and policy making as well as synchronizing pol-
icy implementation in the energy, mineral resources as well as forestry.
At the ministerial level, the energy and oil and gas activities fall under the Department of Energy and Mineral Re-
sources (DEMR).
Upstream business activities fall under the supervision of DEMR, through its Directorate General of Mineral Re-
sources. BP Migas is the Implementing Body for the upstream oil and gas business activities.
Downstream business activities are also under the DEMR who has the authority to manage, foster and supervise
the implementation of the sector and to determine the master plan of the transmission network. BPH Migas is the
Implementing Body for the downstream oil and gas busioness activities.
II. General
The current basis for oil and gas mining in Indonesia is Law No. 22 of 2001 promulgated on 23 November 2001,
which was amended by the Decision of the Constitutional Court in late 2004 (“New Oil and Gas Law”), replacing
the old Oil and Gas Mining Law under Law No.44 (“Old Law”) and all its implementing regulations.
Under the Old Law, Pertamina, as the sole state oil enterprise, had the mining authority within the Indonesian
territory and was responsible for the supply of all petroleum needs of the country. This resulted in the monopolistic
position of Pertamina with respect to awarding Production Sharing Contracts (PSCs) for oil and gas exploration
and exploitation (upstream) activities and with respect to the supply and sale of oil and gas to meet the domestic
needs of Indonesia. This situation gave Pertamina the function of a regulator as well as that of a business entity
with a monopolistic position in the oil and gas mining industry.
The New Oil and Gas Law has taken away the regulatory functions of Pertamina, as well as its monopolistic posi-
tion. The mining authority for upstream (exploration and exploitation) activities is now held by the Government and
downstream activities are carried out based on obtaining specific business licenses from the Government. As the
holder of the mining authority, the Government has established:
(a) the Implementing Body for the Upstream Oil and Gas Business Activities or “BP Migas” as the supervisory
body for upstream activities, and
1
For PMA Companies, this will be issued by BKPM on behalf of the Minister.
(b) the Regulating Body for the Supply and Distribution of Oil Fuel and Transportation of Gas through Pipelines
Business Activities or “BPH Migas” as the supervisory body for downstream activities.
The status of Pertamina was also changed from a State oil enterprise established under the Pertamina Law to a
State-owned limited liability company (Persero) under the Indonesian Company Law.
The current regulatory package in the oil and gas sector is seen as an improvement to the old regulatory pack-
age. In upstream business activities, the new regulatory package has taken out the monopolistic position and
regulatory functions of Pertamina. Certain roles of Pertamina are now assigned to BP Migas, which is a non-profit
governmental body, and Pertamina is now a normal business entity.
In the downstream business sector, the new regulatory package provides a broader business environment and
more competitive market, including for foreign investment. The retail trading business which was closed for pri-
vate entities is now open, including for foreign investment.
III. Upstream Activities
BP Migas
BP Migas was established by Government Regulation No. 42 of 2002, as a State-owned legal entity. The Head of
BP Migas reports to the President who has the right to appoint and dismiss him, after consultation with the Par-
liament.
BP Migas supervises the implementation of Cooperation Contracts for upstream activities to ensure that the ex-
traction of natural oil and gas owned by the State provide the maximum benefit and revenue to the State.
The main tasks of BP Migas are:
(a) to give considerations to the Minister of Energy and Mineral Resources in preparing and offering work areas
and Cooperation Contracts;
(b) to sign the Cooperation Contracts;
(c) to review and submit development plans for the first field to be put on production in a work area, to the Minis-
ter of Energy and Mineral Resources for approval;
(d) to approve field development plans other than the above mentioned;
(e) to approve work programs and budgets;
(f) to appoint sellers of the Government’s share of natural oil and gas.
Cooperation Contracts
The upstream natural oil and gas activities have been further implemented by the Government Regulation No. 35
of 2004 (“GR 35/2004”).
Upstream activities consist of exploration and exploitation. Foreign investors can (i) invest directly in the up-
stream activities or (ii) establish a PMA joint venture company. Such upstream activities are now conducted and
controlled through Cooperation Contracts, which can be in the form of Production Sharing Contracts or other
forms of cooperation contracts. The Cooperation Contracts must contain conditions concerning:
(a) ownership of the natural resources which must remain in the hands of the Government until the point of de-
livery;
(b) management of the operations, in terms of the granting of approval over the work plan and budget plan, the
field development plan and the monitoring of the implementation of said plans, must be with BP Migas;
(c) the capital and risk shall entirely be borne by the oil company which is a party to the Cooperation Contract.
Foreign legal entities may only conduct upstream activities and such activities may not be combined at the same
time with downstream activities, which consist of processing, transporting, storing and trading, except if such ac-
tivities are done in the furtherance of the operations under the Cooperation Contract.
Work areas are determined by the Minister of Energy and Mineral Resources, after consultation with the pertinent
local Government and then offered to oil companies. The Minister of Energy and Mineral Resources also deter-
mines the oil company to be granted the right to conduct the upstream activities in the Work Area under a Coop-
eration Agreement. Each oil company may only hold one Work Area.
The term of a Cooperation Contract is at the most 30 years, with the possibility for extension for a maximum pe-
riod of 20 years. GR 35/2004 has regulated guidelines, procedures, and provisions of the Cooperation Agree-
ment, the determination and offering of work areas, amendment and extension of Cooperation Contracts and area
relinquishments. These provisions in general follow those used in the existing PSCs, but adjusted according to
the current situation, certain improvements being made to make the Cooperation Contract more attractive.
Cooperation Contracts signed by BP Migas must be notified in writing to the House of Representatives of the Re-
public of Indonesia.
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IV. Down Stream Activities

BPH Migas
BPH Migas, which was established by Government Regulation No. 67 of 2002 (“GR 67/2002”), exercises supervi-
sion over the implementation of the supply and distribution of oil fuel and of the transportation of natural gas
through pipelines.
The tasks of BPH Migas are to regulate, determine and supervise, among others:
(a) the availability and distribution of oil fuel,
(b) national reserve of oil fuel,
(c) tariff of transportation of natural gas through pipelines,
(d) price of natural gas for household and small scale business use,
(e) natural gas transmission and distribution business undertaking.
BPH Migas consists of a Committee and fields. The Committee has a Head who is also a member, and eight
members who are professionals and are all appointed and dismissed by the President after obtaining the approval
of the Parliament. BPH Migas is responsible to the President.
GR 67/2002 stipulates the organizational structure, status, functions, tasks, personnel, authority, responsibility
and work mechanisms of BPH Migas which constitutes an independent government institution.
Business License
The oil and gas downstream activities, as provided under the New Oil and Gas Law, are ruled under the Govern-
ment Regulation No. 36 of 2004.
Down stream activities consist of processing; transporting, storing and trading.
Such activities can only be conducted by legal entities established under the laws of Indonesia and domiciled in
Indonesia, after obtaining a Business License from the government. Foreign legal entities can establish a joint
venture (PMA Company) to conduct downstream activities and obtain the required Business License. The Busi-
ness License is issued separately for each activity, and one legal entity can be given more than one Business
License.
The Minister of Energy and Mineral Resources determines the master plan of the transmission network and distri-
bution of national natural gas. A Business License for transporting natural gas through a pipeline network can only
be granted for a certain transportation fragment. The Business License for trading of natural gas through a pipe-
line network can also only be granted for a certain trade area.
The price of oil fuels and of natural gas is left to normal competition.
2. Telecommunications.
a. Present Condition of the Network.
In 2002, one had excellent phone connections from Pekanbaru, Riau (Sumatra) to Singa-
pore, but lines to Jakarta were often dead and working lines often lacked the quality required
for simple faxes. Large companies in Riau have been anyway using satellite links for all their
communication needs. In 2004, the State Telecommunications Company Telkom started to
sell ASDL (a-synchronous broadband), but buyers in suburban Jakarta could not always get
a simple new telephone line, as local exchanges had, again, run out of capacity (or so people
were told). In 2005, companies selling broadband services, such as wireless WAN, have to
deal with a duopoly over the wireless broadband spectre held by two politically well-
connected companies set up in the 1990’s, PSN and CSM. A good two-way broadband con-
nection for business use is still prohibitive in price for small companies, with costs of around
US$ 10 per kB/s per month for the leaseline and the service provider. Only recently, internet
service providers have started to make inroads against this duopoly and prices have slowly
started to drop. Telkom even slashed its prices for ASDL by approximately 50% a few
months after the introduction of the facility. No wonder that in this environment, mobile GSM
networks offering simple prepaid packages have seen their subscriber numbers go up by
massive double-digit numbers, although their revenues per customer are going down. New
and cheap CDMA services, which were first offered by fixed-line operator Telkom in order to
get back into the mobile market segment, are further sending prices downwards.
Table 4.2-1 gives a number of indicators with regard to the development of the network ca-
pacity. Indonesia had only about 1 million telephone lines by the end of the 1980’s. By 1997,
that number had gone up to about 5.5 million. Presently, there are around 10 million lines,
but also 30 million subscriber numbers to mobile services.
Table 4.2-1. Network Size and Growth (BPS 2001a, BPS 2003c)
Network Category Lines (‘1000) Remarks
Java-Bali Other
Fixed-Line subscribers 1997 3547 1309 Notes in Text Box 4.2-1 on:
- fixed networks
2002 5237 (+8%p.a.) 2102 (+10%p.a.)
- JV’s for fixed networks
lines in service 2002 5597 (84%) 2200 (88%) - fixed wireless networks
free capacity 2002 1028 (16%) 276 (12%) - international services
Mobile subscribers 1997 217 - GSM, CDMA services
(fixed wireless)
2002 + 15,000 - ISPs
2005e + 35,000 - broadband: ASDL,
leaselines, WAN wireless,
cable-TV networks, satel-
lite down/uplink services for
telecom and TV
- VOIP
Table 4.2-1 suggests strong growth both in the 1990’s and of course again in recent years.
The fixed line services are supported by fully digital local and trunk exchanges. Transmission
networks are also 98% digital (World Bank 2005a). Indonesia’s fixed line telephone network
has thus given reasonable service quality levels for the last ten years, especially on Java.
Mobile networks are good in almost all large urban centres and along major national roads in
Java. Yet tariffs for fixed services were insufficiently adjusted after the crisis. While tariffs for
mobile services have been free, recently a price war has set in, which had become unavoid-
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Text 4.2-1. The Service Provision Landscape for Telecoms.

• Fixed Line connections are offered mainly by Telkom, although deregulation has opened the market in
principle. Indosat has now a license for local phone services on Telkom’s last-mile network, in a duopoly
service arrangement competing with Telkom, but it has made little inroads into this market as of now. When
Indosat was privatised in 2002, it was obliged to provide no more than 759,000 fixed lines by 2010. In prin-
ciple, Indosat should also be able to offer national long-distance services, but implementation has been de-
layed.
• The expansion of Telkom in the 1990’s was steered towards regional joint-ventures with private partners,
some local and other foreign (including France Telecom and Cable and Wireless). Of the 5 ventures origi-
nally set up, only one so-called KSO remains, with Bukaka and Singtel in Eastern Indonesia. The partners
of the other KSO’s (West Java, Central Java, Sumatra, Kalimantan) were bought out by Telkom after the
on-set of the economic crisis.
• Originally, Indosat offered the satellite services and the international services.
• GSM services are offered by a range of companies. Telkomsel, set up initially as a subsidiary of Telkom, is
the market leader. Other important service providers are Satelindo (owned by Indosat) and Excelcomindo.
• In the past, public phone services and phone kiosks were vital in delivering access to low-income groups.
25% of telephone traffic of Telkom was delivered through these services up to a few years ago. Mobile ser-
vices have decreased the relevance of these franchised public amenities in urban areas, but they remain vital
for service delivery in rural areas.
• CDMA services are offered by Telkom (“Flexi”), Esia (Bakrie Group) and others. These services had been
preceded by a few limited networks of “fixed wireless”, such as Ratelindo (Bakrie Group), which delivered
fixed line infrastructure to difficult to reach urban and suburban locations, mostly however at mediocre
quality.
• Internet services are offered by close to 200 providers offering a wide range of services, but service quality
and penetration is hampered due to poor backbones. Telkom has the deepest penetration, but often at the
cost of poor access. There are presently about 3 mio users and 600,000 subscribers. Internet kiosks have
taken over the function of telephone kiosks in urban areas for increasing access to internet services.
• Broadband is available through ASDL (Telkom), leaselines (CSM, PSN, wireless WAN), satellite down-
and uplinks and cable-TV.
• Cable TV is offered mainly by two companies having each a limited fibre-optic network (Cablevision
(Lippo Group) and Telkom) and by Indovision which offers satellite downlinks accessible through desktop
sets. Government statistics mention 2 mio subscribers for these multimedia services.
• VOIP services are controlled by Telkom, Indosat and Satelindo.
able as mobile operators have been enjoying operating margins of typically 50% upwards in
recent years. Investment budgets from operating cash are thus reasonable but not over the
board. It is to be noted that Telkom and Indosat have good local credit ratings, but are still
below investment grade internationally.
Figure 4.2-1 (next page) shows a more comprehensive sector growth picture, including a
growth forecast until 2020. This forecast simply assumes that Indonesia will have the same
lines per 100 inhabitants as Malaysia has today. Figure 4.2-1 makes clear that stellar mobile
subscription rates have lifted the teledensity growth rates, but also that a return to more nor-
mal long-term averages is to be expected. Indeed, a respectable teledensity rate of 56 lines
per 100 inhabitants could be reached in 15 years with these lower rates. As a comparison :
Malaysia had 51 lines and Singapore 120 lines per 100 inhabitants in 2001.
The assumed growth rates are moreover realistic due to the ongoing urbanisation of Indone-
sia and the concentration of services on Java. The reverse picture is that rural areas and ar-
eas outside Java will continue to lag in access to telecommunication services, especially for
broadband and data services, albeit evolving WAN wireless technologies may come here to
rescue earlier than expected. Presently, however, the introduction of WAN wireless and other
Figure 4.2-1. Telecoms Penetration. wireless technologies

other than GSM are
Telephone Subscription 1990-2004 and Trend
hampered due to a
(2020 = lines per 100 people equal to Malaysia now)
very poor spectrum
150% 150
management by the
government.
120% Overall, it should be
120
clear that although
fixed lines growth in the tele-
90% 90 communication ser-
vices is to remain
mobile strong, Indonesia as a
60% 60
subscribers country may continue
to lag behind coun-
30% 30 tries in the vicinity.
total lines Such weakness
(mio) would put a damper
0% - on the market for
lines per 100 those applications
1990
1993
1996
1999
2002
2005e
2008e
2011e
2014e
2017e
2020e
people which require, for in-
stance, fast, cheap
Note : Government statistics, with a forecast up to 2015 (Infrastructure Develop- and reliable broad-
ment 2005a) are in line with the above predicted teledensity growth. For 2015, band services. Part of
there is also a forecast for 32 mio internet subscribers, up from 3 mio now, and 27 service reliability is
mio multimedia subscribers (cable-TV, TV over internet,,..), up from 2 mio today.
moreover dependent
on backbone and
gateway infrastructure, linking Indonesia’s vast areas together and linking them all up to in-
ternational networks.
Indeed, two bottlenecks which are to impact on market development, and vice-versa, stand
out : backbone reliability and pricing. These issues are moreover interrelated.
In the past three decades, Indonesia built up a backbone via self-owned satellites and sea
cables. Indonesia’s sole gateway was Singapore and Indosat managed all international traf-
fic. This infrastructure served its purposes well in the initial decades but had become highly
overstretched and too monopolistic in recent years. Luckily, that is all changing currently.
The following recent developments, and continuing bottlenecks, should be noted :
• As a result of on-going deregulation, Indosat’s sole gateway has been added with a
new gateway to Malacca and one to Brunei. Another gateway to Australia is planned.
These gateways are built or built-operated by a number of international companies in
Joint Ventures with Telkom or other national operators.
• The major telecom operators are also building stretches of backbones on Java and in
Sumatra. This is resulting in a technically more reliable hybrid backbone grid. A prob-
lem may be inter-connectivity, as this hybrid grid is controlled by competing operators.
There are presently no final regulations yet concerning interconnections of privately
owned networks.
• Network sharing is further hampered as a result of the non-existence of backbone in-
frastructure on power grid infrastructure. At present, no telecommunication lines are
built on high-tension towers. The technical option of using the electrical grid itself as
a data carrier is even more remote operationally.
The evolving regulatory set-up for telecom services will be clarified further on in this Section.
While it is clear that deregularisation and privatisation has moved on quickly in the sector
during the past years, Indonesia still seems to be slow to take advantage of technological
Guidebook page 73
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advancements early on – advancements which could add considerable benefits both to high-
end data and multimedia traffic and to low-end rural access. The lack of intention of coopera-
tion between the State Companies Telkom and PLN is hereof indicative.
The second issue is about pricing. As said earlier, local fixed line tariffs have been low, but
national long-distance tariffs have actually been high. This is hurting again regions outside
Java, which rely more on long-distance services. Deregulation and competition, added with a
more hybrid and competitive backbone infrastructure crisscrossing Java, Kalimantan, Suma-
tra and in the future also Eastern Indonesia (on to Australia) should allow more competition
for national long-distance services. VOIP services and optical data transmission are of
course adding options for cost reductions beneficial to consumers. Again, adding competi-
tion should bring very substantial consumer benefits (World Bank 2005a), but price wars and
resistance from state owned companies may hamper the speed of reforms and progress.
b. Infrastructure Investment Priorities Addressed at the Infrastructure Summit.

At the occasion of the Infrastructure Summit 2005, surprisingly only one (mammoth) project
was proposed : the B-1 Palapa O2 Ring Backbone Network Development. This US$ 900 mio
multi-year programme would provide a fiber-optic sea cable hopping around all major islands
of the country. It obviously mentions the defence department as one of the stakeholders.
This project is curious, as a range of companies are already setting up a hybrid backbone
network in Western Indonesia and as there is no reason why Eastern Indonesia would not be
serviced soon as well, as the gateway connection to Australia will be of strategic importance
to the commercial interests of the large telecom companies.
Indonesia may need one day the Palapa O2 project, but the timing and the scope of this
massive backbone are presently difficult to justify. Table 4.2-2 moreover shows that there are
many more policy issues that needs to be addressed.
Table 4.2-2.
Gateways Providing alternative and • None. Recent deregulation has brought more N
thus reliable links to interna- gateways.
tional communication net-
works
Backbones Providing alternative and • No regulation yet on inter-connectivity. (Y)
thus reliable links within the • No co-operation with PLN for the sharing of
national communication high-tension towers, or of cables
network
Privatisation of Adding competition. • None in principle. Deregulation has already N
state-owned ser- provided a range of maturing and competing
vices service providers
• Telkom remains the main provider in many
services
• Regulatory Body has not yet been set up
Public Service Guaranteeing access to ser- • Dependent on Government budget; more N
Obligation (Rural) vices in remote areas policy than progress
Public Service Promoting cheap access of • Not addressed in public policy N
Obligation (So- data services to educational
cial) and other social institutions
The fact that the Government only presented the Palapa Backbone is for sure related to the
on-going deregulation. Telecommunications investment is no longer decided by the Govern-
ment but by a limited number of established companies. The question is who is now deciding
over telecommunication policy.
c. Main issues relevant to investment decisions.

• Demand growth is to remain very strong for a long time to come, but the growth fig-
ures will become increasingly manageable for the established companies;
• Deregulation and privatisation has already been achieved to a large extent, making
new entrants more likely to happen as a result of buy-outs, strategic alliances and the
introduction of patented substitute technologies;
• Deregulation is also achieving the construction of a more hybrid and reliable back-
bone and gateway infrastructure; this is likely to result over time in better pricing for
national long-distance traffic;
• The regulatory infrastructure accompanying deregulation is still far from complete,
leaving most industry initiative in the hands of established and dominant players
(Telkom, Indosat,…); this implies that dominant local market players will have a very
strong voice in setting new technological standards, of their choice;
• Investments in new data technologies is on-going on Java’s urban centres; better ac-
cess to telecommunication services in remote / rural areas may be expected over
time due to technological advances in wireless technologies and as a result of com-
peting backbones traversing the larger main outer islands; rural access is unlikely to
benefit from substantial government investments;
• The Infrastructure Summit did not address telecommunications and the Government
showed its lack of clout in telecommunications policy and management by proposing
the Palapa O2 Ring Backbone; the present Government may already try to address
this weakness, for instance by setting up a new Communications Ministry, which has
an explicit agenda of accelerating data infrastructure development.
• Investment risk in telecommunications investments is mainly related to country risk;
this is reflected into the good local investment rating of the main service providers,
notwithstanding the fact their international credit rating is still below investment grade.
2.2. Legal and regulatory framework.
1. Relevant authorities in the telecommunications sector

The general responsibility of the telecommunications industry, as in the case of other economic sectors, falls un-
der the coordinating ministry for economic affairs. The coordinating minister acts through his deputy of infrastruc-
ture and regional development who has the general responsibility to prepare planning and policy making as well
as synchronizing policy implementation in the infrastructure as well as regional development.
The Department of Communications and Informatics is now the ministry in charge of telecommunications. It car-
ries out the main functions of formulating the national policy, implementation policies and technical policies in the
fields of telecommunication and informatics.
Under the Department of Communication and Informatics, there are three Directorate Generals which carry on the
policy functions, namely:
a. Directorate General of Post and Telecommunication, which has the primary tasks of formulating
and implementing the technical policy and standardizing in the field of telecommunications;
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b. Directorate General of Telematics Application (Aplikasi Telematika), which has the primary tasks of formulat-
ing and implementing the technical policy and standardizing in the field of telematics application;
c. Directorate General of Telecommunications Facility and Information Dissemination, which has the primary
tasks of formulating and implementing the technical policy and standardization of telecommunications facility
and information dissemination.
The regulatory and supervisory functions are vested in BRTI.
2. General
The telecommunications business is regulated by Law No. 36 of 1999 on Telecommunications (“Telecommunica-
tions Law”). The main objectives of the Telecommunications Law were to accommodate technological develop-
ments and to facilitate competition.
The following government regulations and ministerial decrees were issued as implementing regulations of the
Telecommunications Law:
- Government Regulation No. 52 of 2000 on the Telecommunications Organization,
- Decree of the Minister of Communication No. 20 of 2001 on Telecommunications Networks Operations, as
amended by Decree of Minister of Telecommunications No. 29 of 2004 (“Network Decree”),
- Decree of the Minister of Communications No. 21 of 2001 on Telecommunications Services Operations
(“Service Decree”),
- Decree of the Minister of Communications No. 4 of 2001, as amended by Decree of Minister of Telecommu-
nications No. 28 of 2004, concerning Determination of National Fundamental Technical Plan,
- Decree of the Minister of Communications No. 31 of 2003 on the Determination of Indonesian Regulatory
Body on Telecommunications (Badan Regulasi Telekominukasi Indonesia or “BRTI”).
Before the Telecommunications Law was enacted, the private sector’s involvement was severely limited. The pre-
vious law divided telecommunications operations into: (i) telecommunications service operations, divided into ba-
sic and non-basic services,
(ii) telecommunications operations for special purposes and (iii) telecommunications operations for state defense
purposes. Any telecommunication operator providing basic services (local and long distance telephone, mobile
cellular, fixed wireless, etc) had to enter into a co-operation scheme with the so-called “Organizing Bodies”,
Telkom and Indosat. Such co-operation could be in the form of joint venture, joint operating scheme (Kerja Sama
Operasi/KSO) or management contract.
3. BRTI
BRTI (Badan Regulasi Telekominukasi Indonesia), the Regulatory Body on Telecommunications was established
by Decree No. 31 of 2003 to supervise and regulate the telecommunications network operations and telecommu-
nications service operations.
The BRTI consists of the Directorate General of Post and Telecommunications and (“DGPT”) and the Committee
of Telecommunications Regulations (“Committee”). The Committee consists of five individuals, telecoms and IT
professionals who are chosen by the Minister.
BRTI has the following tasks:
Regulatory functions:
o The issuance of licenses for telecommunications network operations and telecommunications service opera-
tions
o Setting standards of operational performance and quality of services
o Setting interconnection fees
o Setting standards of telecommunications equipment and devices
Supervision of telecommunications network operations and telecommunications service operations:
o The performance of operations;
o The business competition;
o The use of telecommunications equipment and devices.
Control of telecommunications network operations and telecommunications service operations:
o Settlement of dispute between the telecommunications network operators and telecommunications service
operators;
o The use of telecommunications equipment and devices.
o The determination of quality services standard.
4. Telecommunications Operators
The Telecommunications Law classifies telecommunications operations into the following categories:
(a) Telecommunications Network Operation, defined as any provision and or telecommunications network ser-
vice to enable telecommunications, divided into regular network operations and mobile network operations,
subsequently divided into more specific sub-categories.
(b) Telecommunications Service Operations that utilize the telecommunications networks. The Service Decree
divides the telecommunications services into (i) basic telephone services, (ii) value-added telephone services
and (iii) multimedia services. Each of these three main categories is divided into sub categories.
(c) Special Telecommunications Operations, i.e. telecommunications operations for the purposes of:
(i) private use, either for:
• individual use, namely for amateur radio or inter-residents radio communication (either for information
on any danger, natural disaster, search and rescue),
• government institutions (only if the need could not be fulfilled by the operator of telecommunications
network and the operator of telecommunications service, the location of activities are not reachable by
operator of telecommunications network and the operator of telecommunications service, and/or the
activities require separate telecommunications network),
• special agencies, and
• legal entities (only if the need could not be fulfilled by the operator of telecommunications network and
the operator of telecommunications service, the location of activities are not reachable by operator of
telecommunications network and the operator of telecommunications service, and/or the activities re-
quire separate telecommunications network);
(ii) State defense (to be performed only by the Ministry of State Defense, Indonesian Armed Forces, and the
Indonesian Police Forces)
(iii) Broadcasting, in which the nature, form, and use of the telecommunications operation are specifically for
the broadcasting purposes. In this regard, the operators must construct their own networks as broadcast-
ing device (sarana pemancaran) and transmission devices (sarana transmisi) for the purpose of broad-
casting.
5. Licensing
The Telecommunications Law stipulates that the licensing of telecommunications operators must be granted
through a simple, transparent, fair and non-discriminatory process, and a short period of completion.
Applicant telecommunications operators must undergo a two-step licensing procedure. The applicant will first be
granted a principal license in order to conduct the necessary preparation to be telecommunications operator. This
license is valid for a period of three years and can be extended only for one year. The license is issued within a
period of sixty days upon complete submission. In the event that after the lapse of this period, there is no re-
sponse from the Minister, the license is deemed to have been granted. The license will only be granted to Indone-
sian legal entities engaged in the telecommunications field with adequate funds and human resources in this field.
This principal license is not assignable.
Within the validity period of the principal license, the applicant must obtain an operational license which is granted
once it has established the necessary infrastructure and devices and passed an operational feasibility test (Uji
Layak Operasi/ULO/”Test”). The license is valid without time limit. However it will be thoroughly evaluated every
five years.
6. Anti Monopoly Provision
The Telecommunications law provides the prohibition of any action which could give rise to a monopolistic prac-
tice and unfair business competition among the telecommunications operators.
7. Foreign Investment
With the enactment of the Telecommunications law, all telecommunications areas are open to foreign invest-
ments, however, subject to joint venture with a local company as set forth in the Negative List, in which the foreign
investor can hold up to 95%.
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3. Transportation Sector.
a. Present Conditions of the Network.
Being an archipelago, Indonesia’s transport infrastructure strongly relies on an integration of
transport over land and transport over water. As pointed out earlier in Chapter 2, the ameni-
ties underscoring this structure came under duress during the extended economic crisis, due
to under-investment, but the structure itself is intact and vibrant. The global tendency towards
budget air services has added to the intensity of long-distance (inter-island) traffic. The only
looser, so far, has been the rail transport system on Java, which has had difficulties to com-
pete with cheap inter-city air transport and which has moreover failed up to date to develop a
stronger role in suburban transport. In effect, suburban transport in general, including freight
transport from industrial estates, dispersed in the hinterland of the major coastal cities, to the
harbours which are more centrally located, has suffered from the lack of transport capacity
growth. Finally, inter-city freight transport over land, which has to use national roads in ab-
sence of an extended inter-city network of freeways, has become more difficult due to bad
road maintenance and an array of local legal and illegal levies charged to passing trucks.
Tables 4.3-1 and Table 4.3-2 summarises the present condition of the transportation net-
work:
Table 4.3-1 . Transportation Networks

Sector Sub-sector Sector Size Key Problems
Java Other
Toll Roads 558 km 49 km • Integrated network only in Greater Ja-
Roads
karta, including new link to Bandung
(World Bank
2005a) • Limited private sector experience :
Approx. 80% built and managed by
S.O.E. PT Jasa Marga; other operators
belong to, or were set up by a few do-
mestic and politically well-connected
business groups, most notably CMNP
• Tariff revisions have been insufficient
National Roads 4,373 km 21,897 km • Poor condition of the network wors-
ened by over-loading of trucks
Sub-national Main 83,030 km 226,996 km • Due to the decentralisation process,
Roads increasing responsibility disputes over
budgeting and O&M.
General Issues :
• 1990-2004: Vehicle sales growth at over 10%-15% per year, especially in Java; approximately
5%-10% p.a. outside Java
• Upgrading and maintenance not sufficient compared to increasing loads (and axel overload-
ing)
Java Other
Railroads Operational Rail 3,672 km 1,370 km • Decrease of passenger and freight
(website Network traffic in Java
PT KAI) • Accident prone due to poor mainte-
nance and management by PT KAI
Ferry Ser- From Commercial 2 mio 10 mio • Limited attempts to integrate over-land
vices Ports pass./year pass./year and over-water transport logistics
From Non- 0 8 mio • Only provided of very basic amenities
Commercial Ports pass./year
General Issues :
• Areas outside Java have seen a strong growth in mobility by means of ferry services, includ-
ing via river transportation.
Table 4.3-1 indicates that Indonesia heavily relies on a sub-standard road and ferry network
which has to absorb traffic growth figures of 10%-15% p.a. in Java and 5%-10% p.a. outside
Java. Unfortunately, a more integrated and more efficient transportation network, in which rail
lines and freeways offer high-speed backbones, is non-existent. Similarly, more efficient in-
ner-city and suburban transport infrastructure, with underground lines and suburban light
railways, have been largely absent as well, most often as rate of returns are insufficient, es-
pecially if the projects have Rupiah revenues only. Moreover, investments have often to start
from basic upgrading work of public services. For instance, major parts of the inter-city rail
network and inner-city rail tracks are still single-tracked.
Table 4.3-2 . Transportation Amenities.
Sector Sub-sector Sector Size Key Problems

Java Other
Seaports 25 strategic ports 4 ports 21 ports • 63% of all traffic by ton
(Transport. and (in/out=(un)loading out:22,000T out:169,000T • Local authorities trying to break the
Communication in Ton) in:80,000T in:58,000T monopoly of the State Port Operators,
Statistics 2002) often adding to risks (fragmentation of
amenities)
• Average forecast for all large container
terminals to run out of capacity by
2007-2009
non-strategic main >10 ports >61 ports • 37% of all traffic by ton
ports • Only provided of very basic amenities
General Issues and Remarks :
• Main general ports are Medan / Belawan, Jakarta / Tanjung Priok, Surabaya / Tanjung Perak
and Makassar
• Majority of ports managed by 4 regional State Port Operators (Pelindo I to IV) each managing
one large port and all other ports in the region, thereby creating a vital role in managing the
flow of goods between groups of islands
• Reasonably successful partnerships with private operators in Jakarta and Surabaya; focus on
container terminals for import-export with dollar-earnings
• 1991-2002: Inter-island traffic up by 5.5% p.a.; imports up by 4% p.a.; exports up by 3.4 %
p.a. (in Ton)
• Some large port facilities outside Java are commodity specific (e.g. oil); declining oil produc-
tion puts up potential of conversion
Java Other
Airports Major airports 2 airports 4 airports • Terminals of several major airports are
(Infrastructure 19 mio pass. 9 mio pass. close to full capacity
Outlook 2005; • Minimum-standard air traffic control,
Other main air- 5 airports 8 airports
JICA, estimates runway conditions and terminals, with
for 2004)
ports 2 mio pass. 4 mio pass.
frequent safety lapses
• Least prepared to deal with the in-
creased number of budget flights
Other airports / > 167 airports
public air strips
• Main airports and main hub remains Jakarta / Soekarno-Hatta, with 40% of all traffic
• Airports managed by State Airport Operators, Angkasa Pura I and II; selected services
(ground services,…) outsourced
• 1991-2004 : year-on-year growth of both domestic and international travel (passengers and
freight ) of about 11%; very strong growth in recent 3 years in domestic passengers (35%
p.a.), but this is a combination of the effects of the economic recovery and a price war among
budget airlines
Table 4.3-2 shows pressures affecting the port facilities which are in effect identical to prob-
lems identified earlier in Table 4.3-1. The key seaports and airports have reasonable termi-
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nals, sometimes with Joint Ventures for management and development. But with long run
traffic growth figures between 5% and 10% per annum, capacity is quickly running out due to
the investment stops brought about by the economic crisis. In various segments, there is
scope for increased efficiencies in O&M, allowing the worst-case scenarios of reaching full
capacity already in 2006-2008 not to come through. Nevertheless, investments in solid new
amenities, including major expansions, are unavoidable.
The peculiar and politically sensitive position of Jakarta and to some extent Surabaya should
again be underlined with regard to investment needs. The hub position of these two cities
makes investments an absolute necessity : they cannot handle much larger traffic volumes.
Moreover, traffic flows through other ports (seaports, airports) would be suppressed – and
smaller investments there would suffer – if investment in these two hub cities are held up for
whatever reason. Outer areas are thus again depending on mega-growth on Java, or would
have to go through difficult and time-consuming adjustments of their logistics channels in or-
der to avoid these hubs.

The Infrastructure Summit addressed only partially the problems laid out above. It is there-
fore important to summarise the priorities and the potential bottle-necks of the Government
priority programme. Bottle-necks are only selectively identified, especially when such a bot-
tle-neck could impede the basic financial viability of potential investments. This is shown in
Table 4.3-3.
Table 4.3-3.
Sub-sector Key Development Key Bottle-necks. P*
Aim
Regional Toll Trans-Java high-speed • Fragmentation of tender batches, making missing Y
Roads link links possible
• Several inter-city segments economically viable by
2015-2020 (World Bank 2005a), increasing the
risks due to the absence of private-sector interest
for a few links meanwhile
Regional Rail High-speed passenger • Lack of economies of scale due to island fragmen- N
links and freight links in Java; tation
New point-to-point
commodity freight lines
outside Java
Urban Toll Roads Easing car and freight • Lack of planning coordination with regard to multi- 0
traffic, mainly to and modal transportation solutions, with e.g. dedicated
from airports and sea- passenger rail lines to airports and freight lines to
ports container terminals. Possible competing proposals
can uphold decisions
Urban Rail Solu- High-speed inner-city • Difficult on-going attempts in Jakarta to build an N
tions transportation, including elevated light-rail system do not bode well for fu-
to and from air and sea ture investments requiring intense public-private
terminals partnerships
• Summit project for rail link to Soekarno-Hatta is a
simple upgrading project of a commuter line.
Seaports Adjusting capacity to • Monopoly of State Port Authorities 0
strong traffic growth
Airports Adjusting capacity to • Monopoly of State Airport Management Authori- 0
very strong traffic growth ties
Text Box 4.3-1. Projects re-emerging, but not yet a strategy surfacing.
The Toll Road programme inherited many pre-crisis stakeholders who had for instance paid for licenses prior
to the crisis. Not surprisingly, the strategy emerging from the Publics Works departments reflects rather this
past legacy than the weight and the cost of the future programme as a whole. The Government envisions
close to 1,700 km of toll roads to be built, costing US$ 14.9 bn. G-to-G soft loans make it possible for the
Government to complete building 17 km. Jasa Marga is still earmarked to keep a share of 291 km, all in Java.
What is reserved for private-sector investments may not be too appealing : difficult suburban toll roads in the
fringes of Jakarta, facing long land acquisition proceedings and complicated dealings with multiple local au-
thorities (141 km); a range of projects in Java set aside for “later-stage” bidding (668 km) and three small
projects outside Java (56 km). There is also no clarity on how the licenses of the aborted projects of 1997 will
be re-allocated. These licenses comprise 523 km and Jasa Marga was always a partner in the Joint Ventures,
so it is still a shareholder now. Licensees were companies such as Bukaka Teknik Utama and Bakrie Invest-
indo. Some licenses became state property as a result of debt restructuring processes, but many linger in one
form or the other. Some licensed Joint Venture companies set up prior to the crisis had also equity capital
from Jasa Marga on their books, but there are cases in which the cash evaporated over time.
Finally, a number of projects did not (yet) re-appear in new Government long-lists, although they were on the
drawing boards in the 1990’s. The following list is but a selection : a high speed train for the route Jakarta to
Surabaya, the Jakarta MRT/Underground, the Surabaya MRT/light rail system, new rail lines in the wider
periphery of Jakarta, the Java-Bali bridge and Java-Sumatra Bridge. Projects pursued in the past years by
stronger local authorities, such as the toll road from Pekanbaru to Dumai in Riau Province, are also no longer
on official lists. Many of these projects (but not all) are by no means commercially viable. Furtermore, a
number of past projects are presently being pursued by State Operators and/or local authorities and for that
reason do not appear on the list open to private investors, for instance : the Palembang airport terminal, the
Greater Jakarta commuter train system, the Jakarta/Manggarai integrated rail-bus terminal, the Bandung light
railway system, the double-tracking of the rail line from Jakarta to Surabaya and the Surabaya-Madura bridge.

• Demand growth for transport infrastructure is strong and over time solid. The crisis
has hardly dented increasing transportation needs. Only sea transportation may show
lower than 10% p.a. long-run growth figures, but this is dependent on many variables,
such as world prices of commodities, new manufacturing investments on Java, etc.
• Overall, the Government reasonably projects a transportation growth of 17.2% p.a. if
the economy achieves to grow at 6.6%;
• Capacity extensions of terminal infrastructure is urgent, although efficiency improve-
ments may buy adequate time for better planning; this seems to particularly the case
for terminals outside Java;
• The planning of integrated and complementary transportation networks, which in-
cludes the development of high-speed inter-city and suburban amenities, is done only
at a rudimentary level
• At the Infrastructure Summit, the Government presented investment proposals which
were mostly shelved at the start of the crisis; the selective approach shows more
pragmatism than concerted planning, although the rates of return on these projects
have not drastically changed; this is due to the fact that demand growth has been
constant and high; however, projects which were not feasible prior to the economic
crisis remain most often not (yet) viable at present;
• The pay-back of most infrastructure investments on Java simply depends on steady
(and not exponential) demand growth and unlikely on multipliers due to an increased
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inter-connectivity of transportation networks; the longest pay-back is to be expected

from inter-city amenities; rates-of-return depending heavily on a late pay-back (e.g.
within the last five years of the concession period) are highly uncertain;
• State enterprises control most investment decisions and decisions are dependent on
a legacy of past licenses and stakeholders with legacy interests;
• All revenues, except for international traffic, are in local currency; local-currency long-
term investment vehicles, such as a Transportation Fund, are non-existent as for
now.
C.3. Legal and regulatory framework
1. Relevant Authorities in the Transportations Sector

The general responsibility for coordinating infrastructure projects in transportation in general falls under the coor-
dinating ministry for economic affairs. The coordinating minister acts through his deputy for infrastructure and re-
gional development who has the responsibility to prepare planning and policy making as well as synchronizing
policy implementation in the infrastructure and regional development.
Under the coordinating minister of economic affairs, there are two key central government actors in the road
transport sector:
1. Minister of Public Works (MPU), through its Directorate General of Spatial Management (Direktorat Jenderal
Penataan Ruang, DGSM) and Directorate General of Road Development (Direktorat Jenderal Bina Marga,
DGRD). DGSM has primary responsibility for the formulation and implementing policies, and technical stan-
dards of spatial management; DGRD has the primary responsibility for the formulation and implementing
policies and technical standards on road developments.
2. Minister of Communications (Perhubungan or MOC), through its Directorate General of Land Transport
(DGLT) has primary responsibility for the formulation and implementing policies, and technical standards of
land transportation.
The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to Regional Governments and its
role in supporting the implementation of regional autonomy.
Regional Governments - regency (kabupaten), municipal (kota) and provincial – each have agencies (Dinas)
whose responsibilities broadly align with the central Government Departments in the form of regional offices (Kan-
tor wilayah) of the Department:
a. Offices of Public Works (Dinas Pekerjaan Umum) are responsible, among others, for the road infrastructure
functions and programs of their respective regions.
b. Offices of Communications (Dinas Perhubungan) are responsible for road traffic and transport functions and
programs, including route licensing and tariff regulation for public passenger transport services.
The regional autonomy law defines the power of provincial as well as the regency in each the transportation sec-
tors, as follows:
1. licensing of inter-regency/municipality toll roads;
2. determination of policy management and licensing of provincial ports;
3. management of provincial seaports and airports constructed by the provincial government or seaports and
airports whose management is granted by the central government to the provincial government;
4. planning, construction and maintenance of provincial roads;
5. planning, construction and maintenance of inter-regency/municipality railways.
In the air transport sector, licensing of airport operations will be granted by the MOC and the Head of the Regional
Government where the airport is located.
In the sea transport sector, MOC guides harbors affairs which include aspects of regulatory, control and supervi-
sion on construction, empowerment, and development for implementing the National Harbor System. The regula-
tory aspect includes the MOC’s authority for policy making on harbor sector.
2. Toll Roads
General
Construction and operation of roads including toll roads in Indonesia are regulated under the Law No. 38/2004
regarding Roads (“Law 38/2004”) which replaced the old Law No. 13/1980.
Government regulation No. 15/2005 (“GR 15/2005”) as an implementing regulation of Law 38/2004 has been
enacted and contains the main following provisions with respect to the operation of toll roads:
Policy on development of toll roads
Policy on the planning of toll road is established by the government every five years. The toll road development
programme is established with due regard to regional and economic development, national transportation sys-
tems and national policies on other sectors.
The Regulatory Body for Toll Roads
GR 15/2005 establishes BPJT (Badan Pengatur Jalan Tol), the Toll Road Regulatory Body,
as an institution responsible to the minister in charge of the road construction and development (the “Minister”).
BPJT replaces PT Jasa Marga, the State-owned Corporation which served as toll authority under the previous
law. BPJT will be directed by a steering committee that will oversee a professional management and staff. The
steering committee will comprise government representatives, representatives from interested parties and the
community/public.
BPJT is tasked with the regulation and supervision of business entities that operate toll roads, including:
i. Recommending the initial toll tariff and tariff adjustment to the Minister;
ii. Taking over the right to operate a toll road the concession of which has expired and recommending on the
further operation of such toll road to the Minister;
iii. Taking over temporarily the operation of a toll road which failed in the implementation of its concession and
further re-auctioning of its operations;
iv. Preparing toll road projects covering technical and financial feasibility studies as well as environmental im-
pact analysis;
v. Procuring the toll road investment through an open and transparent auction mechanism;
vi. Assisting the implementation of land procurement in case there is certainty on availability of funds and pre-
paring mechanism for the use of land procurement fund;
vii. Monitoring the implementation of toll road projects by the business entities;
viii. Supervising and controlling the implementation of all toll roads operations and reporting periodically to the
Minister.
Operation of Toll Roads
Under Law 38/2004 and GR 15/2005 operation of toll roads encompasses the financing, technical planning, con-
struction, operation and/or maintenance of toll roads.
The operation of toll roads may be conducted by state-owned companies, regional government-owned companies
as well as by private companies.
In certain circumstances, due to the lack of private interest in building certain segments of the toll roads, the gov-
ernment may engage in the construction of toll roads either wholly or partly.
The concession for the operation of a toll road is granted for a certain period of time to meet an appropriate return
on investment of the business.
The right to operate a toll road granted by the government to a business entity is to be carried out in a transparent
and public tender. The business entity winning the tender will enter into a toll road operation agreement with BPJT
acting on behalf of the government.
GR 15/2005 provides that the preparation of toll road projects is conducted in the framework of a priority list of toll
roads that are intended to be tendered. The preparation will include pre-feasibility studies, feasibility studies, and
analysis of environmental impact, to be conducted by BPJT. The technical preparation of toll roads is to be pre-
pared by the toll operators (business entities). On the construction phase, GR 15/2005 provides that construction
can only be implemented after the procurement of land has been finalized at least for the segment of toll that is
feasible for the operation.
Funding for land acquisition will either be from the government or the business entities. The government will set
the amount of funds for the procurement of the land. In the event the amount of funds for the procurement ex-
ceeds what the government has already set forth, the government will grant an extension of the concession pe-
riod. The same principle applies if the amount of funds is less than what has been provided, in which case the
excess will be deposited as non tax revenue.
Tender Mechanism for Toll Roads
GR 15/2005 provides that tenders will be conducted in an open and transparent manner by a tender committee
established by BPJT. Tenders are divided into prequalification and limited tender phases for the party which have
passed prequalification. The prequalification is conducted to evaluate the financial ability of the tender partici-
pants. Both Indonesian and foreign companies may participate in the tender.
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Aside from toll roads projects that are initiated by the government, GR 15/2005 provides a scheme under which a
business entity can propose to operate a toll road. Under this scheme, a business entity must propose a plan to
operate a segment of toll road with a demonstrated feasibility. The feasibility study will be used as a basis for a
regular tender involving other business entities.
Following the tender, the concession agreement to operate a toll road is to be signed between the business entity
and the Minister, acting on behalf of the government. GR 15/2005 specifies the terms and conditions of the con-
cession agreement to operate the toll road. Special emphasis is put on provisions regarding the delivery of the toll
road in the event the concession to operate ends.
Toll Tariff
Article 48 of Law 38/2004 specifies that the toll tariff will be calculated based on the following components: (i) the
affordability of the toll road user, (ii) the extent of the profit generated from the vehicle operational cost, and (iii)
feasibility of investment. The application of the toll tariff, the range of which is provided in the toll road operation
agreement, is stipulated in a simultaneous manner with the stipulation concerning the operation of the road as the
toll road by the Minister. Evaluation and adjustment of the toll tariff is carried out once in every two years based
on the impact of inflation on the tariff. The formula for the tariff adjustment is as follows: New Tariff = Old Tariff
(1+inflation rate).
Further provisions on the toll tariff are contained in GR 15/2005. The element of the profit generated from the ve-
hicle operational cost is calculated based on the difference of vehicle operational cost and value of time on toll
roads and alternative crossing on the existing public road. On the element of feasibility of investment, GR 15/2005
specifies that it will be calculated based on an accurate and transparent appraisal of all costs during the term of
the concession agreement, which will enable the toll road operator to get a reasonable profit on its investment.
The application of toll tariff will be decided by the Minister concurrently with the operation of the toll road. BPJT
will recommend any adjustments of the toll tariff to the Minister.
Foreign Participation in Toll Road Projects
Construction and operation of toll roads is open for foreign participation. Foreign partners may own up to 95% of
the equity in the business.
3. Railways
General
Construction and operations of railroads in Indonesia are regulated under the Law No. 13/1992 regarding Rail-
ways (“Law 13/1992”) which replaced several laws and regulations that were promulgated during the Dutch colo-
nial period. In addition to Law 13/1992, the government has issued Government Regulation No. 69/1992
regarding Railway Infrastructure and Facilities (“GR 69/1992”). A draft on amendment of GR 69/1992 is being
prepared to regulate the cooperation between the Government Railways Company and the private sector (“Draft
GR”). Furthermore, a new law on railways has been drafted and is ready for submission to the parliament (“Draft
Law”). The Draft Law is more extensive in its coverage of the railway sector and is intended to attract more opera-
tors into the industry.
Law 13/1992 divides the railway industry into two categories, railway infrastructure and railway facilities. The rail-
way infrastructure comprises railway lines, railway stations and railway operational facilities. Railway facilities
comprise driving facilities, facilities for the transportation of passengers or cargos and facilities for specific pur-
poses.
Operation of Railways
Under the Draft Law, public railways management is divided under the following categories:
1. National railways
2. Provincial railways
3. Municipal railways
Entities other than the state railway company PT. Kereta Api Indonesia (“PT KAI”) may participate in railways ac-
tivities under cooperation schemes with PT KAI.
The operation of railways is divided into types of operators:
1. Operator of infrastructure
2. Operator of facilities
3. Operator of both infrastructure and facilities
The facilities itself is defined as anything that runs on the railway whereas the infrastructure includes railways and
railways stations and other supporting infrastructure for the operation of railways.
The Role of PT KAI
PT KAI is a State-owned enterprise and is currently the sole railway and public train operator in Indonesia. Basi-
cally the government provides and maintains the train infrastructure. The provision and maintenance of the infra-
structure may be delegated by the government to PT KAI. The operation of the infrastructures itself will be carried
out by PT KAI.
The government also develops the railway’s construction design and engineering. The government will also stipu-
late regulations concerning the railroad comprising of the road way area, right of way area, and road control area
including areas below it and the free space above it.
Under Draft Law, operation of railway infrastructure can be conducted by government, regional government, state
owned enterprise (BUMN like PT KAI), regional government owned enterprise (BUMD) or private entities and may
also be conducted in a joint venture between those institutions.
Tariff
Draft Law contains provisions with respect to tariff. Passenger tariff is set by the operator based on the quality of
services that operator provides whereas tariff on goods is set based on contract between the operator and the
user. Government may be involved in the setting of tariff in the event (i) the train service is deemed an essential
public need and (ii) the service is provided as part of regional development.
Train Transportation Service Network
Law 13, 1992 governs a train transportation service network, which is operated in an integrated manner and
forms an inseparable part of the entire transportation system. Train Transportation Service Network consists of
inter-city transportation service network and the city transportation service network.
Under Law 13/1992, the operation of train transportation service is carried out after the fulfilment of the general
requirements as as stipulated by PT KAI as the operator/regulator in this field..
The structure and classification of tariff for the train transportation is stipulated by the government.
GR 69/92 provides that the Minister in charge of railways will stipulate a railway lane network in the form of gen-
eral plan on railway lane network taking the following into account:
a. the general plan on spatial layout, consisting of existing lanes and future lanes;
b. integration of intra and inter transportation modes;
c. integration into other development sectors;
d. safety and smooth-running of railway operations;
e. the economic growth;
f. environment conservation.
Participation in the Railway Business
Draft GR contains provisions with respect to the participation of private parties in the railway sector. Cooperation
is intended to increase the use of infrastructures, the capacity and quality of services and to foster the participa-
2
tion of the private sector. The cooperation between the government or PT KAI and the Indonesian entities may
involve the following: (a) procurement; (b) operation; and (c) maintenance.
The cooperation has to meet the following requirements:
i. the ability to procure the required capital;
ii. environmental friendly;
iii. having qualified human resources;
iv. safety and smooth-running of the railway operation;
v. meet the technical requirements set by the government;
vi. in accordance with the general plan on railway lane network and the general plan on spatial layout;
In meeting the above cooperation, the Indonesian entity applies to the minister attaching the following documents:
i. cooperation agreement between PT KAI and the Indonesian entities in the form of a notarial deed;
ii. audit report from a public accountant regarding the Indonesian entities;
iii. performance of the Indonesia entities covering its capital, human resources, and equipments;
iv. detail design of the railway infrastructure to be built;
v. evidence of ownership of maintenance facilities for the infrastructure;
vi. plan on steps to construct the infrastructures and operational plan on the construction.
The Minister has to verify the application with one month after the application having been received completely
and correctly.
2
Under the draft GR, this is stated as “Indonesian entity”. We assume that this refers to the private sector.
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Foreign Participation in the Railway Sector

Foreign investors have to cooperate with PT KAI to establish a joint venture company in railways. A foreign inves-
tor may own up to 49% for foreign Investment in railway that will engage in public transportation. Foreign investor
may own up to 95% of equity in the joint venture company if the cooperation is to build a new network.
4. Airports
General
Airport activities are governed under Law No. 15 of Year 1992 concerning Aviation (“Law 15/1992”) which is due
to be amended. Under Law 15/1992, the provisions related to airport are set out with Government Regulation as
the implementing regulations.
The current Government Regulation on airport activities is Government Regulation No.70 Year 2001 (“GR
70/2001”). The government also plans to amend this regulation in the near future.
In this section, the ‘Government’ is meant as the central government.
National Airport Guidelines
Airports in Indonesia are built based on a National Airport Guideline (“NAG”) which is established by the Minister
(which in this matter is Minister of Communications as the minister who holds the responsibility for the flight au-
thority). The NAG sets out the following:
a. functions, utilization, classification, status, operational and airport activity;
b. synchronization of intra and inter transportation mode;
c. synchronization with other development sectors.
Airport Classification
- Based on its utilization, Airport is classified into airports open for serving air transport to/from abroad and
which airports closed for serving air transport to/from abroad.
- Based on its classification, airport is categorized into classes based on facility, operational activity and type of
surrounding air control.
- Based on its status, airports are categorized into public airports which serve public flights and private airports
which serve personal interest for supporting specific activities.
- Based on its operations, airports are categorized into (i) public airports operated by the Government, includ-
ing the regional government or by an airport business entity (“Airport Business Entity”)3 (ii) private airport op-
erated by the government, including the regional government and Indonesian legal entities.
- Based on its activities, airports are classified into airports which serve aircrafts and airports which serve heli-
copters.
- Based on hierarchical functions, airports are divided into two types, hubs and non-hubs.
- Based on control of the surrounding airport airspace, airports are divided into controlled air space and uncon-
trolled airspace.
Stipulation of Location, Land Utilization and Possession, Water and Air Space in Public Airport
The land and/or water location, and air space for airport operation is stipulated by Minister on Communications
with due observance of the Regional Spatial Plan, economic development, economic worthiness, technical con-
struction and operation, environment, flight safety and state defence.
The airport operator must possess the land and/or water and air space in the airport location for purposes such as
airport services, flight safety services and airport supporting facilities.
Public Airports
With regard to public airport operations, the Minister stipulates (i) the construction standard procedure/master
plan requirement of airports (ii) design standards and/or airport facility and tools engineering (iii) facility and tools
reliability standard and (iv) airport operation standard.
The operations of public airports provide airport services related to air traffic of aircrafts, passengers, cargo and
postal. This group of activities/operations is undertaken by the Government (for its functions as mentioned below),
the Airport operator, and legal entities that conduct related activities in the airport.
Government function is carried out by government agencies which authority is related to:
a. flight safety;
b. fees and excise;
3
This is a State/Regional Government-owned enterprise specifically established for engaging airport activities.
c. immigration;
d. airport safety;
e. quarantine.
The operation of public airports may only be carried out by the Government or the Regional Government and an
Airport Business Entity. In the framework of public airport operations, an Airport Business Entity may establish
cooperation with the Government (including the regional government) and Indonesian legal entities.
Airport Supporting Activities
Based on GR 70/2001, public airport support activities consist of (i) flight supporting service such as hangars,
aircraft workshops, warehouses, aircraft catering, aircraft ground handling, cargo services and (ii) airport activities
support services such as accommodations, stores, restaurants, parking, nursery.
Airport Service Fees
Airport service fees are fees charged by an airport operator, such as landing fees, ground handling fees and air-
craft parking fees. Service fees of a Government-operated airport shall be stipulated by a government regulation
or regional government regulation. For airports operated by an Airport Business Entity, the service fees shall be
stipulated by the Airport Business Entity after consultation with the Minister.
Special Airports
The operation of a special airport may be carried out by the Government, including the regional government, or
Indonesian legal entities for a personal/private interest for supporting specific purposes. A special airport is pro-
hibited for public use, except after having prior approval from the Minister.
International Flight Airports
The Minister can stipulate public airports or special airports as airports that are allowed to serve international
flights which serves passengers, cargos or postal services.
Regional Government Role
As of the implementation of Law No.22 of 1999 regarding Regional Autonomy, most of the authority and respon-
sibilities of the central government is assigned to the regional government, including airports.
Based on GR 70/2001, the operations of an airport conducted by the central government can be assigned to the
provincial government (as implementation of de-concentration task) and to the Municipality/City Government (as
implementation of decentralization task).
In the event a Municipality/City Government is not able to conduct airport operations, the respected authority can
establish cooperation with an existing Airport Business Entity or return its operations to the Central Government.
Airports that have been operated by Airport Business Entities shall remain to be operated by Airport Business
Entities.
Conditions for Foreign Participation
According to the Negative List and the IPU established by BKPM, foreigners may hold a maximum of 49% of
shares of a company engaged in public airport operations or direct airport supporting services. For indirect airport
supporting services, the foreign shareholding can be a maximum of 95% of the company’s share capital.
Division of Responsibilities
With respect to licensing, the Minister shall have the authority to grant permits or licenses on hub and
non-hub airport operations, while Head of Regional Government shall stipulate work areas in non-hub
airports and airports with uncontrolled air space.
Draft Laws and Regulations on Airports
The major changes in current draft law concerning aviation especially with regard to airport activities, are among
others, the following:
- the deletion of the provisions related to the restriction of international cargo airlines initiating domestic cargo
flights,
- determination of scheduled and non-scheduled flights,
- airports that are setup to serve pioneer flights in remote areas.
Additional provisions are made on the requirement to obtain certificates for the establishment and operations of
airports (airport operations certificate, competency certificates) and the requirement to fulfil sound ambiance stan-
dards and air pollution standards.
There are no material amendments in the current draft government regulation concerning Airports, except that it
simplifies the classification of airports. In the current draft, the major classification of airports is determined by the
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capability of an airport in handling aircrafts with 30-seat configuration or pay load more than 5,700 kilograms (the
“Required Capacity”).
If the respected airport is able to handle higher than the Required Capacity, the airport-related licenses will be
granted by Minister, and if the respected airport is only able to handle less than the Required Capacity, the li-
censes will be issued by Head of Local Government, namely, either by the Governor, the Regent or the Mayor.
5. Harbours
General
The harbour sector in Indonesia is governed by Law No. 21 of 1992 concerning shipping (“Law No.21”) and its
implementation regulations namely, Government Regulation No. 69 of 2001 concerning harbour affairs (“Gov-
ernment Regulation No. 69”), Decree of Minister of Communications number KM 53 of 2002 concerning national
harbour system, Decree of Minister of Communications number KM 54 of 2002 concerning harbour operation,
and Decree of Minister of Communications number KM 55 of 2002 concerning special harbour operation.
Law No. 21 and Government Regulation No. 69 provide that there are two types of harbour in Indonesia, i.e. gen-
eral and special harbour. The general harbour is a harbour which is operated for public utilities whereas the spe-
cial harbour is a harbour which is operated only for specific needs to support certain activities.
What follows are the description of the current government policy with regard to the construction and business
activities of general and special harbour.
General Harbours
a. Construction
The construction of a general harbour must satisfy the following requirements:
(i) administration;
(ii) evidence of acquisition of land and waters;
(iii) obtaining the decree for harbour location;
(iv) obtaining harbour master plan; and
(v) technical design which includes soil condition, construction, hydro-oceanography condition, topography, con-
struction and installment of navigation facilities, shipping lane, harbour pool; site plan and equipments capac-
ity at the harbour.
The construction must be subject to the technical directives of harbour construction as determined by the Minister
of Communications (“Minister”). The central government, province governments and/or regency governments
may only develop a new harbour subject to the national harbour system (Tatanan Kepelabuhanan Nasional) and
must comply with the provisions set out in the Government Regulation No. 69.
The harbour operation can only be undertaken provided that a number of requirements have been fulfilled, among
others:
(i) the construction has been completed as in accordance to the construction conditions as set out in article 25
of Government Regulation No. 69 (see previous paragraph);
(ii) safety and security navigation have been in place;
(iii) facilities for securing the smooth flow of passengers and goods have been provided;
(iv) environmental management has been in place;
(v) system and procedure for service has been in place; and
(vi) the operator has certified and qualified human resources for technical operation who support the harbour
operation.
As a consequence of the authority distribution between the central and local governments, the Government Regu-
lation No. 69 provides that the decision for harbour operation is issued by the difference officials subject to the
types of general harbour.
(i) The minister grants the decision for international and national harbour;
(ii) The governor grants the decision for regional harbour; and
(iii) The head of regency/mayor grants decision for local harbour.
b. Activities
Pursuant to the Government Regulation No. 69, there are three key players of the activities in general harbours:
(i) government agencies;
(ii) harbour operators; and
(iii) Indonesian legal entities which provide services relating to smooth flow of the traffic of ships, passengers and
goods in the harbours.
Below is the description of the authorized activities for each player in the general harbour pursuant to the Gov-
ernment Regulation No. 69.
(i) Government Agencies.

The government agencies have functions for navigation safety, custom and excise, immigration, quarantine;
and peace and order at the general harbour.
(ii) Harbour Operators (Penyelenggara Pelabuhan).
The harbour operators in the Government Regulation No. 69 are as follows:
a. Technical Operating Unit (Unit Pelaksana Teknis)/Harbour Task Force (Satuan Kerja Pelabuhan) for the
general harbour which is operated by the government, province government, and regency/town govern-
ment;
b. Technical Operating (Unit Pelaksana) of Harbour Business Entity for a general harbour which is oper-
ated by the harbour business entity.
Under Indonesian law, the state-owned enterprise which is authorized to operate harbours, being the Har-
bour Business Entity, is PT. Pelabuhan Indonesia (Persero) (hereinafter referred to as “Pelindo”).
These players are authorized to conduct the following business activities:
a. providing harbour pool and waters for ship traffic and anchoring;
b. providing services related to pilotage;
c. providing services for jetty, loading and unloading of goods and animal; and facilities for passengers and
vehicles boarding;
d. providing warehousing and containers yard services, transportation in harbour waters, loading and
unloading equipments, and harbour equipments;
e. providing land for any building and yards related to the smooth flow of sea transportation and industry;
f. providing roads and bridges network, vehicles parking area, water disposal channel, drinking water and
electricity installations, fuel depot, and fire engine;
g. providing services of container terminal, liquid bulk and dry cargoes;
h. providing other services which support the harbour services.
Harbour services undertaken by the Technical Operator Unit/Harbour Task Force is assignable to the Har-
bour Business Entity provided that the entity has met the financial, operational and facility criteria. The provi-
sions as regards the assignment on the harbour services will be further regulated in the Minister Decree.
(iii) Indonesian Legal Entities or Citizens.
Indonesian legal entities or citizens may only undertake the following support harbour business activities:
a. activities which are not included into an essential harbour business, namely:
1. providing office for harbour services users;
2. providing industrial estate;
3. providing trading area estate;
b. activities which support the smooth flow of harbour operation, which in a certain time if they are not in
place will have an effect on the smooth flow of harbour operation, which may include:
1. providing waste storage area facility (reception facility);
2. providing cargo terminal service;
3. providing warehousing service;
c. activities which support the smooth flow of harbour operation, and not disturbing the smooth flow harbour
operation if they are not in place, which may include:
1. public transportation services from and to the harbour;
2. hotel, restaurant, tourism, post and hotel;
3. other public facilities.
These support activities according to the Government Regulation may also be undertaken by the Technical Op-
erator Unit/Harbour Task Force of the government, province government, regency/town government or Harbour
Business Entity. Indonesian citizens or legal entities may also undertake these services after they have been
firstly considered by the Technical Operator Unit of the Government Harbour, province government, regency/town
government or Harbour Business Entity.
The current regulations and policies with regard to the foreign capital participation in the general harbour opera-
tions are discussed under “Conditions for Foreign Participation” section below.
Special Harbours
As mentioned earlier, a special harbour is a harbour which is developed and operated only for specific needs to
support certain activities. The location of a special harbour is a part and inseparable to the national harbour sys-
tem and is determined by the Minister after obtaining a prior recommendation from the governor and head of re-
gency/mayor.
The Government Regulation No. 69 divides the special harbours into 3 (three) types, i.e. national/international,
regional and local special harbour. The criteria for each type are as follows:
(i) National/international harbours have the following criteria:
1. The minimum ships tonnage is 3,000 DWT.
2. The minimum length of jetty is 70 meter.
3. The minimum water depth in front of jetty is -5 M LWS.
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4. These harbours handle services for dangerous and poisonous goods

5. These harbours handle activities for inter-provinces and international lanes.
(ii) Regional harbours have the following criteria:
1. The minimum ships tonnage is 1,000 DWT and the maximum is 3,000 DWT.
2. The minimum length of jetty is 70 meter, and the construction is made of steel.
4. These harbours do not handle services for dangerous and poisonous goods.
5. These harbours handle activities for inter-regencies/cities within one province.
(iii) Local harbours have the following criteria:
1. The ships tonnage is less than 1,000 DWT.
2. The length of jetty is less 50 meter, and the construction is made of wood.
4. These harbours do not handle services for dangerous and poisonous goods.
5. These harbours handle activities within one province/city.
The special harbours may be operated either by the government, province government, regency government or
an Indonesian entity for its own interest to support its certain activities.
A. Construction
The permit for special harbour construction is issued by the Minister for national/international special harbours,
the governor for regional special harbours and the head/mayor for local special harbours.
There are a number of requirements that must be satisfied for the special harbours construction:
(i) administration requirements:
1. deed of incorporation;
2. taxpayer registration number;
3. principal business license from relevant agency;
4. land certificate as evidence of acquiring land;
5. proposal for activities plan;
6. obtaining the decree on the special harbour location;
7. recommendation from the official in charge for navigation safety;
(ii) technical requirements:
1. harbour master plan;
2. jetty design;
3. main building construction plan;
4. hydrographic and topography plans, and an extract of survey on raising tide and stream;
5. survey report on soil condition;
6. study report on navigation safety including lane and harbour pool;
7. borders of inland and waters area along with geographical coordinates; and
8. environmental study.
The decision on whether the construction of special harbour is acceptable by the relevant authority will be issued
no more than 14 days as from the complete application is received.
B. Operation
The operation of special harbours must be in accordance to a permit issued by (i) the Minister for na-
tional/international special harbours, (ii) governor for regional harbours and (iii) head of regency/mayor for local
harbours. The operation permit is valid as long as the operator still conducts its main business.
The operation may be commenced after the following requirements are satisfied:
(i) the construction has been completed and has complied with the standard requirement and conditions as set
out previously (see paragraph A. Construction);
(ii) navigation safety and security;
(iii) environmental management;
(iv) having a system and procedure of services; and
(v) the operator has certified and qualified human resources for technical harbour operation field as stipulated by
the Minister Decree.
The special harbour permit is assignable to other parties along with the principal/main business and this assign-
ment must be reported to the Minister, governor or head of regency/mayor as in accordance to their own authority
set out in the Government Regulation No. 69.
Conditions for Foreign Participation
Based on the current Negative List, the construction and operation of harbours is open for foreign investors with a
requirement that they enter into a joint venture with an Indonesian partner to set-up a foreign investment company
in which the capital participation of the Indonesian partner must be at least five per cent.
Under the IPU issued by BKPM, the policy as regards foreign capital participation in the harbour sector is as fol-
lows:
- Basically, general harbours must be operated by Pelindo.
- Foreign investors may only undertake the following harbour businesses with some specific requirements:
Reception Facilities Ship to Ship Transfer: The foreign investors must set-up a joint venture company with the
local Pelindo and the maximum foreign capital participation in the company is 49 percent.
Cargo Terminal: The foreign investors must set-up a joint venture company with the local Pelindo and the
maximum foreign capital participation in the company is 95 percent.
New Draft Law on Shipping
The government has recently issued a new draft law on shipping (“Draft”) which is going to be discussed by the
House of Representatives prior to its enactment. In general, the provisions in this Draft re-affirm the provisions
stipulated in the Government Regulation No. 69 as mentioned above.
The Draft divides harbours into general and special harbours. The general harbours consist of sea harbours, river
and lake harbours; and channel harbours.
The central government, province and/or regency/city governments may construct and develop new general har-
bours subject to the National Harbour System. The operation of general harbours may be performed either by the
Harbour Business Entity, central, province, regency or town government. Business related to the general har-
bours may be undertaken by an Indonesian legal entity or citizen.
With regard to the special harbours, the Draft provides that they can be developed and constructed for a specific
purpose and needs. These harbours are a part and inseparable with the national harbour system. The permits for
special harbours are issued by the different authorities subject to the types of harbours:
(i) permits for national/international special harbour are issued by the minister of communications;
(ii) permits for regional special harbours are issued by the governor; and
(iii) permits for local special harbours are issued by the mayor.
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4. Water and Sanitation Sector.

a. Present Conditions of the Network.
Water supply and sanitation are vastly under-serviced in Indonesia. 307 often bankrupt local
water authorities (“PDAM”) deliver water to 5.25 million connections, supplying about 30 mil-
lion people. Sixty million people living in metropolitan, urban and small-city areas have no
access to piped water. Tariffs are well below cost and 40% of water is unaccounted for. Ja-
karta’s unaccounted water reaches 53% (World Bank 2005a). Collection networks and treat-
ment for grey water or sewerage are practically non-existent in Indonesia. Only 10 cities
have small networks, benefiting only some 1 million people. By contrast : Greater Jakarta
has 20 million inhabitants. Table 4.4-1 gives some estimates of how people get water.
Table 4.4-1. Estimated Water Distribution in Urban and Rural Areas. (World Bank 2005a)
Source Supplied Area
of Supply Urban Rural Mode of Distribution Urban Rural
PDAM 50% 8% PDAM (connections, tankers,…) 35% 5%
non-PDAM distribution of PDAM water (re- 15% 3%
selling, tanker-supply,…)
Non-PDAM 8% 3% Private networks, private sellers of bulk 8% 3%
drinking water (gallons),…
Self-Supply 42% 89% Community supply 2% 33%
Household supply (wells,…) 40% 56%
Note : Data collected in 2001. Overall, PDAMs supply 17% of the total population, non-PDAM supply provisions
sell to 13% of the population and 70% is provided through self-help. In 2001, approximately 85 million people were
living in urban areas and 125 mio in rural areas. It is estimated that between 55% and 60% of the population will
be urban by 2020, that is about 145 million people.
Chapter 2 already indicated that the supply alternatives are considerable, resulting in less willingness to pay than
the need for water may suggest. Java’s density should make supply networks more efficient compared to net-
works elsewhere in Indonesia, but this benefit is to been against Java’s easier access to water and thus its lesser
willingness to pay. It will take time to overcome this hurdle before tariffs can raised drastically.
The Government’s strategy for water and sanitation development is still about basics first
(Rantetoding 2005) :
• Promoting institutional reform, by strengthening the role of consumers in decision
making and by improving governance;
• Expanding the service, by introducing competition and private-sector participation, as
well as by promoting cooperatives and community-based developments;
• Conserving water resources, by efficiently managing river basins (one river-one man-
agement) and by promoting integrated water conservation and treatment;
• Improving the equality of services, by setting minimum standards of service; and
• Mobilising alternative funding.
Real institutional change is, however, coming slowly. The Water Resources Law of 2003 is
most relevant, as its name suggests, in relation to managing regional water resources. It has
little clout with regard to water supply and municipal water and sanitation systems. As a re-
sult, a concept has been set down in which a river basin is to be managed in a wholesome
manner but PDAM’s remain on a municipal footing. How PDAM’s should overcome their debt
burden, increase tariffs, attract and counter-guarantee private investments and solve con-
flicts between private investors and vaguely defined multi-stakeholder “Consultative Coun-
cils” is hardly set down in the Law. Answers on these issues are only very slowly emerging
in national regulations. One should also keep in mind that municipalities (either Kabupaten
(districts), Cities or Provinces) cannot yet borrow independently, for instance by issuing mu-
nicipal bonds. The Central Government is presently not willing to go further than allowing so-
called Two-Step Loans, which are bilateral or multilateral concessional funding taken up by
the Central Government and channelled through as piecemeal loans to local authorities.
What has worked well in the past ? And what not ? These questions may shed some prag-
matic insights on what can be expected for the future.
• Existing municipal systems were most often established in the Dutch-colonial era or in
the 1950’s; these networks have been further extended by PDAM operations;
• Most newer raw water supply installations were built in the 1970’s and 1980’s, often
as a result of the construction of new dammed reservoirs which were also to provide
hydro-power; in the 1990’s, additional large hydro-power reservoirs never proceeded
beyond the drawing board, often due to protests because of unfair evictions; existing
reservoirs have been silting up earlier than expected, because of upstream deforesta-
tion; reservoirs are therefore no longer a priority option and no longer a driver for in-
creased water supply;
• Throughout the 1990’s, so-called Integrated Urban Infrastructure Development Pro-
grammes added supply capacity, for instance through the construction of new main
supply pipes; these programmes provided also in the first grey water treatment instal-
lations since the 1950’s;
• These programmes evolved into preparations for a number of municipal water devel-
opments with possible private-sector involvement (Gresik, Bandung,…), but the crisis
has put these developments on hold before implementation was started;
• Packaged (small-scale) water supply and integrated waste water treatment were suc-
cessfully developed for a limited number of residential and industrial estates in and
around the largest cities (Jakarta, Surabaya, Batam); around US$ 30 mio was in-
vested in such schemes by private developers; locations like Serpong (BSD devel-
opment), Karawaci (Lippo Karawaci development) and various industrial estates in
Bekasi and Karawang as well as on Batam are provided with good quality but com-
mercially priced and thus expensive water.
• Only a few municipal privatisation schemes were set up, most notably in Jakarta (with
Thames Water and Lyonnaise des Eaux / Ondeo) and more modestly in Medan (On-
deo); the Jakarta privatisation process practically collapsed due to the unwillingness
of Local Authorities to match the need for new investments with tariff increases;
• A number of private water schemes were drawn up in the second half of the 1990’s,
but these schemes were often speculative (Jambi, Samarinda) and have never left
the drawing board.
All in all, the Government lists twenty on-going PPP ventures in water supply, but few have
been financially rewarding and even fewer have had any significant impact in terms of scale.
Text Box 4.4-1 sheds some light on what is deemed possible presently.
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Text Box 4.4-1. Private sector investment in water : contemporary views on what may
and may not work.
Kevin Stovell, of Mott MacDonald Engineers (UK) summarised the problems for foreign private-sector par-
ticipation well during the Infrastructure Summit : (1) the private sector is ready to deliver expertise or man-
agement but unlikely equity investment; (2) most municipal water programmes are small and managed in a
fragmented way by localised PDAM’s; (3) there is no clarity how the private sector would not get caught in-
between the political-social-environmental interests of water resource management and political-social inter-
ests of local, municipal water supply. Even if the private sector would agree to BOT’s for, say, limited treat-
ment installations for clean water, then there is the risk that intake or take-off or both are uncertain, making
apparently simple “take-or-pay” agreements difficult to uphold and conflicts nearly impossible to arbitrage.
Local and politically well connected investors may be less wary of these obstacles, but they lack the expertise
to make private water management pay off.
An on-going Dutch initiative sheds some light on what it takes to overcome the obstacles. In 2002, the Dren-
the Provincial Water Authority WMD (Waterleidingmaatschappij Drenthe) approached the Manado PDAM
for co-operation. WMD is a public company and is allowed to invest funds in development projects, on a not-
for-profit basis. However, WMD first asked considerable and improbable guarantees from the PDAM, includ-
ing management control, in order to ascertain that the funds would be well invested. By early 2005, the intent
of cooperation has evolved : a Dutch water fund for developing countries added 7.5 mio Euro to the 2.5 mio
Euro which WMD would contribute; the co-operation has been expanded and should now include another ten
PDAM’s in Eastern Indonesia; WMD would work which each of the PDAM’s individually but would also set
up a joint training centre; and excess cash earned in the future would be put into a revolving fund for water
development in Eastern Indonesia. The issue of management and control has, however, not been resolved.
WMD is asking for 51% of the shares in each of the PDAM’s to guarantee financial control. Legally, it is not
clear whether this is line with the 2003 Water Law. It is moreover telling that majority control is not defined
on the basis of equity input and the prospect of a fair share in profits, but simply for reasons of operational
control. If the hurdles are that basic for a not-for-profit ventures, it is clear that bottlenecks for genuine private
investments will only be worse.

The above hurdles of private-sector investment should lead to the obvious conclusion that
the Infrastructure Summit 2005 evaded water projects. That the opposite is the case is there-
fore at least surprising. Twenty-four water supply projects were proposed, albeit with a mod-
est total value of US$ 385 mio. The list of 36 priority projects has five water projects, four of
which are in Tangerang (west of Jakarta). The latter combined programme costs US$ 100
mio and is by no means unreasonable as Tangerang has the least water provisions of all
metropolitan fringe areas of Jakarta, notwithstanding the fact that mid-income and high-
income residential developments have been brisk in the past 10 years. Table 4.4-2 shows
the scope of the 24 proposed projects, and highlights the main bottlenecks.
Table 4.4-2.
Water Resources To ascertain long-term water N
Solutions availability, e.g. by upgrad-
ing irrigation systems, build-
ing new dams, reducing
water run-off time, adding
upstream waste water
treatment in order to avoid
river basin pollution, etc.

Raw water intake To focus on private sector • Kali Garang/Semarang, Kali Jajar/Semarang, Y
and treatment, expertise in treatment Surakarta(Solo), Karang Pilang/Surabaya:
primary distribu- OK, if PDAM healthy
tion • Banjarmasin, Samarinda, Menado : small
scale
Clean water dis- To focus on private sector • Semarang, Yogyakarta, Umbulan (from spring Y
tribution and re- expertise in network man- resource) : potentially OK, pending health of
ticulation agement (which should in- PDAM
clude invoicing systems) • No mentioning of invoicing management
Combined pack- To provide in turn-key inte- • Commercially unviable schemes : e.g. Duri, Y
age of intake, grated solutions, reducing Dumai, Tanjung Pinang (Riau) (“pending
treatment, distri- the “take-or-pay” risks of IBRD loan”); these schemes also deal with
bution and reticu- treatment only and insuffi- competing intake interests, respectively from
the oil industry (Pertamina) and from water
lation cient water supply in case of
sales deals with Singapore
distribution/ reticulation only
• Cileduk, Cengkareng, Ciparens/Bintaro-
Serpong, Sepatan/Pasar Kemi, Pondok
Gede, Cikarang : tariff issue; issue of financial
health of PDAMs; co-agreements required
with private estate developers having their
own water facilities; enforcement required
against industrial facilities relying on cheap
but good ground water
• Jatinangor/Sumedang : small scale
• Cirebon : likely OK as Cirebon has a good
network (both of supply and sanitation)
• East Semarang : potentially OK, as local
ground water is brackish and unfit for con-
sumption
• Tegal, Menganti/Gresik : same as Semarang,
but small scale
• No mentioning of invoicing management
Gray water / Ideally to be integrated into N
sewage treat- PDAM treatment systems, in
ment order to ascertain stable raw
surface water qualities
Table 4.4-2 clarifies that notwithstanding the reasonable development aims, there is no inte-
grated approach in making sure that water is managed well from its source until re-treatment
and disposal. The most likely form under which a number of public-private partnership deals
may substantiate is by converting contractor-arranged construction funding into equity or
quasi-equity as part of B.O.T. programmes. This will however invite partners to mark up
construction budgets (in order to recoup profits early on) and subsequently to downscale
management and expertise, especially if the outstanding financial balances are carried by
uninformed third-party lenders. The most likely scenario is that the Central Government will
increase simple Two-Step lending (which does not require public-private partnership in fi-
nancing and management) and will eventually settle for the risks of municipal lending.
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• Demand growth is substantial, but demand elasticity is not always large, due to the
availability of (less sustainable) supply alternatives;
• The Water Resources Law stresses a comprehensive approach to water manage-
ment, but it is not clear, from the Law, from regulations or from developments in prac-
tice, how this will impact municipal water management which is presently fragmented;
• Most PDAMs are financially nor organisationally ready or open even in principle for
genuine public-private partnerships;
• Private-sector water provision is fraught with past failures, except for small packaged
deals for industrial and up-market residential developments;
• The pay-back of most water infrastructure investments is very uncertain due to the fi-
nancial condition of most PDAMs, but also in relation to the absence of independent
arbitration mechanisms in relation to tariff setting and for attributing responsibility in
case of service failure;
• The present emphasis on private-sector participation is more about the raising of con-
struction finance and the securitarisation of the repayment of this financing, rather
than about the injection of management expertise; due to the near-zero credit worthi-
ness of PDAMs but also of local administrations (which cannot give viable multi-year
commitments), the guarantees on repayments are likely to be more political than
strictly financial;
• All revenue is in local currency.
D.3. Legal and regulatory framework
1. The Relevant Authorities in the Water & Sanitation Sector

The general responsibility for coordinating infrastructure projects (including the development of SPAM in general)
falls under the coordinating ministry for the economic affairs. The coordinating minister will act through his deputy
of infrastructure and regional development who has the responsibility to prepare planning and policy making as
well as synchronizing policy implementation in the infrastructure and regional development.
Under the coordinating minister of economic affairs, the key central government actor in the development of
SPAM is the Department of Public Works (PU), through its Directorate General of Water Resources (Direktorat
Jenderal Sumber Daya Air, DGSDA). DGSDA has primary responsibility in the formulation and the implementa-
tion policies and in the technical standardization of the water resources field.
The Ministry of Home Affairs (MHA) is involved in the sector through its linkage to regional governments and its
role in supporting the implementation of regional autonomy. Regional governments – provincial, regency (kabu-
paten), municipal (kota)– each have agencies (Dinas) whose responsibilities broadly align with the central Gov-
ernment Department in the form of regional offices (Kantor wilayah) of the department.
The Office of Public Works (Dinas Pekerjaan Umum) is responsible, among others, for the water resources infra-
structure functions and programs of their respective regions.
The regional autonomy law defines the power of province as well as the regency in each the water resources sec-
tors as follows:
- determination of criteria for regional arrangement of the ecosystem water catchments area in the river basin
- determination of the planning and development guideline on the housing and settlement construction
- determination of the standard for regional infrastructure and facilities development consisting of irrigation,
large dam, bridge and road and toll-road
- determination of the guidelines in controlling the natural resources and preserving environmental function
- determination of the guideline on the natural resources conservation
- determination of standard for managing surface water resource inter-regency/municipality
- providing support/assistance for managing surface water resources.
2. General
The construction of infrastructure and facilities related to water in Indonesia, including for drinking water and sani-
tation, is regulated under Law No. 7/2004 regarding Water Resources (“Law 7/2004”) which replaced the Law No.
11/1974 (“Law 11/1974”) concerning Irrigation. In addition to Law 7/2004, the government has to issue a number
of government regulations covering more than thirty issues.
Law 7/2004 further describes the authority and the responsibility of the central government, which among others,
is required to establish a National Water Resource Council (Dewan Sumber Daya Air Nasional or “DSDAN”)
which constitutes a coordinating forum between the stakeholders of water resources at the national level. DSDAN
gives recommendation to the President on the basis of input from the regional government.
The only issue mentioned in Law 7/2004 that has been previously regulated is concerning Water Quality Man-
agement and Water Pollution Control as set out under Government Regulation No. 82/2001 (“GR 82/2001”). GR
82/2001 was issued before the enactment of the Law 7/2004 and therefore still refers to Law 11/1974. GR
82/2001 is further implemented by the Decision of the State Minister of Environmental Affair No. 111/2003 con-
cerning Guidelines on Requirements and Procedure for Licensing and Study on Disposal Waste Water to the Wa-
ter or Water Resources.
On March 21, 2005, the Government further regulated another issue mentioned in Law 7/2004 by enacting Gov-
ernment Regulation No. 16/2005 concerning the Development of Drinking Water Supply System (“GR 16/2005”).
The Drinking Water Supply System (Sistem Penyediaan Air Minum or “SPAM”)4
Under Law 7/2004, the water resource utilization is conducted by way of, among others, developing the water
resources by referring to the water resource management plan which is determined in each river areas. Such de-
velopment is directed to enhance the benefit of the water resource functions to meet the need of raw water for
5
households , agriculture, industry, tourism, defence, mining, power, communications and any other needs. Law
7/2004 rules that the need of raw water for household drinking water shall be fulfilled by developing a drinking
6
water supply system .
The SPAM may be conducted by way of pipe network and/or non-pipe network system. The SPAM with the pipe
network system shall cover the raw water unit, production unit, distribution unit, service unit, and processing unit
and be managed in good and sustainable manner. The SPAM without pipe network system may cover shallow
well, well hand pump, rainwater reservoir, water terminal, water tank vehicle, packed water installation or water
spring protection building. The technical provisions concerning the SPAM without pipe network system shall be
further regulated by a minister regulation.
The Development of SPAM
Law 7/2004 requires the development of SPAM to be the responsibility of the government and the regional gov-
ernment. GR 16/2005 further explained that such responsibility is given to guarantee the right of the people to
obtain drinking water for daily basic needs in order to fulfil healthy, clean and productive life.
The development of the SPAM shall be carried out by the State-owned company (“BUMN”) and/or the regional
administration-owned company (“BUMD”) which is established specifically for such purpose. According to the
elucidation of Law No. 7/2004, in the absence of the drinking water provider conducted by State-owned compa-
nies and/or regional government-owned companies in a particular area, cooperatives, private entities and the
community (the private sector) can become the provider of drinking water within such particular area.
Both Law 7/2004 and GR 16/2005 stipulate that the purpose of regulating the development of SPAM is to:
(i) establish a qualified drinking water management and service with reasonable price;
(ii) achieve equitable interests between the consumers and the service providers; and
(iii) improve the efficiency and coverage of drinking water service.
Protection of Raw Water (Air Baku)
The protection of raw water shall be conducted by harmoniously regulating the development of SPAM and sanitation infrastruc-
tures and facilities, which cover infrastructure and facilities for waste water and solid waste. The waste water infrastructure and
4
GR 16/2005 defines SPAM as an integral unit of physical (technical) and non-physical system of the drinking water infrastruc-
ture and facilities
5
GR 16/2005 defines the raw water for household drinking water as water originated from surface water spring, groundwater
notches and/or rainwater that fulfil certain water quality as raw water for drinking water. The elucidation of Law 7/2004 defines
household drinking water as water with drinkable standard without having to be boiled first and is declared healthy in accor-
dance with the micro biology examination result (e-coli test).
6
GR 16/2005 defines the development of drinking water supply system as activities having purpose of building, expanding
and/or improving the physical (technical) and non-physical (institution, management, finance, community participation and law)
systems in an integral unit as a whole to provide drinking water for the community leading to a better condition. The elucidation
of Law 7/2004 defines further explained that the developments of installations, networks and drinking water supply system for
household include hydrant model and distribution model by water tank vehicles.
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EU – Asia-Invest
facilities shall be conducted by local and/or centralized waste water disposal system. The solid waste infrastructure and facili-
ties, on the other hand, covers the collection, transfer, transportation, processing and final disposal, which must be conducted
harmoniously.
The processing of waste water and solid waste shall be conducted in accordance with the technical guideline stipulated in a
minister regulation.
The Implementation of the Development of SPAM

As required by Law 7/2004, GR 16/2005 stipulates that the development of SPAM shall be regulated harmoni-
ously with the development of infrastructure and facilities for sanitation, in order to guarantee the sustainability of
the drinking water supply and the prevention of raw water being contaminated by waste water and solid waste. .
The regional government may conduct inter-regional cooperation in order to carry out the development of SPAM
and/or infrastructure and facilities for sanitation.
The Planning of the Development of SPAM
The planning of the development of SPAM shall cover the drafting of master plan, feasibility study
and/or detailed technical planning. The SPAM provider itself or an appointed certified construction
planning service provider may perform the drafting process. Such drafting shall be done based on the
norm, standard, guideline and manual regulated by the minister regulation.
The Construction of SPAM.
GR 16/2005 regulates that the construction of SPAM shall comprise the physical construction activities and trial.
GR 16/2005 further rules that the construction of SPAM may be carried out by the SPAM provider itself or con-
ducted by a construction service provider through a tender/auction process. However, the elucidation of GR
16/2005 requires the SPAM construction activities to be conducted by construction service provider through a
tender/auction process in accordance with the prevailing laws and regulation in the case where the BUMN/BUMD
is the SPAM provider.
The Management of SPAM
The activities of managing the SPAM, which cover (i) operations and utilization; and (ii) administrations and insti-
tutions, shall be conducted by giving priority to the principle of justice and environmental preservation in order to
guarantee the sustainability of the drinking water service function and the improvement of the community’s health
and prosperity degree. The technical guideline and procedure in managing SPAM shall be decided by the minister
regulation.
Maintenance & Rehabilitation of SPAM
The SPAM Provider shall conduct routine and periodical maintenance to and rehabilitate part and/or the whole
SPAM. The technical guideline and procedure for maintenance and rehabilitation shall be decided by the minister
regulation.
Monitoring & Evaluation of SPAM
The central and regional government conduct the monitoring and evaluation of the implementation of the SPAM
provider in order to obtain performance data of the drinking water service. The SPAM provider shall submit its
activities report and required data to the central and regional government for the monitoring and evaluation pur-
poses. The technical guideline and procedure for monitoring and evaluation shall be decided by the minister regu-
lation.
Funding of the Development of SPAM
GR 16/2005 provides that the funding for the development of SPAM shall cover the funding for building, expand-
ing and improving the physical (technical) and non-physical systems. The funding resources may be originated
from:
(i) the central and/or regional government;
(ii) BUMN or BUMD;
(iii) cooperatives;
(iv) private legal entities;
(v) community fund;
(vi) any other sources of funds in accordance with the prevailing laws and regulations.
The Participation of Private Sector in the Development of SPAM
As mentioned in Law 7/2004 and GR 16/2005, the development of Drinking Water Supply System is to be carried
out by BUMN and/or BUMD specifically established for such purpose.
Nevertheless, GR 16/2005 provides that if the BUMN or BUMD is unable to improve the service quantity and
quality of SPAM in their regional services, such BUMN or BUMD upon the approval of their supervisory
board/commissioner may involve cooperatives, private entities, and/or the community within their services areas.
In case that the drinking water service which is required by the community cannot be provided by BUMN or
BUMD, the government or the regional government can build part or all the SPAM infrastructure and facilities,
which will then be operated by BUMN or BUMD.
GR 16/2005 further grants the cooperatives, private legal entities and/or the community (“Private Sector”) oppor-
tunities to participate in carrying out the development of SPAM in the areas or regions that have not been reached
by the service of BUMN/BUMD.
The aforesaid cooperative and private legal entity are to be established specifically for conducting business activi-
ties in providing SPAM. The involvement of the Private Sector in the development of SPAM shall be conducted
based on fair competition principle through auction procedure in accordance with the prevailing laws and regula-
tions, which may cover all or part of the development phases of SPAM . The Private Sector obtaining the right to
develop SPAM based on the aforesaid auction shall execute an agreement in developing SPAM with the govern-
ment or regional government in accordance with their authorities. Such agreement shall contain the following pro-
visions:
(i) the coverage of the service providing;
(ii) the technical standard (water quality, quantity and pressure);
(iii) the initial tariff and tariff calculation formula;
(iv) the duration of the service providing;
(v) the right and obligation of the parties.
After the period of such agreement lapses, all assets shall be transferred to the government or regional govern-
ment in good condition and operation. The auction procedure and methods of drafting the agreement on develop-
ing SPAM and the assets transfer shall be further regulated by a minister regulation.
The Development of SPAM Supporting Agency (Badan Pendukung Pengembangan SPAM or “BPP
SPAM”)
Law 7/2004 stipulates that the government may establish an agency which is subordinate to and responsible to
the minister in charge of the water resources in order to reach the purpose of regulating the development of
SPAM and infrastructure and facilities for sanitation, which will be implemented by a government regulation. Such
agency is formulated in the form of the Development of SPAM Supporting Agency or BPP SPAM.
According to GR 16/2005, BPP SPAM is established to achieve the purpose of regulating the development of
SPAM as mentioned above. BPP SPAM, which is domiciled in Jakarta, is a non-structural agency established by,
under and responsible to the Minister carrying out the governmental affairs in the field of water resources.
The task of BPP SPAM is to give support and assistance in the framework of reaching the purpose of the devel-
opment of SPAM in order to distribute the most benefit to the state and the greatest benefit of the people’s pros-
perity.
In order to implement its task, BPP SPAM has the following functions:
(i) to give input to the central government in the policy and strategy drafting;
(ii) to assist the central and regional government in the application of the norm, standard, guideline, and manual
by the SPAM Provider and community;
(iii) to conduct evaluation on the SPAM Provider’s service quality and performance standard;
(iv) to give recommendation on the action against the deviation of the SPAM Provider’s service quality and per-
formance standard;
(v) to support and give recommendation to the central government in the SPAM providing by cooperative and
private legal entity;
(vi) to give recommendation to the central government in preserving balanced interests between the SPAM Pro-
vider and the community.
Further provisions on the implementation of the BPP SPAM’s task and functions shall be decided by the Minister
carrying out the governmental affairs in the field of water resources.
3. Foreign Participation
According to the Negative List and the IPU, the fields of public works that are open to foreign direct investment
with specific conditions include the activities of (i) clean water construction and business; (ii) waste management
and (iii) waste water management.
The activity of clean water construction and provision of clean water business requires the cooperation with the
Drinking Water Regional Company (Perusahaan Daerah Air Minum or “PDAM”) or with a national company in the
absence of PDAM in such area. The activity of waste management requires the cooperation with the regional
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EU – Asia-Invest
government and the Sanitary Regional Government Company (Perusahaan Daerah Kebersihan or “PDK”). For
waste water management, this activity requires the cooperation with the regional government and the PDK.

Chapter 5.
Positioning of EU companies in the
Infrastructure Sector.
This chapter describes the presence of EU companies in Indonesia and points to the compe-
tition they are facing from traditional actors like Japanese companies, but also increasingly
from emerging players from other Asian countries.
1. A Review of EU Companies operating in Infrastructure Sectors.

In all there are about fifty EU companies operating in Indonesia’s major infrastructure sec-
tors: energy including power, oil & gas; telecommunications; water supply; and transportation
including roads, railways, airports and seaports.
These companies include operator companies, technology/equipment and solution providers,
EPC contractors, as well as consulting/technical service providers. They are present as joint
ventures, fully-owned subsidiaries or representative offices.
Several of them are large transnational companies with a large footprint over several conti-
nents, and also a significant presence in Asia. Among such large companies present in Indo-
nesia are the following:
• Power: ABB, Alstom, Babcock, International Power, Rolls Royce, Siemens, Thyssen
Kruppe, Wartsila
• Oil &Gas: Total, Shell, British Petroleum, British Gas
• Telecommunications: Alcatel, Ericsson, Nokia, Philips, Pirelli, Siemens
• Water Supply: Ondeo Services, RWE Group (Thames Water), WMD
• Transportation: SNCF, Colas
• Consulting/engineering: BCEOM, Halcrow, Mott MacDonald, Binnie Black and Ve-
atch, WSP, Witteween and Bos, Fichtner, Sofrecom,
Among the major European banks and insurance companies present in Indonesia are ABN
AMRO, Allianz, AXA, BNP Paribas, Calyon, Deutsche bank, HSBC, ING, Rothschild, Stan-
dard Chartered.
Table 1. Comparison of EU Investment Presence in select Asian countries

Company Indonesia China India
ABB Present 20 JVs, Subsidiary,
5500 employees 1500 employees
Siemens Subsidiary and JVs, 40 JVs, Subsidiary,
21000 employees 3000 employees
Alcatel Subsidiary 17JVs, Subsidiary and 2 JVs,
5000 employees
France Telecom Present through Sofre- Provides services in Exited mobile services
com, exited JV with partnership with China joint venture
Telkom Telecom, Unicom, JV
in Guangzhou
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Company Indonesia China India

Ericsson Subsidiary Manufacturing JV, Subsidiary, 1000 em-
2000 employees ployees, JV in telecom
cables
Nokia 5000 employees Subsidiary, 700 em-
ployees
Telecom Italia Not present directly, Rep office Exited JV in cellular
though Pirelli services
Vivendi Not present Rep office Rep office
Thales Rep office Rep office 150 staff Rep office
Total JV
Ondeo JV JV, 100 staff JV, 100 staff
Rolls-Royce Subsidiary Subsidiaries
Deutsche Tele- Rep Office
com
RWE Solutions JV
BCEOM Rep Office Rep Office Rep Office
EdF Not present JV Exited
GdF Not present JV JV (gas distribution)
Tractabel Exited Exited
British Telecom Rep Office JV telecom solutions
Source: EU business directories in China, Indonesia and India
2. The positioning of European Companies.

Overall, EU companies represent a major force in the Indonesian infrastructure sector. Their
presence in the country has been longstanding, and most of them have continued to do
business through the recent economic crisis, with a few notable exceptions in the telecom-
munications sector.
The respective position of EU companies differs significantly across sectors.
In the oil and gas sector, EU companies like BP, Shell and Total are among the largest for-
eign investors in Indonesia.
EU companies have been the dominant foreign investors in the water supply sector, with
Ondeo Services (formerly Lyonnaise des Eaux) and Thames Water operating water distribu-
tion companies in Jakarta.
In the telecommunications sector, EU operators (France Telecom, KPN, Deutsche Telecom)
have had a significant presence until 2002, but they have exited or reduced their presence
following the crisis. However EU companies (Alcatel, Ericsson, Nokia, Pirelli and Siemens)
still dominate the telecommunications equipment market, with an aggregate market share of
more than 60%.
In the power sector, EU companies (ABB, Alstom and Siemens) altogether hold an estimated
40% share of the equipment and supplies market.
Generally, he EU is highly regarded as a source of technology, best practices, capital goods
and investments in all infrastructure sectors. EU companies in Indonesia are present across
the spectrum of activities: investors/operators, equipment suppliers, technology solution pro-
viders, and consulting/engineering.

Within the EU, France, Germany and the UK outweigh others in presence, both in terms of
number of enterprises and volume of investments.
Overall, the international presence in Indonesia’s infrastructure is dominated by Japan, who
has had a looming presence in the energy sectors and has also been involved in transporta-
tion, telecom and water supply.
Recently, China, South Korea and some of the ASEAN countries have been emerging as
serious players in the country, crowding out other origins, especially the EU and US, which
have shown tendencies to withdraw from Indonesia or hold back further investments.
Unlike the EU, Japan and, increasingly, China and ASEAN countries have long-term strate-
gic interests in Indonesia. Japan has had an investment presence for over 100 years, and is
the largest donor of development assistance to Indonesia.
These countries’ strategic interests in Indonesia are based on the following:
• Indonesia has the most important energy and mineral reserves in the region, specifi-
cally coal, geothermal and oil/natural gas, which is of competitive interest to Japan as
well as ASEAN and China.
• There are over 400 Japanese companies in Indonesia in various industrial sectors,
which require infrastructure conditions to match their business growth potential.
• Indonesia is the largest economy and the biggest market in ASEAN, and will conse-
quently be the biggest consumer of goods and services in South-East Asia. It will also
be a major buyer of capital goods in the next twenty years.
As a result, there is intense competition in infrastructure projects from Japan and other re-
gional players, often with an un-stated strategic mandate with the support of government and
development institutions. For instance, in the energy sector, Japanese consortia offer not
only a large export market, but also compete in supplies of capital goods, provide financial
assistance and invest in projects. The largest projects in electricity, oil and gas processing,
etc, have Japanese investors, backed by Japanese equipment suppliers, financial institutions
and large trading conglomerates.
Such a consortium approach is not followed by US and EU players. EU institutions have
been extremely cautious with exposures to Indonesia.
Regional players are also more conversant and comfortable with the Indonesian business
culture and are willing to take greater risks than their competitors, notably EU firms. This is
illustrated by the fact that ASEAN companies have successfully ensconced themselves in the
telecom space, by taking over the EU investments in leading telecom service companies.
Thus the EU positioning in Indonesia remains that of a niche player, as a supplier of techno-
logical solutions in projects on a BOT or concession basis, but not at the scale of Japanese
investments in the same sectors. However, there are some large EU companies with a
strong presence in the Asia region, which enables them to offer competitive products from
their own subsidiaries in Indonesia, China and other parts of Asia. This has helped compa-
nies like Alcatel, Alstom, Pirelli, Siemens, and Ericsson compete successfully against other
competitors. However, these companies are not always able to secure the levels of subsi-
dised financial assistance from EU financial institutions/governments to match offers from
Japanese or other regional competitors.
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Chapter 6.
Key Issues in Enhancing Investment in Infrastructure.
This chapter presents an overview of the main issues that affect the investment climate in
Indonesia, with special emphasis on investment in the infrastructure sector, as experienced
by EU companies. It then submits a list of key factors that should be addressed by the Indo-
nesian authorities in order to improve investment conditions in the country.
1. Assessment of the Business Environment.

The survey of EU companies present in Indonesia mirrors the overall investment climate in
Indonesia as captured by recent detailed investor surveys:
Table 6-1. Experiences of business community in Indonesia.

% of respondents
Issues faced by business community with negative experience
Law enforcement 91%
Corruption 88%
Tax 84%
Bureaucracy and policy inconsistencies 82%
Manpower 64%
Crimes and security 58%
Infrastructure 51%
Regional autonomy 51%
Source: business experience survey by International Chamber August 2004
These inputs, along with recommendations by the Consultative Group on Indonesia (CGI)
have been used by KADIN (Indonesia Chamber of Commerce) in preparing a road map (Oc-
tober 2004) to revitalize industry and investment and to restore investor confidence in the
economy.
For companies, market access and production cost advantages are the most relevant issues
in deciding to invest abroad, but the key factors that determine the selection of a particular
country are its business regulatory environment and its legal/judicial recourse mechanisms.
In both these respects, the track record in Indonesia has been discouraging.
EU investors currently face rather challenging circumstances in Indonesia in terms of the
regulatory environment, legal recourse, and, consequently, access to competitive interna-
tional long-term funding.
Regulations
EU companies cite major risks in implementing infrastructure projects, arising from uncertain-
ties related to land acquisition, overlap and conflict among various implementing regulations
and laws issued by the central and regional government, non-market tariff setting by regula-
tors, the duality of the government’s role as an operator and as regulator.
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Decentralisation
Indonesia embarked on a major decentralisation programme in 1999. However, important
aspects of decentralisation (like jurisdiction on a large number of local subjects, decentralisa-
tion of local tax revenues and expenditures, etc.) were not clearly defined, which resulted in
confusion for investors, who had to deal with central as well as sub national levels of gov-
ernment.
Decentralisation has increased uncertainties and costs for companies, due to the following
reasons:
• The number of rent-seeking points increased in projects, as decentralisation in-
creased opportunities for illegal levies;
• Sub national governments imposed new taxes and charges in addition to central
taxes, which were economically harmful as they added to costs without providing new
public services;
• Sub national bodies did not have clearly defined roles nor the institutional and human
resource capacities to carry out their new missions, and central ministries themselves
were reluctant participants to the decentralisation programme;
• Sub national governments often made regulations that conflicted with central laws or
regulations in the same sectors;
• While sub national bodies were allowed to provide infrastructure services, they were
not provided adequate funds for infrastructure development. They were also not al-
lowed to not raise their own funds through bonds or international debt, which also lim-
ited their ability to generate their own resources and provide for public goods and
services under a public-private partnership model (this has changed recently). As a
result, regional governments could not initiate and financially promote infrastructure
projects, even though these would be under their jurisdiction.
Corruption
According to a World Bank study, 41.5% of firms interviewed in recent surveys cite corruption
as a serious business constraint. EU companies report frequent demands for bribes, organ-
ised protection money and harassment by tax authorities.
The new government has affirmed its serious intentions to mitigate corruption and has taken
measures to address this major constraint affecting the investment climate.
Some companies observed that corruption levels were actually coming down to more man-
ageable levels.
Dispute settlement and legal recourse

Perhaps the most important concern of foreign investors including EU companies in Indone-
sia is the lack of confidence in the judicial system to resolve disputes legally, under the provi-
sions of contracts. This lack of confidence stems from a wide-spread attitude of disregard
towards contractual sanctity, and the low credibility of Indonesian courts in enforcing contrac-
tual rights.
In some cases, contracts that had international arbitration clauses and had been decided
through international award have seen non-enforcement of these awards by the local courts.

Financing bottlenecks
The domestic financial markets in Indonesia suffer from maturity mismatches between the
sources of funds and the demand for funds, as well as risk-return mismatches, given the high
perceived uncertainties (risks) in infrastructure projects:
The uncertainty of recoveries restrains long-term exposures in projects. Less than 2% of
bank loans have maturity exceeding two years. Insurance and pension funds account for less
than 5% of the funding that goes into infrastructure.
The rates of interest on these loans, exceeding 12%, are unviable for infrastructure projects,
which are capital intensive and sometimes operate on subsidised revenues.
Indonesian state owned institutions have low equity capital (many of them have not accessed
public equity), which restricts their debt raising capacities, and affects the capital gearing in
investments.
International funding for Indonesia continues to be restricted, influenced by its low credit rat-
ing. EU companies experience difficulties in obtaining foreign currency funding, both in form
of soft loans, and commercial long-term loans, purely on project-level risks. The absence of
government guarantees for payments, and the record of contract cancellations and/or viola-
tions without adequate legal recourse, remain the principal bottlenecks in financial closure of
infrastructure projects.
Furthermore, EU companies engaged in infrastructure activities stress the following key is-
sues that are seen as major factors affecting investors’ adherence to the government’s re-
cent initiatives, as exposed at the recent Infrastructure Summit :
• Lack of an overall government policy on the private provision of infrastructure,
• Lack of a comprehensive “Master Plan” for each key sector of infrastructure with a
clear indication of the private sector’s role,
• Lack of a firm institutional framework for the implementation of infrastructure policies
and projects.
2. EU investors’ Expectations.
Consequently, EU companies state the following requirements as key issues in assessing
the investment outlook in Indonesia:
Improvements in governance:
• Development of a clear policy and strategy for infrastructure development, including
well-defined roles for central and sub-national levels of government and for the pri-
vate sector,
• Development of a comprehensive master plan for each main sector of infrastructure,
• Development of a comprehensive institutional framework for the implementation of
policies and projects, including the creation of a multi-disciplinary coordinating body
that would provide an independent evaluation of tenders and a special unit with au-
thority on subsidies and other project enhancement schemes,
Setting up of mechanisms for addressing investor grievances, establishment of a permanent
dialogue with the business community,
Development of institutional capacities, especially at sub-national levels of government.
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Improvements in the regulatory environment :

• Establishing a framework for private participation in infrastructure by revising existing
outdated laws and regulations (in particular Keppres 7/1998),
• Institution of a tendering process that is comparable to international standards in
terms of content, clarity and selection procedures,
• Presence and clarity of enabling laws and implementing rules and regulations for
each sector and type of investment,
• Clarity over roles and responsibilities of central and provincial governments,
• Creation and empowerment of autonomous sector regulatory bodies, with powers to
set tariffs and competitive rules, without political interference.
Legal recourse for investors:

• Development of a business culture based on contractual sanctity,
• Special dispensation of litigations involving foreign investors/parties under interna-
tional laws (UNCITRAL) rather than Indonesian domestic laws,
• Enforcement of arbitration awards, especially those awarded under international arbi-
tration.

Chapter 7.
Recommendations for Prospective European
Investors.
This final chapter gives recommendations for European companies looking for opportunities
in the Indonesian infrastructure business. The discussion in this Manual amply clarified that
Indonesia is not an easy business environment, either for companies already operating in
Indonesia or for those looking for market expansion or investment opportunities.
This chapter therefore proposes a tentative decision tree which can guide companies in their
evaluation process. The decision tree shows that the key capabilities which would enable
companies to approach infrastructure investment in Indonesia are the following :
1. Capabilities in project finance
2. Experience in operating in Asia / Indonesia
3. Capabilities in value stream segments with relevance to infrastructure investment
(which are to be broadly defined : project development, supply, construction, opera-
tions and management)
4. Sector-specific know-how, either in sectors with active competition (power, telecoms)
or in sectors where serious competition is notably absent (transportation investment,
water and sanitation).
A final variable in the decision tree is whether investment decisions in Indonesia are purely
commercial or whether there is a non-commercial mission. This may be the case for some of
the European public companies or public authorities who subscribe to development objec-
tives and international co-operation.
The decision tree is obviously indicative, as there are many more combinations possible
based on the profiles of individual companies or due to the variety inherent to infrastructure
sectors. The discussion of the variables in the following paragraphs is therefore mainly a
guide for strategy-making.
1. Capabilities in Project Finance.

The capability to commit project finance and investment funds in general in Indonesia’s high-
risk business environment is primordial as a competitive advantage. The 2005 Infrastructure
Summit was over-optimistic by portraying the Indonesian business environment as ready for
receiving substantial new FDI flows based on the good intentions of the new Cabinet and
pent-up needs. Nonetheless, the capability to bring in project finance and also the ability to
be influential in influencing policies that are easing such investment is a key advantage. To
put this in perspective: in March 2005, the Indonesian tobacco group Sampoerna sold its
companies to Phillip Morris / Altria for US$ 2 billion in cash. The reasons given for the auda-
cious sale of a very successful Chinese-Indonesian family business was the fear of declining
returns in the consumer business and especially in the tobacco business but also the stated
intention to use cash for upcoming infrastructure investments.
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The decision tree indicates two strategic areas for European companies with project finance
strengths.
For companies with little prior experience in developing or operating infrastructure facilities
either in Asia or in Indonesia, the suggestion is to explore future financial portfolio invest-
ments in infrastructure, preferably through derivative financial vehicles and instruments spe-
cialised in infrastructure. These could simply be future infrastructure funds targeting
Southeast Asia, Indonesia or even specific infrastructure sectors in Indonesia. There are few
opportunities as of today, but it is a reasonable prediction that in a few years, such funds will
take off. Chapters 1 and 2 gave ample indications that policies of Bank Indonesia focusing
on bond issues by national banks will likely make the country more fertile for derivative finan-
cial instruments. Also the Government’s intention to strengthen governance mechanisms in
relation to risk management should help to some extent. It should be noted, however, that
project risk in Indonesia is likely to remain high, even more so for minority investors. None-
theless, the volume of upcoming investments opens up reasonable perspectives of en-
hanced liquidity of derivate investments resulting thus in a reduced portfolio risk.
The suggestions in the decision tree are especially valid for companies with limited prior ex-
posure to investments in fixed assets in Asia. Companies without such exposure are advised
to scout for opportunities in general, preferably through specialised investment bankers.
Companies with Asia experience may be better placed to contribute to building such invest-
ment vehicles, preferably in co-operation with other potential investors in more advanced
markets in the ASEAN region, e.g. in Singapore and Malaysia.
Companies which already have experience in dealing with fixed assets in Indonesia need to
evaluate whether or not equity investment may be placed in infrastructure investments. The
following basic options emerge:
• European companies with strengths in competitive sectors (mainly power and tele-
coms) should actively build or strengthen alliances both with Asian investment com-
panies and with European financial institutions.
• European companies with strengths in sectors which are dependent on donor finance
and/or heavily controlled by Indonesian State-owned Enterprises (i.e. transportation,
including O&M of terminals; water and sanitation) will unlikely identify a significant
number of viable investment opportunities. The decision tree therefore indicates the
necessity for long-term aid-based engagements in accessing immature market envi-
ronments at municipal and sub-national levels in general. In the short term, this may
mean no more than small projects and/or feasibility study work.
• Finally, if no equity finance is to be committed but only loan finance or bridging fi-
nance, then again it is advisable to access or develop multi-project investment vehi-
cles, to channel in more credit insurance and in general to build financial risk
management modalities.
2. Capabilities in Infrastructure Development, but no particular

strengths in Project Finance.
Infrastructure investment will clearly lead to opportunities for studies, engineering services,
supply, construction and operations and maintenance, yet in the end the opportunities are
sector-specific.
Supply contracts will be easiest accessible in sectors where competition is better estab-
lished, that is power and telecoms. The procedures for fairer tendering and for reasonable
forms of dispute resolution are here better established compared to sectors where competi-

tion is low (transportation and water). The analysis of Chapter 2 also indicated the expecta-
tion that tender procedures will be more open in the more crowded market environment of
Jabotabek compared to other areas of Indonesia, although cherry-picking by State-owned
enterprises will remain a fact of life.
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Sectors which lower levels of competition may see foreign investment participation, but more
likely in packaged development schemes which will include large Indonesian companies, in-
cluding State-owned Enterprises. Participating in such foreign or foreign-local investment
set-ups may still be beneficial for European companies, as long as scale-advantages or rela-
tively risk-free sub-contracting modalities can be ascertained. Of special interest here are
future multi-year construction contracts, e.g. for gas pipelines and potentially in the rail sec-
tor.
With regard to business opportunities where know-how is more heavy on issues of opera-
tions and maintenance (municipal water, toll road management, but also the management of
air and sea terminals), investors need to be cautious and learn from past experiences. In
case of new turn-key investments with a B.O.T. component, it is advised to focus on new
ventures and not on ventures which need to receive revenue flows from existing operations.
All O&M operations where revenues are in Rupiah and/or defined by tariffs set by third-party
agencies are also high-risk.
A final segment of interest is small projects with a public service component which are fur-
bished under public-private partnership schemes. Here, the experience points to the need to
bring in also public overseas partners, as set-ups where the private partner is foreign and the
public interest is catered for by Indonesian organisations offer no investment security to such
private parties. Indonesian companies and local politics would overshadow foreign private
interests in such ventures. Finally, public-interest projects should be understood here
broadly: they may involve European municipal authorities which set out a public mission of
international co-operation, but they may also be private-sector schemes taking advantage
from such schemes as the Clean Development Mechanism and which aim at renewable en-
ergy programmes in developing countries.
3. Partnering.
A final note is here required on partnering. Indeed, many of the suggestions in the decision
tree point to the need of partnering. It is however important, as laid out earlier in the Manual,
that the reasons and modalities for business partnering have been changing in emerging
markets such as Indonesia.
Past partnerships deals were strongly related to market access. Joint Venture partnering
served a dual purpose to enhance licenses (legal access) and to facilitate access to re-
sources and to distribution (physical access). However, the economic and subsequent so-
cial-political crisis undermined these needs fundamentally:
• Local partners can often no longer ascertain business security;
• Local partners often failed to re-finance businesses in case of peak-crisis losses;
• For surviving businesses, local partners have often been no longer content with fac-
ing decreasing returns as a result of lesser monopolistic practices and thus more
market competition; and/or
• Local partners have been equally discontent to have their own entrepreneurial capa-
bilities sidelined in their positions of minority shareholder, while foreign majority
shareholders took the reigns in managing their businesses in an environment of en-
hanced competition.
Therefore, European businesses will need to adapt themselves in working out new forms of
alliances, which will need to focus more on complementary capabilities (e.g. to furnish pack-
aged deals) and on broader regional coverage (covering other ASEAN countries as well).
From a competition point of view, there is a downside in the sense that success will be less
likely due to simple expertise but rather as a result of market concentration and market con-
trol. This is visible in the increasing market concentration of multinationals in the consump-

tion sector in Indonesia – as the Sampoerna business again so convincingly showed. Also
in the infrastructure sector, there are clear tendencies of increased market concentration, as
companies are either merging or exiting.
Regulators in Indonesia and Southeast Asia are unlikely to impact on or to reverse this ten-
dency of concentration. They will first of all try to achieve a reasonable level of fair service
delivery to which the private sector is contributing rather than only a hand-full of State-owned
Enterprises. Opening up the market for enhanced competition and actively promoting in-
creased foreign presence will be unlikely a policy objective as vigorous as it was in the
1990’s – for the simple reason that there will not be enough foreign companies willing to en-
ter the market merely for the sake of giving consumers the enhanced competition.
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Annex 1.
Legal and regulatory framework.
Foreign Investment in Indonesia
The Foreign Investment Law
Foreign direct investment in Indonesia is governed by Law Number 1 of 1967 concerning Foreign Capital In-
vestment, which was subsequently amended by Law Number 11 of 1970 as implemented by a number of regula-
tions issued thereafter (the “Foreign Investment Law”). The government institution in charge of matters that
pertain to foreign equity investment is the Investment Coordinating Board (Badan Koordinasi Penanaman Mo-
dal or “BKPM”), which has been given comprehensive authority by virtue of a Presidential Decree.
A foreign direct investment in Indonesia can be made by way of:
(1) establishing or purchasing a special purpose vehicle in the form a limited liability company within the
framework of the Foreign Investment Law and pursuant to the Indonesian Company Law, Law Number 1 of
1995. This company is commonly known as a ‘PMA Company’ (Perusahaan Penanaman Modal Asing, or
“PMA Company”);
(2) purchasing the shares of an existing company that engages in the field of infrastructure, that are listed in an
Indonesian stock exchange. The purchase of the shares of listed companies is not subject to the provisions
under the Foreign Investment Law.; or
(3) using a foreign legal entity (a non Indonesian company), i.e. by having the foreign legal entity establish a
permanent establishment in Indonesia that will enter into a cooperation contract with BP Migas as explained
in section [5.1.2]. This vehicle is especially for investment in upstream oil and gas sector.
Sectors open to Foreign Direct Investment

The Foreign Investment Law stipulates the following:
- The Government determines the fields of business that are open to foreign direct investment and sets forth
special conditions on such investment.
- The Government has determined that certain business fields are closed to foreign direct investment.
- Those business fields that are vital to the State and essential to the livelihood of the people are completely
closed to foreign investment, and cannot be undertaken by foreign investors without the participation of In-
donesian businesses. These business fields are as follows: harbours; production, transmission and distribu-
tion of electric power for the public, shipping, telecommunications, aviations, drinking water, public
railways, development of atomic energy; and mass media. Industries performing a vital function in national
defense such as the production of arms, ammunition, explosives, and war equipment are also absolutely
closed to foreign direct investment.
Based on the above caveats, the Indonesian Government has from time to time issued a list of the business fields
which are either open or closed to foreign direct investment. The list is known as the ‘Negative List’ and is is-
sued by way of a Presidential Decree. The most recent Negative List is that in Presidential Decree No. 96 of
2000 as amended by Presidential Decree No. 118 of 2000.
In practical terms, and based on the recent liberalization in the investment sector, all business sectors are open to
foreign direct investment, with the following exceptions and qualifications:
- fields of business which are absolutely closed to foreign investment as listed in the Negative List (please see
Schedule 1 Annex 1);
- fields of activities that referred to as "strategic activities", which are significant for the State; the maximum for-
eign shareholding is 95% (these include, among others, public harbours, transmission and distribution of electric
power for public use, telecommunications, shipping, aviation, public drinking water, public railways nuclear
power generation, etc.);
- fields of business open to foreign investment with the requirement of a joint venture with domestic capital
(Indonesian shareholder(s)), (please see Schedule 1 Annex 2);
- fields of business open to foreign investment under certain conditions, as listed in the Negative List (please
see Schedule 1 Annex 3).
In addition to the Negative List, the Government of Indonesia under Presidential Decree No. 127/2001 has also
specified certain fields of business that are reserved for small scale businesses and fields of business that are
open to medium and large scale businesses with the requirement of partnership between the small scale business
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and medium and/or large scale business. The partnership may be carried out under various arrangements, includ-
ing a share participation or nucleus plasma, as normally conducted in the business of plantation, sub-contracting,
franchising, general trading, agency and/or other businesses. The partnership with the small scale business may
also be carried out in the form of foreign investment, as long as the business concerned is not closed to foreign
investment. The fields of business that are reserved for small-scale businesses as listed in Attachment I of Presi-
dential Decree number 127 of 2001, are closed to foreign direct investment (please see the fields of business in
Schedule 1 Annex 4). The fields of business that are open to medium and large scale enterprises, as listed in At-
tachment II of Presidential Decree number 127 of 2001, are open to foreign investors provided that they work in
cooperation with a small scale enterprise under the so called partnership program (please see Schedule 1 Annex
5).
A 100% foreign-owned PMA Company can be established in the fields of business that are in the Negative List
and not reserved for small-scale businesses. Law Number 9 of 1995 regarding small-scale businesses sets forth
in its article 1 that a business undertaking is a small scale business if it:
- has a maximum net asset of Rp. 200,000,00 (two hundred million Rupiah) excluding the land and the build-
ing where the business is carried out; or
- has maximum annual sales proceeds of Rp. 1,000,000,000 (one billion Rupiah);
- owned by an Indonesian citizen;
- is independent, not a subsidiary or a branch of a company owned and not controlled directly or indirectly by
a medium scale or a large scale business or affiliated directly or indirectly with a medium scale or large
scale business.
- Is in the form of an individual undertaking, a non-statutory business undertaking or a statutory business un-
dertaking, including a cooperative.
As mentioned above, the partnership with small scale businesses can be equity partnership or non-equity partner-
ship. In an equity partnership, the small-scale enterprise holds at least 20% of the share capital of the PMA com-
pany, while the investor holds a maximum percentage of 80% of the PMA Company’s share capital. In a non-
equity partnership, the foreign investor can hold up to 100% of the share capital of the PMA Company, but the
PMA Company is required to enter into a contractual relationship with the small-scale enterprise. The objective
of the partnership requirement is to help small-scale enterprises improve their management capabilities and in-
crease their business opportunities. The partnership can take the form of among others, agency, sub-contracting,
franchise, and other partnership arrangements. Although a foreign investor can own up to 100% of the share in a
PMA Company, one needs to bear in mind that under the Indonesian Company Law, a limited liability company
must at all times have at least two shareholders.
In an attempt to elucidate the Negative List, which does not completely and comprehensively outline the condi-
tions for the engagement in the lines of business that are available to foreign direct investment, the BKPM has
also issued a handbook known as “Petunjuk Teknis Pelaksanaan Penanaman Modal” (Investment Implementa-
tion Technical Guidelines) -- formerly known as “Informasi Peluang Usaha” or “IPU” (Business Opportunities
Information). The IPU describe in greater details the fields of business that are open or closed to foreign invest-
ment. This handbook has in fact become the ‘true’ negative list, since it makes it clear that the business fields
included in the Negative List are merely broad categories that in fact cover a number of fields of activities that
are closed to foreign investment.
Repatriation
One important feature of the Foreign Investment Law is the guarantee that the Government will not nationalize a
foreign investment or revoke rights to control a foreign investment. The exception to the foregoing is where it is
declared by law to be in the national interest to do such nationalization and then only upon payment of mutually
agreeable compensation determined in accordance with principles of international law. The Foreign Investment
Law also assures that the foreign investor shall have the authority to appoint the management of the investment
company and the right to repatriate capital in the form of after-tax profits, reimbursements for expenses of expa-
triate manpower, depreciation of fixed assets, etc.
Disputes on Foreign Investment

The Foreign Investment Law provides for arbitration of investment disputes. By virtue of Law Number 5 of
1968, Indonesia ratified the Convention on the Settlement of Investment Disputes between States and Nationals
of other States (known as “ICSID”), thus allowing for such disputes to be submitted to international arbitration
under the ICSID rules.

Planned Changes in the Foreign Investment Law

Over the past few years, the Government has developed plans to amend the existing Foreign Investment Law
with the intention of simplifying the existing licensing procedures and providing legal certainty to investors in
Indonesia. The main issues regarding the need to amend the Foreign Investment Law are, among others:
- the need to eliminate discrimination in the treatment of foreign direct investment and that of domestic in-
vestment;
- the need to simplify and expedite the establishment of a PMA Company;
- the need to extend the duration or eliminate the time limit for the duration of a foreign direct investment
(currently, as noted in this report, a PMA company’s period is limited only to 30 years as of its commercial
production or commencement of its activities, but can be further extended subject to obtaining a license for
expansion of its investment).
The Coordinating Minister for Economy, Aburizal Bakrie, made an announcement in January of 2005 regarding
the government’s plan to change the current Foreign Investment Law.. One significant proposed change is the
change in the procedure for the establishment of a PMA Company. Instead of the requirement for the BKPM’s
prior approval in the current procedure, the company is to be registered with the BKPM. It is intended that the
role of the BKPM be changed from a licensing body to a registration body for PMA Companies and a promotion
body for investment opportunities in Indonesia in general.
It is interesting to note that in the process of changing the current law, the office of the Coordinating Minister for
Economy invites the participation of the private sector, in the discussions of the draft and welcome inputs from
the private and business sectors.
From the draft new Foreign Investment Law which was available during the first week of March, among others
the following key matters are noted:
- the duration limitation of 30 years for PMA Companies has been lifted;
- the establishment of a body which is responsible for investment matters, which will also be, among others,
the agency for the registration of PMA Companies;
- the establishment of a PMA Company is stipulated to require the prior registration with an investment body;
the prior registration requirement does not eliminate the lengthy process of the PMA Company establish-
ment, which involves dealings with other government agencies;
- the provisions that are too detailed for a law.
In the discussions of the new Foreign Investment Law, we note that the following are the main concerns on the
business community in Indonesia:
- The current Foreign Investment Law may not need to be amended, but the implementing regulations regard-
ing the role of the BKPM needs to be amended to accommodate the plan for the registration of PMA com-
panies and the plan for making BKPM a promoting body for investment.
- The amendment to the Foreign Investment Law (if required), and also the changes in the implementing
regulations on the role of the BKPM, must take into consideration other laws which are related to the estab-
lishment of a PMA Company, such as the Indonesian Company Law and the Law on Mandatory Company
Registration. Under the current laws and regulations, there are four general steps in process of establishment
of a PMA Company: (i) the processing of the license from BKPM (ii) the processing of the approval from
the Minister of Law and Human Rights of the company’s deed of establishment; (iii) the registration of the
deed of establishment with the Company Registration Office (iv) the processing of other ancillary licenses
from several government institutions, including another license from the BKPM – the permanent operating
license. In this respect, if the intention is to simplify the process, certain changes may also need to be con-
sidered under other laws (such as the Indonesian Company Law and Mandatory Company Registration).
The new Foreign Investment Law (or an amendment to the current law, as the case may be) may also need
to contain waivers for PMA Companies to comply with other registration requirements under other laws
which are understood to be unnecessary or redundant.
Based on the discussions on the new Foreign Investment, with the drafting team at the Office of the Coordinating
Minister for Economy, further discussions between the team and the Minister are needed for the purpose of de-
ciding on whether or not to change or replace the current Foreign Investment Law, and on whether adjustments
are to be made to the other laws to synergize the concept for the simplification of the procedure for the estab-
lishment of a PMA Company.
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Foreign Direct Investment in the Infrastructure Sector

The power, transportation, water and sanitation, and telecommunications sub sectors of the infrastructure sector
is open to foreign direct investment. Investment in these sub sectors also subject to the provisions of the Nega-
tive List and the IPU as mentioned in section 3.1 above. Among the fields of business that are open to foreign
direct investment in the infrastructure sector, as set out in the IPU, are the following.
Energy Sector
Power Generation, Transmission and Distribution
Power Support Services
Oil and Gas Sector
Transportation Sector
Railways
Special Railways
Harbours
Airports
Transportation Support Services
Toll Roads
Telecommunications Sector
Telecommunications Network
Telecommunications Services
Water and Sanitations
Development and Operations of Clear Water
Waste Management
Waste Water Management
In addition to the above infrastructure sub-sectors, foreign investors may participate in the development of infra-
structure projects as supplier/contractor. For this purpose, they can establish a PMA Company, or, if they are a
foreign construction service company, they can establish a representative office in Indonesia.
Under the IPU, the lines of business available for construction services are as follows:
- Construction Services
- Plant Hire Services
The specifics on the conditions and shareholding requirements are set out in Schedule 2, in “Other Services”.
Foreign construction service companies are required to obtain a representative office license if they intend to
operate in Indonesia in the field of construction consultancy services (consultants) and/or construction imple-
mentation services (contractors). A foreign construction service company may handle projects in Indonesia only
in a joint cooperation with an Indonesian party which must be a member of AKI/GAPENSI of qualification A,
for a contractor.
The permit for a foreign construction service company is valid for three years, at the end of which a new permit
may be applied for. The foreign construction service company has the obligation to, among others, submit an
annual report of its business activities to the Minister of Public Works and to guarantee the occurrence of a trans-
fer of the technology to its Indonesian partner.
Establishment of a PMA Company

Foreign Investment Approval
For the establishment of the PMA Company, an application must be submitted to BKPM to obtain a foreign in-
vestment approval (“PMA Approval”) which serves as provisional license to operate. The procedures for ob-
taining the foreign investment approval is as set out in the Decision of the State Minister of
Investment/Chairman of BKPM Number 57/SK/2004 on the Procedure for Filing Applications for Domestic and
Foreign Capital Investments, as amended by Decision of the Minister of Investment/Chairman of BKPM No.
70/SK/2004 (“SK57/2004”).
Upon issuance of the PMA Approval, a deed of establishment containing the Articles of Association of the PMA
Company must be signed by the founders of the PMA Company before a notary public. The deed of establish-
ment, after signing, will thereafter be submitted to the Minister of Law and Human Rights (“MOL”) to obtain
approval. Only after the issuance of the MOL approval, the PMA Company obtains its status as a limited liability
company. The PMA Company may, however, commence business activities prior to obtaining the MOL Ap-
proval.
Under Indonesian Law, the incorporation process is only completed after the MJHR Approval has been obtained
and approved Articles of Association have been published in the Supplement to the State Gazette. At this point

of time, the PMA Company gains limited liability status. Prior to the issuance of the MJHR Approval, the PMA
Company may commence business activities and contracts may be entered into in the name of the PMA Com-
pany, but the founders of the PMA Company remain personally liable until such contracts have been ratified by
the first general meeting of shareholders of the PMA Company held after the MJHR Approval.
The PMA Company is also required to obtain a permanent operating license after the company is ready to com-
mence its commercial production or commercial operations. This license is known as a ‘Permanent Operating
License’ that must be obtained from BKPM.
Apart from the above, the PMA Company is also required to obtain other ancillary licenses from other Govern-
ment Agencies, such as, the Certificate of Domicile, Company Registration Certificate, and Tax Registration
Number.
Changes on Investment
The PMA Company must also comply with the provisions stated under SK57/2004, if there’s any routine or in-
cidental changes to the PMA Company’s investment plans as stated in its PMA Approval, prior approval from
BKPM is required. These are, among others, the following:
- any expansions or diversification of the PMA Company;
- change in the PMA Company’s line of business;
- any change in the PMA Company’s shareholders;
- any change in the composition or numbers or the members of the Board of Directors or Commissioners of
the PMA Company;
- any investment change which results the change in facility and financing sources.
Term of Investment
The Foreign Investment Law stipulates that the validity of a foreign investment permit shall not exceed 30 years
from the date the PMA Company commences commercial production, i.e., 30 years from the date of the PMA
Company’s Permanent Operating License.
Government Regulation Number 20 of 1994 states that the 30 year term may be extended beyond that term so
long as the PMA Company continues to carry out its business for the benefit of the national economy and devel-
opment. Absent such a showing, presumably, the provisions state that when the 30 year time limit is reached, the
foreign investor must transfer it shares to an Indonesian, investor, and will be subject to mandatory liquidation if
it fails to do so. BKPM began ameliorating this rule by stating that expansion permits and diversification permits
granted to existing investment companies would also be valid for 30 years from the date of the permit. There is
still some doubt, however, about the appropriateness of this policy.
Purchase of an Existing PMA Company
Under the current regulations, it is possible for foreign investors to invest in an existing legal entity, which can
be an existing PMA Company or a non-PMA Company.
If the company to be acquired is a non PMA company, the company must be converted into a PMA company.
The participation of the foreign investors must not exceed 95% as stipulated in the Decision of the Minister for
the Mobilization of Investment Funds/Chairman of the BKPM number 15/SK/1994 concerning the Implement-
ing Provisions on Share Ownership in Companies Established within the Framework of Foreign Investment
(“SK 15/1994”).
Pursuant to Article 17 of SK 15/1994, purchase of shares by a foreign entity(ies) in an existing company can be
done only if the line of business of said company is open for foreign investment at the time of the purchase and
the amount of shares of the Indonesian participants in such a company does not become less than 5% of the
amount of the issued and paid-up capital.
Divestment Requirement
Under the Foreign Investment Law, it is required for the foreign shareholder to divest part of its share to an In-
donesian citizen or legal entity, within 15 (fifteen) years as of the date the PMA company obtains its Permanent
Operating License. This stipulation is applied whereby a PMA company is 100% owned by foreigners. The per-
centage of divestment has not been specified by the government, but government officials have publicly hinted
that even a 1% divestment to local ownership can be acceptable.
Minimum Investment and Equity Requirements
In the past, it was required that the amount of an investment must be at least US$ 1,000,000 in equity basis and
loans. This minimum amount is no longer strictly applied, but the amount of investment acceptable to the BKPM
will depend on the funds required for the type of investment concerned and required funds needed to maintain
the PMA Company.
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There are no regulations limiting the debt to equity ratio (DER), but it has been a policy of BKPM that the DER
does not exceed 3:1 (3 loans compared to 1 equity). For certain sectors which require large investment, the ac-
cepted DER can be higher, such as 1:5 or 1:6.
Under the Company Law and procedures of BKPM, the founders of a PMA Company are required to subscribe
not less than 25% of the total authorized capital stated in the PMA approval at the time of the deed of establish-
ment of the PMA Company is prepared by the Notary, and to pay into the PMA Account not less than 50% of
the nominal value of the share capital subscribed. Upon issuance of the MJHR Approval, payment of the remain-
ing 50% of the nominal value of the subscribed share capital must be paid into the PMA Account. The founders
of the PMA Company are then required to subscribe to the remaining authorized but un-issued share capital, and
pay up the nominal value thereof in full, as and when the additional capital is needed.
Management of Limited Liability Company
It is a requirement under the Company Law that a limited liability company, including a PMA company, must
have a Board of Directors (Direksi). The Board of Directors is responsible for the management of the Company
in accordance with the interests and objects of the Company, and is the authorized to represent the Company
both in and out of the court. The Board of Directors is responsible for determining Company policies and per-
forming the day to day management of the Company, as well as making plans for the future and undertaking new
activities in pursuance of the objects of the company.
Besides a Board of Directors, a PMA Company must also have a Board of Commissioners (Komisaris) also
sometimes referred to as a Board of Supervisions or Supervisory Directors. The duty of a Board of Commission-
ers is to supervise the way the board of Directors discharges its management responsibilities and to provide the
Board of Directors with advice. The Board of Commissioners has no executive functions, although it can take
care of the management of the Company for a limited period of time in the absence of directors. The minimum
number of Commissioner required is at least 1, which can be either a foreign citizen or an Indonesian citizen. A
foreign commissioner is not expected to reside in Indonesia
The members of the Board of Directors and Commissioners in a PMA Company must be consistent with the
composition approved under the foreign investment approval issued by BKPM and the composition under the
PMA Company’s Articles of Association.
Schedule 3 sets out the key aspects on the steps required for obtaining the foreign investment license and other
steps involved in the setting up of a PMA Company.
Government Procurement Mechanism
The regulation on government procurement is Presidential Decree No. 80/2003 regarding Technical Guidelines
on Government’s Procurement of Goods/Services (“Guidelines on Procurement”). Under the Guidelines on
Procurement, the government’s general policies in its procurement of goods/services are as follows:
1. intensifying the use of domestic products, national designs and engineering with the target of expanding job
opportunities and developing domestic industries in the framework of enhancing the competitiveness of do-
mestic goods/services in international trade;
2. enhancing the role of small-scale businesses, including small cooperatives and groups of communities in
the procurement of goods/services;
3. simplifying the provisions and procedures for the purpose of speeding up decision makings in the procure-
ment of goods/services;
4. enhancing the professionalism, independence and accountability of the users of the goods/services, the pro-
curement committees/officials and the suppliers of the goods/providers of the services;
5. raising state revenue through the taxation sector;
6. enhancing the participation of national businesses;
7. requiring the selection of suppliers of goods/providers of services in the territory of the Republic of Indone-
sia;
8. requiring the transparent announcement of any plan for the procurement of goods/services, with the excep-
tion of confidential procurement of goods/services at the beginning of a budget realization.
The Guidelines on Procurement covers the following aspects of the procurement:
1. the procurement of goods/services that is financed partly or wholly by government budgets (“APBN”) as
well as by regional government budgets (“APBD”);
2. the procurement of goods/services that is financed partly or wholly by overseas loans/grants (“PHLN”) in a
manner that is in accordance with or not contravening the guidance and provisions on the procurement of
goods/services set out by the grantors of the said loans/grants;
3. the procurement of goods/services for investment within Bank Indonesia (BI), state owned legal entities
(“BHMN”), BUMN, BUMD, that is financed either partly or wholly by APBN/APBD.

The Guidelines on Procurement also provides for the establishment of a Procurement Committee (“Procure-
ment Committee”) by the users of the goods and services. The following are the provisions with respect to the
Procurement Committee:
1. The establishment of a Procurement Committee is compulsory for all procurement plans of above Rp.
50,000,000.00 (fifty million Rupiah).
2. Procurement of a value of up to Rp. 50,000,000,000.00 (fifty million Rupiah) can be done by the Procure-
ment Committee.
3. The members of the Procurement Committee comprise civil servants and members of the relevant institu-
tions or other technical institutions. The Procurement Committee members/officials must meet the following
requirements:
a. have moral integrity and discipline, and responsibility in executing tasks;
b. understanding the whole job to be procured;
c. understanding type of certain job becoming task of the said procurement committee/official;
d. understanding content of document of procurement/method and procurement procedures on the basis of
this presidential decree;
e. having no family relation with officials appointing and stipulating them as procurement commit-
tee/official;
f. having certificate of expertise in procurement of government goods/services;
4. The task, authority and responsibility of procurement committee/official include:
a. to prepare schedule and stipulate technical procedures as well as location of procurement;
b. to formulate and prepare a self estimated price (“HPS”);
c. to prepare documents of procurement;
d. to announce procurement of goods/services through printed media and official billboard for public in-
formation and if possible, electronic media;
e. to evaluate qualification of suppliers/providers through post-qualification or pre-qualification;
f. to evaluate incoming bids;
g. to propose prospective winner;
h. to make report on process and result of procurement for users of goods/services;
i. to sign integrity pact before the procurement of goods/service starts.
5. Procurement Committee comprises at least 3 (three) persons understanding procedures for procurement,
substance of the said job/activities and other necessary fields, from apparatuses of the said institution or
other institutions.
6. In order to prevent a conflict of interest in the procurement, the following persons cannot become Procure-
ment Committee/official:
a. users of goods/services and treasurers;
b. employees of the Financial and Development Supervisory Board (BPKP)/Inspectorate General of Minis-
tries/Main Inspectorate of Non-government ministerial institutions/provincial/regency/city supervisory
boards, internal supervisors of BI/BHMN/BUMN/BUMD, except procurement committee/official for the
procurement of goods/services needed by their institutions.
The Guidelines on Procurement also stipulates that the suppliers of goods/providers of services must:
1. comply with the provisions of the prevailing in their activities as providers of goods/services;
2. possess the expertise, experience, as well as technical and managerial capabilities to supply the
goods/provide the services;
3. not be under court supervision, not be in the state of bankruptcy or have their business activities suspended,
and/or their executive directors who act for and on behalf of companies currently serving criminal sanctions;
4. be legally capable of signing contracts;
5. as taxpayers, have already paid their taxation liabilities in the latest year, as proven by the copies of their
latest annual income tax returns and tax payment form of income tax-article 29;
6. in the past 4 (four) years, have undertaken jobs to supply goods/provide services within the government and
private circles, including having sub-contract experience, except for suppliers of goods/providers of services
which were established less than 3 (three) years ago;
7. have sufficient human resources, capital, equipment and other facilities necessary for the procurement of
goods/services;
8. not be listed in the blacklist;
9. have a permanent and clear address which is reachable by post;
The above requirements, excluding item 3, also apply to individual suppliers of goods/providers of services.
Experts recruited to provide consultation services in the government procurement must:
1. have a taxpayer code number (NPWP) and evidence of their having settled their tax liabilities;
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2. be graduates of state-run universities or accredited private universities or must have already passed the State
examination or are graduates of a overseas universities whose diploma has been legalized or is recognized
by the authorized government institution in the higher education field;
3. have sufficient experience in the field.
Civil servants, employees of BI, BHMN/BUMN/BUMD are prohibited from becoming suppliers of
goods/providers of services. Exception of this provision is where the person concerned takes a leave without pay
from such institution Suppliers of goods/providers of services whose involvement will trigger a conflict of inter-
est are prohibited from becoming suppliers of goods/providers of services. The evaluation of the compliance
with the above requirements is conducted in prequalification or post-qualification assessments by the procure-
ment committee/officials.
The policies on government procurement are developed by the Institution for the Development of Government
Procurement Policies (LPKPP) which has been established by way of a separate Presidential Decree.
Selection of the Vendors for the Procurement, and Tender Procedures for Infrastructure Projects
In consideration of the lengthy processes and procedures, the above subject matters are dealt with separately in
Schedule 4.
Other Matters.
A. Indonesian Judicial System and Business Disputes Resolutions
Indonesian Judicial System

The Indonesian Judicial system consists of five types of lower courts, and a Supreme Court. The lower courts
include: General Courts (which consist of two levels: the State District Court and State High Court); Military
Courts (which consist of two levels, the Military Court and Military High Court); Administrative Courts (which
consists of two levels, the Administrative Court and the Administrative High Court); Religious Courts (consist-
ing of two levels, the Religious Court and the Religious High Court); and the Commercial Court (a specialized
court for hearing insolvency cases with the possibility of appeal to a special bankruptcy tribunal of the Supreme
Court). The Supreme Court is the highest judicial tribunal and the final court of appeal in Indonesia. The Courts
are independent from the executive and legislative arms of the government.
Dispute Settlements
Under the Indonesian business practice, settlement of disputes is usually handled by way of amicable settlement.
If an amicable settlement cannot be reached, the parties can either elect to settle the dispute through court or
through alternative dispute resolutions, such as mediation and arbitration.
Court Proceedings
Settlement of disputes through court is known to be quite a lengthy and costly process.
Alternative Dispute Resolutions

Indonesia recognizes the concept of Alternative Dispute Resolution (“ADR”). ADR falls within 3 (three) general
categories: (1) Mediation, (2) Arbitration, and (3) Alternative Dispute Resolution inside the court (“CDR”).
ADR (including arbitration) in Indonesia is governed by Law No. 30/1999 concerning Arbitration and Alterna-
tive Dispute Settlements (“Law No. 30/1999”). Law No. 30/1999 replaced the provisions concerning arbitration
which were embodied in the old Dutch originated Law on Civil Procedures. An international convention, gener-
ally known as the New York Convention 1958, governs the recognition and enforcement of international arbitra-
tion awards. International arbitration awards are enforceable in countries which are parties to that Convention.
Indonesia is a signatory to the 1958 New York Convention and has adopted such convention into Indonesian law
by way of Presidential Decree No. 34 of 1981.
In addition, to enforce a foreign arbitral award, it is necessary to register the award with the Clerk of Central
Jakarta District Court, obtain a writ of execution from the Chairman of the Central Jakarta District Court or, in
case the award which involves the Republic of Indonesia as one of the parties in dispute, from the Supreme
Court of the Republic of Indonesia (through the Central Jakarta District Court).
Aside from a voluntary face-to-face negotiation based on consensus, Law No. 30/1999 recognizes a statutory
mediation as referred to in article 6 of the Law No. 30/1999. Mediation can be carried out in several ways, such

as consultation, negotiation, mediation, conciliation or expert determination. Mediation usually takes place if the
disputed parties fail to achieve a resolution by negotiation.
If the mediation methods mentioned above cannot resolve the dispute, the disputed parties, on the basis of a writ-
ten agreement, can recommend another effort to resolve the matter by way of an arbitration (both institutional or
ad-hoc) as specifically described in article 6, paragraph 9 of Law No. 30 year 1999.
Article 1 paragraph 1 of Law No. 30 year 1999 defines arbitration as a mechanism of settling civil disputes out-
side the general courts based upon an arbitration agreement entered into in writing by the disputed parties. Arbi-
tration can be carried out between private individuals, entities, states or between states and private individuals.
In addition to the foregoing methods of ADR, there is also an in-court alternative dispute resolution or “CDR”,
which has been created to strengthen the courts as a place to find justice for all people. Court congestion and
delays as well as backlog of cases are seen as part of the weaknesses of Indonesia’s present judicial system.
Formal litigation through the courts is not generally considered as an appropriate method of dispute resolution,
most of the time; however, resort to litigation is quite costly, time-consuming and unpredictable. If appeals are
necessary to achieve a reasonable result, the whole process can take many years. CDR only applies in civil cases,
where the law allows legal matters to be settled. In practice, CDR can be carried out in either of two ways: (1)
compromise settlement, and (2) mediation, after the civil case is registered in the District Court.
B. Land Matters
As a matter of principle, perpetual ownership of land can only be owned by Indonesian individuals. Foreigners
can, to a certain extent, but with certain conditions, own the right to use of land. In the case of a PMA Company,
a PMA Company can for purposes of its investment in Indonesia acquire and hold specific land titles, i.e., the
Right to Build, Right to Cultivate, Right to Use, and Right to Administer/Manage. These types of land shall be
explained in this section.
Indonesian Land Law

Indonesian land law is very complex, reflecting customary (“adat”) law developed over hundreds of years at the
village level, as modified by Dutch Colonial rule, with an over layer of more recent central Government laws
and regulations. The recent laws and regulations are an attempt to make Indonesia’s land law more usable for
modern conditions without completely abandoning the communal concepts applicable to land in customary law,
which communal concepts are also embodied in Indonesia’s constitution of 1945.
Most lands in Indonesia are not registered with a Government land office, and thus without land certificates,
which is the best evidence of title. Rights in unregistered (and thus uncertificated) land are based, in part, on un-
written law of the jurisdiction where the land is located and, accordingly, is different in different locations and
often is quite deficient in legal certainty.
The Basic Agrarian Law of 1960

The Indonesian Government’s attempt to adapt its land law to modern needs was through the adoption of the
Basic Agrarian Law No. 5 of 1960 (the “Agrarian Law”). The Agrarian Law introduces classification of land
rights and extends to all land a system of registration which is to result in the issuance of a land certificate. As
mentioned above, the Agrarian Law is superimposed on customary (“adat”) law.
Under the Agrarian Law, conceptually, all land is governed by adat law as long as this customary law does not
contravene public interest and the welfare of the nation. It is therefore the State that determines the proper use of
land, the relationship between land and individuals or groups of individuals, and the consequences of legal ac-
tions concerning land.
A notable change effected by the Agrarian Law is to permit land rights to be held by individuals rather than in
common by the community, which is the status mandated under adat law. However, the adat law principle that
the community has the ultimate right to approve of the party to whom the land is transferred is continued under
the Agrarian Law. This final approval right is exercised through the system by which the party with current
rights in the land “relinquishes” these rights to the State with a request that those rights be conveyed by the State
to a particular purchaser.
Classification of Land Rights

The Agrarian Law recognizes several types of land rights, of which the following are the most important:
- Hak Milik (Right of Ownership);
- Hak Guna Bangunan (Right to Build);
- Hak Guna Usaha (Right to Cultivate);
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- Hak Pakai (Right to Use).

- Hak Pengelolaan (Right to Administer/Manage)
While all of these rights allow the holder to utilize the land concerned, they differ in their duration, in the nature
of utilization allowed and in the ability of the right to be used for security purposes. A brief summary of each of
these land classification follows.
Hak Milik/Right of Ownership
This is the most extensive right available on Indonesian land, being unlimited in duration and utilization and
available for hypothecation. This “Right of Ownership” is available only to individuals who are Indonesian citi-
zens (natural persons). This Right of Ownership is conveyed by executing a deed before a Land Deed Of-
fice/Notary reflecting the desired transaction.
Hak Guna Bangunan/Right to Build (“HGB”)
A Hak Guna Bangunan title is the grant of a right in land for a maximum period of 30 years authorizing the
holder to utilize the land and anything previously or thereafter build upon the land on an exclusive basis for that
period. An HGB in principle can be extended for an additional maximum period of 20 years after the expiration
of the first 30, but so far the Government has always preferred to grant a new HGB title for 30 years to the grant-
ing of an extension of an existing title. Conceptually, it is similar to a long-term ground lease in the common law
system.
An HGB title may be held only by Indonesian citizens and Indonesian companies, including PMA Companies,
that have their legal domicile in Indonesia. The title may be transferred by executing a notarial deed before a
Land Deed Office/Notary. Any transfer must be registered with the National Land Office.
Hak Guna Usaha (the Right to Cultivate)
The Hak Guna Usaha (“HGU”) is a right that is generally issued on government-owned land to Indonesian indi-
viduals or legal entities, including PMA companies, for agriculture purposes. Its term is usually 35 years at the
most, with a possible extension of a maximum of 25 years. Upon the expiration of its term, the holder may apply
for a renewal of the land title for a period of 35 years at the most.
Hak Pakai (Right of Use)
This is subsidiary right in land which may be granted by the holder of any of the land rights mentioned above or
by the Government for land controlled by the government on behalf of the State. The Hak Pakai is the right to
use and/or to collect products from the land. The Hak Pakai is limited in duration by the contract or decree, as
the case may be. The granting of this right is usually for a 25 yeas at the most, with extension possibilities of 20
years at the most, and is ordinarily subject to specific restrictions on the intended use of the land. Indonesian
citizens, corporations, foreign individuals and corporations may posses a Right of Use over land.
Right to Administer/Manage (Hak Pengelolaan)
A Hak Pengelolaan, or “right to manage”, is granted to governmental authorities, state agencies and state enter-
prises to administer government land. The holder of Hak Pengelolaan may grant rights of use in the land to a
third party, including a Hak Guna Bangunan or a Hak Pakai without diminishing his right to manage the land. A
Right to Manage is not available for security purposes.
Titles are evidenced by the issuance of certificates of land titles by the relevant Land Office. The rights men-
tioned above are the basis for any transaction concerning land. Any purchase, lease, rent or any other types of
transaction will involve one of these titles. Therefore, the above titles are the rights held and/or owned by a per-
son or entity which can be transferred to other person or entity.
Hak Pengelolaan is not specifically mentioned in the Agrarian Law but the government has granted the right to a
number of government institutions involving in large scale of infrastructure such as harbours and housing.
Imposition of Security
Except for the Hak Pengelolaan, all of the titles of land mentioned above can be used for security purposes by
way of execution of granting of a Hak Tanggungan (mortgage).
Registration of Land Titles

Government Regulation No. 24 of 1997 imposes land right holders the obligation to register their land rights. In
spite of the requirement, the fact is that most lands in Indonesia are not currently registered.
Although privately held lands located in urban areas are now properly registered and documented under the pro-
cedures stipulated by the Agrarian Law, still, many privately held lands in rural areas are not. Often, the only

documentation available to support a claim of right is the so-called “girik” right, which is actually a land tax re-
ceipt and not evidence of title, but which is often taken into consideration in establishing title to land.
Procedures to Transfer Land Title

The various procedures are described below.
1. Location Permit
Pursuant to the Regulation of the State Minister for Agrarian Affairs/Head of the National Land Agency Number
02/1999, a PMA Company that intends to acquire a land title in its name must first obtain a Location Permit,
which is a permit for the acquisition of land for a certain usage which must be in line with the designation set
forth in the spatial layout of the region concerned.
To obtain a Location Permit, an application therefore must be submitted to the Local Government where the land
is located.
The holder of a Location Permit has a priority, but not an exclusive, right to acquire the land in the designated
area. In principle, however, the original land owner is free to sell its land to any other interested party.
2. Land Transfer Documentation

Following the issuance of the Location Permit, the Company concerned has a period of 12 (twelve) months to
arrange for the relinquishment of the land concerned by the land owners, for which a deed of relinquishment will
need to be executed before a land deed officer who could be a notary or a Camat or the Head of the Land Office
of the Kabupaten (Regency under which jurisdiction the land concerned is located).
These individual land owners cannot directly transfer the land to a company. To change the original “right of
ownership” into one of the land title mentioned above, the original land owner must first release his/her right of
ownership in the land back to the State (the State is considered to be the ultimate holder of all land in Indonesia)
for the benefit of the purchaser (the Company). By this deed, the land concerned becomes government land.
After the execution of deed of relinquishment, the PMA Company may proceed with the submission of its appli-
cation for a land title. For this purpose, the Company must apply to the Head of the National Land Agency/State
Minister for Agrarian Affairs (Jakarta) for issuance of a title in the Company’s name. If the land located in more
than 1 (one) regency, the application copy should also be given to each of the Head of Land Office in Regency
level.
3. Granting the Title

Following its receipt of the title application, the Land Office of Provincial level will proceed with its measure-
ment of the land in question, and its examination of the pertaining documents. At the satisfactory completion of
these acts, this Land Office will issue a recommendation letter to the Head of the National Land Agency/State
Minister for Agrarian Affairs.
If the recommendation from the Land Office in Provincial level is accepted, the Head of the National Land
Agency/State Minister for Agrarian Affairs will issue a Decree on the Granting of the Right (Surat Keputusan
Pemberian Hak/”SKPH”) in the name of the Company. The Decree will contain land specification, including the
location, the land measurement, the type and duration of the right, the cost/retribution fees which must be paid to
the State for the Granting of the Right concerned.
It should be noted that the issuance of the SKPH in the name of the Company cannot be considered as a valid
legal right with respect to the granting of the title to the Company of the land concerned. This SKPH can only be
considered as a conditional granting of land rights. The granting of the right will be subject to the fulfillment of
all condition as stipulated in this SKPH decree and the issuance of the land title.
4. Certificate of title in the name of the Company

Following the submission of the original SKPH and the fulfillment of all conditions as set forth in the SKPH
decree, including the submission of the original evidence of the retribution payment/administration fee and any
other fees, the Head of Local Land Office (Kabupaten level) will register the land and issue the registration cer-
tificate under the name of Company.
We wish to mention that with the enactment of the Regional Autonomy Law No. 22/1999 (as revoked by Law
No. 32/2004), it is possible that the Local Government will impose additional requirements to PMA companies
that are applying for land titles.
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5. Land acquisition issues

Delays in land acquisition/procurement have been a major bottleneck to key infrastructure projects, and that the
Government will soon issue a revision to the Presidential Decree No. 55 of 1993 (on the Land Acquisition for
Development Activities for Public Interest, “Presidential Decree 55”) for more efficient and timely land acquisi-
tion. Presidential Decree No. 55 of 1993, in essence, governs the procurement of land for development activities
which are for public interest carried out and subsequently owned by the Government which are not for profit.
The areas of development include development of infrastructure projects. The proposed new regulation will pro-
vide, among others, a time limit for an amicable settlement between the land owners and the committee for land
acquisition. The infrastructure sector that is governed by the Draft Regulation has been expanded, to include,
among others, development of toll roads.
The Draft Regulation concerns land acquisition for public interest development carried out by the Government,
and does not stipulate acquisition of land for infrastructure projects by the private sector.
SCHEDULE 1 - NEGATIVE LIST

ANNEX A1: List of Business Fields Completely Closed to Investment in the Infrastruc-
ture Sector
COMMUNICATIONS SECTOR
1. Air Traffic System providers (ATS providers) as well as ship classification and survey statutoria services.
2. Management and operation of radio frequency spectra and satellite orbit monitoring stations.
MINING AND ENERGY SECTOR
3. Mining of radioactive minerals.
ANNEX A2: List of Business Fields in the Infrastructure Sector which are Closed to
Investment for Companies with Foreign Capital and/or Foreign Legal Entities.
COMMUNICATIONS SECTOR
1. Taxi/bus transport services.
2. Small-scale shipping.
ANNEX B: List of Business Fields in the Infrastructure Sector which are Open to In-
vestment by Way of Joint Venture between Foreign Capital and Domestic Capital
1. Building and operation of seaports.

2. Electricity production, transmission and distribution.
3. Shipping.
4. Processing and provision of clean water to the public.
5. Public railway system.
6. Atomic power plants.
7. Medical services, including building and operation of hospitals, medical check-ups, clinical laboratories,
mental rehabilitation services, public health maintenance security, medical equipment rental, assistance
services for health aid and evacuation of patients in emergency condition, hospital management services,
and services for testing, maintenance and repair of medical equipment.
8. Telecommunications.
9. Scheduled/unscheduled commercial air transport.

ANNEX C: List of Business Fields in the Infrastructure Sector which are Open to In-
vestment Under Certain Conditions
1. Electricity planning and supervision consulting services.

Open to foreign investment on the provision that:
a. Hydroelectric plants (PLTA) with a capacity above 50MW;
b. Steam plants (PLTU) with a capacity above 100MW;
c. Geothermal plants (PLTP) with a capacity above 55MW;
d. Main electrical relay stations with a voltage above 500KV;
e. Transmission networks with a voltage above 500KV.
12. Electricity equipment construction, maintenance, installation services, development of technology that
supports supplying electricity and testing of electricity installations.
a. Main electrical relay stations with a voltage above 500KV;
b. Transmission networks with a voltage above 500KV.
13. Petroleum and natural gas drilling services.
a. only offshore drilling;
b. if locations outside Eastern Indonesia, must be in cooperation with national partners operating in
similar fields.
14. Power plant businesses.
- open to locations outside Java, Bali and Madura.
TRADING SECTOR
15. Restaurants
- open to foreign investment on the special provision that they must be located in tourism areas/zones
and/or integrated with hotels.
16. Games of skill services
- open to foreign investment on the special provision that they must be located in tourism areas/zones
and/or integrated with hotels.
ANNEX D: SECTORS/TYPES OF BUSINESS IN THE INFRASTRUCTURE SECTOR

WHICH ARE RESERVED FOR SMALL-SCALE ENTERPRISES
COMMUNICATIONS
Rural transportation, river transportation, lake transportation and water transportation with 30 GT vessel.
TELECOMMUNICATIONS
Telecommunications services including telephone stalls, internet stalls, and cable installation for house and
building.
ANNEX E: Sectors/Types of Business in the Infrastructure Sector Open to Medium-

Scale or Large-Scale Enterprises in Cooperation with Small-Scale Enterprise under the
Partnership System
TRANSPORTATION
1. Business of taxis, loading services, vessels for the transport of goods, community vessels and safekeeping
services
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SCHEDULE 2 – FIELD OF BUSINESS AVAILABLE IN THE INFRA-

STRUCTURE SECTOR
I. ENERGY
Field of Business Special Requirements Maximum
Foreign
Participation
1. Power Generation Joint Venture with Indonesian parties. [Up to
Projects are solicited, namely, determined by the Minister re- 95%]
sponsible in the power sector. The appointment/designation
shall undergo a competitive and transparent selection process.
Transmission and Since activities in transmission and distribution of electricity up to 95%
Distribution constitutes natural monopoly, the first opportunity shall be given
to State Owned Enterprises/Regional Government Owned En-
terprises provided if for certain conditions, the State Owned
Enterprises/Regional Government Owned Enterprises are not be
able to invest, then they can cooperate with other legal entities,
and if such cooperation is not possible, it can be conducted by
other legal entities.
Although the transmission and distribution business are open for
the private sector, however, so far, no licenses have been issued
to the private sector.
2. Power Support Ser-
vices
Services in the field of For PMA: Not stated
power consulting ser- a. PLTA (hydro-powered generation) with the capacity of more Based on
vices, development and than 50 MW research it
installation of power b. PLTU (steam-powered generation) having a capacity of more can be
equipment and mainte- than 100 MW 100%.
nance of power equip- c. PLTP (geo-thermal powered generation) having a capacity of
ment. more than 55 MW
d. Main electrical relay stations with GIS System (Gas Insu-
lated Switchgear)
e. under water cable transmissions network
Services in the field of For PMA: Not stated
technology develop- a. Main electrical relay stations with GIS System (Gas Insu- based on
ment for equipment lated Switchgear) research it
that supports power b. under water cable transmissions network can be
supply and commis- 100%
sioning of power in-
stallation.
Power Installation Op- Not available to PMAs, only available to PMDN Not stated
erations Services based on
research it
can be
100%.
3. Mineral Resources
General Mining For PMAs, granted in the form of a Contract of Work, through a Up to 95%
joint venture with Indonesian legal entities/Indonesian nationals
Coal Mining For PMAs, granted in the form of a Coal Contract of Work, Up to 95%
through a joint venture with Indonesian legal entities/Indonesian
nationals

Upstream Oil and Gas The upstream oil and gas business activities (i.e., exploration
and exploitation), can be engaged by:
Non-Indonesian entities, in the form of a Permanent Establish- Foreign

ment (Bentuk Usaha Tetap), without having to establish a PMA contractors
Company, subject to the execution of a Cooperation Contract can have
with BP Migas; or 100% par-
ticipating
interest in
the Coop-
eration
Contract,
subject to
require-
ment to
offer cer-
tain per-
centage of
interest to
local com-
panies
An Indonesian legal entity (which may include PMA Compa- Not speci-
nies) subject to the execution of a Cooperation Contract with BP fied
Migas.
Refinery and Process- Must obtain approval from the Minister of Energy and Mineral Not Speci-
ing Resources fied
of Oil and Gas
Oil and Gas Drilling For Onshore Drilling, only available for PMAs with drilling Up to 49%
Services equipment of above 2000HP, and must be a joint venture with
Indonesian parties
Offshore Drilling
Oil and Gas Mining Must be a joint venture with Indonesian parties Up to 95%
Support Services
II TRANSPORTATION
1. Railways General Requirement: Investors must cooperate with the Oper-

ating Body (PT. Kereta Api Indonesia);
For railway transportation with no railway network Up to 95%
For public railway transportation which already has a railway Up to 49%
network and infrastructure
2. Special Railways For own use only, must be a joint venture with Indonesian legal Up to 95%
entity(ies)
If using infrastructure of the Government, the company must
cooperate with Operating Body, PT. Kereta Api Indonesia.
3. Transportation on the Must be a joint venture with Indonesia legal entity(ies) Up to 95%
Rivers and Lakes The joint venture company shall be incorporated solely to en-
gage in transport business on rivers and lakes.
The joint venture company at least must have 1 unit of vessel
that meets the requirements of safety vessel and harbour techni-
cal specification.
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4. Sea Transportation
a Domestic Transporta- Closed to

tion PMA
b Overseas Transporta- Must be in the form of a joint venture company. Up to 95%
tion Such joint venture company must have an Indonesian flag ves-
sel with a minimum size of GT 5000.
c Transportation Support
Services
Marine Warehouse, Must be in cooperation with the local PT. Pelabuhan Indonesia [Not
Specified]
Marine Transportation Must be in cooperation with the local PT. Pelabuhan Indonesia [Not
Equipment Lease Ser- Specified]
vices,
Loading-Unloading Must be in the form of a joint venture with a national loading- Up to 95%
Services, unloading services company/ Indonesian local company/ Indo-
nesian nationals
Outside-of-Port Con- Must be in the form of a joint venture with a national container Up to 95%
tainer Depot Services depot services company/Indonesian local company/Indonesian
nationals
d Harbours
Harbours: Reception Must be in cooperation with the local PT. Pelabuhan Indonesia Up to 49%
Facilities and Ship to
Ship Transfer
Container Terminal Must be in cooperation with the local PT. Pelabuhan Indonesia Up to 95%
5. Airports
a Public Airports Must be in the form of a joint venture with the Operating Body Up to 49%
of airports.
b Special Airports The operations can be undertaken by the Government, Provin- [Not
cial Government, Regencies and Indonesian entities for own Specified]
purpose. For public purposes, can be established, if it fulfils
certain requirements.
c Airport Support Ser-
vices
Direct Support Ser- Must be a joint venture with an airport operator or Indonesian Up to 49%
vices entity
Direct/Indirect Support Must be a joint venture with an airport operator or Indonesian Up to 95%
Services entity
6. Toll roads Undertaken by PT. Jasa Marga as the operator, foreign investors
can be in cooperation with or in a joint venture with PT. Jasa
Marga
Provision of toll- Undertaken by PT. Jasa Marga as the operator, foreign investors [Up to
roads/bridges can be in cooperation with or in a joint venture with PT. Jasa 95%]
- Development, Op- Marga
erations, and Main-
tenance of Toll
Roads and Bridges
- Development of
Flyover Intersections
Other Services
- Rest Areas/Services
and Advertising

III TELE-
COMMUNI-
CATIONS
1 Provision of Tele- Provision of fixed networks, comprising local, long distance, Up to 95%
communications Net- international and closed connections.
work Provision of mobile network, comprising terrestrial, cellular and
satellite.
Provision of telecommunications may also provide telecommu-
nications services
PMA is also available for satellite-based mobile networks and
Very Small Aperture (VSAT) and telephony-based networks.
2 Provision of Tele- Provision of: basic telephone services, telephone services with Up to 95%
communications Ser- added value, and multimedia services.
vices
3 Provision of Special Telecommunications for own use, state defense and broadcast- [Not
Telecommunications ing. Specified]
IV WATER AND
SANITATION
1 Development and Op- Must cooperate with the relevant Regional Drinking Water [Not
rations Company (Perusahaan Daerah Air Minum) or in the event that Specified]
the Regional Drinking Water Company is not available in rele-
of Clean Water
vant region, with a national company.
2 Waste Management Must cooperate with Regional Government of the relevant prov- [Not
ince and/or regency and the Regional Sanitation Company (Pe- Specified]
rusahaan Daerah Kebersihan)
3 Waste Water Man- must cooperate with Regional Government of the relevant prov- [Not
gement ince and/or regency and Regional Company of Sanitary Services Specified]
(Perusahaan Daerah Kebersihan)
V. OTHER SERVICES
1 Construction Services Must be a joint venture with a national company. [Not
and Construction Con- Specified]
Foreign participant must have experience and has developed
sulting Services
various engineering techniques and has international experience,
(Building, Civil, Elec-
and is registered with the Lembaga Pengembangan Jasa Kon-
trical and Mechanical)
struksi Nasional (LPJKN) – the Institution for the Development
of National Construction Services.
2 Plant Hire Services Not a leasing business. [Not
Specified]
Equipment must be owned, and cannot be hire-purchased.
3. Construction Services Foreign established companies can also participate in construc-
tion of projects by establishing its representative office in Indo-
nesia and in cooperation with a local construction company
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SCHEDULE 3 – PMA COMPANY ESTABLISHMENT

ANNEX 1: Setting Up a PMA Company
Steps for Establishment of a PMA Company:

How to obtain the Foreign Investment License
The application and procedures to obtain the approval on the intended investment are determined in the Decree
of the Minister of Investment/Chairman of BKPM Number 57/SK/2004 concerning “Application Guidelines and
Procedures for Investment Established in the Framework of Domestic and Foreign Investment” (“SK57/2004”).
A. The Foreign Investment License
The principal license for a foreign investment project is the foreign investment provisional license (the “Foreign
Investment License”). To obtain a Foreign Investment License, an application must be submitted to the BKPM
by using a prescribed form which is called the Model I/PMA application form (see attached). Pursuant to
SK57/2004, the Foreign Investment License shall be issued 10 (ten) days as of the complete submission of the
application.
B. Model I/PMA Application
The Model I/PMA application form contains the basic information on the intended investment, such as: (i)
names of the applicants; (ii) intended line of business; (iii) total equity and loan capitalization; (iv) location of
project, and (v) etc.
To enable you to complete the Model I/PMA application (see attached form in Annex 1), the following details
must be provided in each of the section in the application:
1. Part I-A (of the Model I/PMA Application): please insert the description of the participants (prospective
shareholders) of the PMA Company, (including address, telephone and fax number of the participants).
Note: Pursuant to Law Number 1 of 1995 on Company Law, a limited liability company must have at least 2
(two) shareholders.
2. Part II-1: please determine the name of the PMA Company.
Note: The proposed name of the PMA Company shall be tentative, since it will be further subject to the ap-
proval of the Minister of Law and Human Rights. We can, however, check with the Ministry of Law and
Human Rights whether the proposed name is acceptable.
3. Part II-3: please state the location of the project (regency and province), and tentative address of the PMA
Company.
4. Part II-4 (annual production): please specify as noted.
Note:
(a) the ‘name of products’ column shall be inserted by the line of business of the PMA Company;
(b) the ‘unit’ column shall be inserted by US Dollars;
(c) the ‘capacity’ column shall be inserted by the basic capacity of the services stated in US Dollars.
5. Part II-6 (required land area): please specify the land area required, as noted.
Note: If no land area is required, it should be explained that the PMA Company will lease an office space.
6. Part II-7 (employment), please specify the following:
(a) the number of foreign/Indonesian Directors and Commissioners of the PMA Company;
(b) number of foreign/Indonesian professionals.
Note: The position of the foreign professional should be specified.
(c) number of foreign/Indonesian workers.
7. Part II-8 (allocation of investment funds), please specify the appropriation of investment funds as noted.
8. Part II-9 (source of investment funds), please specify the source of investment funds as noted.
Note: Please note that the end amount of Part II-8 and Part II-9 must be the same.
9. Part II-10 (equity capital), please specify the equity capital as noted.
Note: As stated in the application, the issued capital in this Part II-10 must equal to the equity in Part II-9.a.
10. Part II-11 (shareholding), please specify the amount of shareholding of each shareholders.
11. Part II-12 (implementation to be completed), please insert as noted.
C. Attachments to the Model I/PMA Application
The Model I/PMA application form must be accompanied by the following documents:
1. documents of the applicants (prospective shareholders of the PMA Company):

(a) copy of Articles of Association of the foreign entity;

(b) copy of a valid passport for foreign individual (if the other shareholder is an individual);
2. explanation of the business activities to be conducted by the PMA Company (including a flowchart visualiz-
ing the production process);
3. powers of attorney to sign the Model I/PMA application form if it is not signed by the applicants.
D. Deed of Establishment
Upon receipt of the Foreign Investment License, the PMA Company must be incorporated by the applicants.
Such incorporation shall be reflected under a (notarial) deed of establishment which contains an Articles of As-
sociation to be drawn up by a notary public. These Articles of Association must be approved by the Minister of
Law and Human Rights. The PMA Company does not attain the status as a legal entity until such approval of
the Minister of Law and Human Rights has been issued.
The following documents are required to be accompanied upon the submission of the Articles of Association to
the Ministry of Law and Human Rights to obtain approval of the Minister of Law and Human Rights:
1. Taxpayer Identification Number (NPWP)
This registration is done with the Tax Office.
2. Certificate of Domicile (Surat Keterangan Domisili)
This certificate is granted by the Head of the Village where the PMA Company is domiciled.
Pursuant to the Company Law, the Minister of Justice and Human Rights will issue an approval within 60 days
after receipt of the application. Practically, the estimated time for obtaining the approval from the Minister of
Law and Human Rights on the Articles of Association is between 1 (one) to 2 (two) months after receipt of the
application.
After the Minister of Justice and Human Rights approval has been obtained by the PMA Company, the Articles
of Association must be registered with the Department of Trade where the PMA Company has its domicile, and
published in the State Gazette (Berita Negara) of the Republic of Indonesia.
After the above requirements have been fulfilled, under Indonesian Law, the incorporation process of a PMA
Company is considered to be completed, subject to further follow up steps in E below.
E. Follow up Steps.
The following are the follow ups and the routines that must be undertaken by the PMA Company after it has
completed the establishment process in step D above.
(1 Reporting on Off-shore Loans
The PMA Company may receive loans up to the maximum amount stated in the PMA Approval. All loans and
other forms of indebtedness to be received by the PMA Company from overseas sources must be reported to
Bank Indonesia within the designated reporting periods.
(2) Master List Approval and Limited Import License
(a) The Master List
Pursuant to SK57/2004, the importation of capital goods and basic/complementary materials for which import
duty privileges are sought, require approval from BKPM.
For such approval, the PMA Company must submit a list of capital goods and basic/complementary for which
import duty privileges are sought, known as the ‘Master List’.
The Master List must specify the item of equipment to be imported (as specifically as possible, including serial
numbers), the country of origin, quantity and item price. The specifications, flow diagrams, layout drawings, and
production calculations accompanied in the Master List is to facilitate the evaluation by BKPM.
Approval for the import of capital goods and basic/complementary materials with facilities will be issued by
BKPM in the form of an Approval Letter of customs facilities for capital goods and basic/complementary mate-
rials together with Master List of Capital Goods.
(b) Limited Importer Identification Number
After the PMA Company has filed and obtained approval for its Master List, the PMA Company must again go
to BKPM to obtain a Limited Importer Registration Number (Angka Pengenal Importir Terbatas, commonly
referred to as APIT), for the importation of capital goods and basic/complementary materials.
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EU – Asia-Invest
(3) Manpower Plan Approval

For the Master List, the PMA Company must submit a Manpower Plan (“Rencana Penggunaan Tenaga Kerja”
commonly referred to as ‘RPTK’, the “Manpower Plan”) reflecting the number of expatriate positions stated in
the PMA Approval. The application can be submitted/processed to BKPM or the Department of Manpower.
BKPM or Department of Manpower will issue the final approval, but only after it has received the opinions of
the Technical Department responsible for the supervision of the sector of investment concerned. Each of such
departments has jointly determined with the Department of Manpower the types of positions and job descriptions
which may be filled by foreign personnel.
The Manpower Plan must state the minimum qualifications for all positions to be filled by foreigners, the num-
ber, names and identity card numbers of Indonesian employees who will be assigned as counterparts and the
program for training of Indonesian staff to replace the foreigner(s).
When the PMA Company has received and approved the Manpower Plan, separate applications must be filed for
each foreign person to be employed.
(4) Registration Requirements
There are a number of registration requirements (which apply to all companies in Indonesia) which new invest-
ment companies must adhere to, as follows:
(a) Tax Registration
An application to the Directorate General of Taxes of the Department of Finance for a “Tax Number”, or NPWP
(“NPWP”) must be filed before business can commence. The NPWP is normally issued within a few days after
application. The application must be submitted together with a copy of the PMA Company’s Articles of Associa-
tion.
(b) Company Registration Requirement
Under Law Number 3 of 1982 concerning Mandatory Registration of Companies, there is a mandatory registra-
tion of all business enterprises. This registration is intended to form the basis of a public registry and is main-
tained by the Department of Industry and Trade.
The PMA Company is required to register with the Department of Trade within 30 days after approval of its Ar-
ticles of Association by the Minister of Law and Human Rights and to display the certificate of registration
(Tanda Daftar Perusahaan or TDP) at the PMA Company’s place of business.
(c) Labour Registration
Under Law Number 7 of 1981, all enterprises having at least 6 employees must register with the Department of
Manpower. The manager or Director of the PMA Company must submit a written report (“Report Form”) on
all matters, particularly relating to its personnel and the PMA Company within 30 days after the establishment of
the PMA Company.
The Report Form is to be submitted to the Regional Office of the Department of Manpower where the PMA
Company has its domicile, and it should contain information, among others, in respect of the name, address and
type of business of the PMA Company, its date of establishment, its share capital, the number and classification
(including nationality) of the employees, the employee benefit programs, the employee training programs, work-
ing hours, the schedule of the workers.
The report is to be filed annually, following the first report. In the event of the discontinuance, resumption, re-
moval or liquidation and re-establishment of the PMA Company, a report must also be filed at the latest 30 days
after such event occurs.
The information needed to accompany the Report Form is as follows:
- Company identities;
- Personnel relationships;
- Manpower protection; and
- Employment opportunities.
(Information as meant above are, among others, name of the PMA Company, address of the PMA Company,
Company leadership, corporate capital, the process of production, terms of work, conditions of work, expansion
plans, reduction of employment and vocational training schemes for workers).
(d) Approval for the Company Regulations (Employment Policies)
For enterprises employing 10 employees or more, a set of Company Regulations must be drawn up in line with
Department of Manpower guidelines. The Department of Manpower must approve the Company Regulations
prior to their announcement to employees.

(5) Local Level Regulations

A number of local permits and licenses will need to be obtained by a new investment company, such as location
permit (“Izin Lokasi”)7 and license under Nuisance Act or Hindrance Ordinance (“Izin Undang-Undang Gang-
guan”)8.
(6) Reporting Requirements
BKPM requires approved investment companies to submit semi-annual reports on the progress of their invest-
ments throughout the life of the company. This report is known as the investment progress report (Laporan
Kegiatan Penanaman Modal or LKPM) and must be submitted in January and July of each year. For companies
that have obtained a Permanent Operating License, the report is submitted annually to BKPM at the latest on
January 31 on the following year.
(7) Permanent Operating License (or Permanent Business License)
After all requirements of the PMA Approval have been fulfilled, the PMA Company must apply to BKPM for
the issuance of a Permanent Operating License (Izin Usaha Tetap or “IUT”).
(8) Other Licenses
The steps mentioned above sets out the steps to be taken by the PMA Company, from the establishment of the
PMA Company up to the time the PMA Company obtains its IUT. The PMA Company must also comply with
the provisions stated under SK57/2004, if there are any routine or incidental changes to the PMA Company’s
investment plans as stated in its PMA Approval, such as, among others:
- any expansions or diversification of the PMA Company;
- change in the PMA Company’s line of business;
- any change in the PMA Company’s shareholders;
- any change in the composition or numbers or the members of the Board of Directors or Commissioners of the
PMA Company;
- any investment change which results the change in facility and financing sources;
the prior approval of BKPM is required.
7
This will be applicable if the PMA Company acquires land for purposes of its investment plan.
8
If the PMA Company is a services company and not a manufacturing company, and is located in an office building, this will not be applica-
ble.
Guidebook page 135

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ANNEX 2: Form of Model I Application
Submitted to BKPM in 2 (two) copies Lampiran 2

----------------------------------------------------------- SK Kepala BKPM
No. 57/SK/2004
MODEL I/PMA
INVESTMENT APPLICATION
IN TERMS OF FOREIGN INVESTMENT LAW
This investment application under the Foreign Investment Law No. 1 of 1967 and No. 11 of 1970 is herewith
submitted to BKPM on behalf of the Government of the Republic of Indonesia and Implementation of Presiden-
tial Decree Number 29 of 2004 concerning.[sic!]
I. DESCRIPTION OF THE PARTICIPANTS

A. Foreign Participant(s)
1. Name of company :
2. Main line of business :
3. Address (incl. Phone, telex, and fax :
number)
B. Indonesian Participant(s)
1. Name (company, cooperative or indi- :
vidual)
2. Tax Registration Code (NPWP) :
3. • Main line of business :
• Investment status : PMA, PMDN or Non PMA/PMDN
4. Address (incl. Phone, telex, and fax :
number)
II. DESCRIPTION OF THE PROPOSED PMA COMPANY

1. Name of company :
2. Main line of business :
3. Location of the project
a. Regency :
b. Province :
4. Annual Production:
Name of Designed Capacity
Product(s)/Services Value Amount Remarks
5. Annual sales of products:

Name of Export Domestic Market
Product(s)/Services Value Market Sales Amount Internal Use
Amount Amount
Estimated total export value: US$

6. Land area required : Sq.M/Ha
7. Employment
Expatriate Indonesian
a. Commissioner(s)
b. Director(s)
c. Professional(s)
• Manager(s)
• Expert(s)
d. Worker(s) XXXXXXXXX …………………
Total
Note: Expatriate professionals position should be specified

8. Allocation of investment fund

a. Fixed Capital
Cost of land & land development : US$
Cost of building : US$
Cost of machinery, equipment & spare
parts : US$
Other Miscellaneous : US$
--------------------------------
Sub total : US$
b. Working capital (one turn over opera-

tion) : US$
--------------------------------
Total US$
Note: If more than one location/line of business, Investment Funds should be listed for
each location and/or line of business.
9. Source of Investment Funds
a. Equity : US$
b. Loan : US$
--------------------------------
Total : US$
10. Equity Capital

a. Authorized capital : US$
b. Issued capital : US$
c. Paid-up capital : US$
Note: Issued capital should be equal to equity.
11. Shareholding
a. Foreign partcipant(s) US$ %
Sub Total
b. Indonesian participant(s)
Sub total
c. Total (a+b)
12. Implementation to be completed within ………. months, from the date of the issuance
: of the Government’s Approval
III. DECLARATION
1. We acknowledge that the company(ies) shall be obliged to take preventive measures against any pol-
lution resulting from the operation of our investment project, at our joint venture company’s own
expense, and in conformity with the applicable laws and regulations.
2. This application has been properly and duly executed and we (the participants) are responsible for its
accuracy, correctness and completeness, including all data and documents attached hereto
Place and date of signing

Foreign Applicant(s) Indonesian Applicant(s)
Stamp duty Rp. 6,000
Name: Name:
Title: Title:
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EU – Asia-Invest
ENCLOSURE
1. By foreign participant:
a. Articles of association of the company in English or Indonesian language; or
b. Copy of valid passport for foreign individual.
2. By Foreign Investment Company (PMA):
a. Articles of association of the company and any amendment(s).
b. Tax Registration Code Number (NPWP).
3. By Indonesian participant:
a. Articles of association of the company and any amendment(s) or Identity Card for Individual.
b. Tax Registration Code Number (NPWP).
4. a. Flowchart of the production process and a raw materials requirement for processing industries.
b. Explanation of business activities for services sector.
5. Power of attorney to sign the application if the participant(s) are represented by another party.
6. a. Other requirements from the Sectoral Ministry concerned, if any, as stated among others in the
"Technical Guidance’s Book on Investment Implementation".
b. Certain sectors namely mining sector which has extraction activity, energy sector, palm oil planta-
tion, and fishery must obtain a Letter of Recommendation by the related/technical ministries.
c. For the palm oil processing industry which does not have raw material supplied by its own planta-
tion, the raw material guarantee documents supplied by the plantation must be completed, and rec-
ognized by the Plantation Office of the local Regency/Municipal
7. In the business sector required for partnership cooperation:
a. Agreement between small scale enterprise and medium/large scale enterprise outlining among oth-
ers name and address of each party, pattern of partnership, right and obligation of each party as well
as guidance provided for small scale enterprise.
b. Letter of statement from the small scale enterprise outlining that the enterprise fulfils the criteria of
small scale enterprise based on Law No 9, 1995.

SCHEDULE 4 – PROCUREMENT AND TENDERS

ANNEX A: Selection of Vendors for Procurement
Public Tender
Suppliers of goods/providers of contract services/other services are principally selected through method of public
tender. Public tender is a method of selection of suppliers of goods/providers of contract services/other services
transparently by broad announcement through mass media and official billboard for public information so that
the interested and qualified public and business entities can take part.
In the case of the quantity of capable suppliers of goods/providers of contract services/other services being be-
lieved limited, namely for complicated jobs, suppliers of goods/providers of contract services/other services can
be selected by method of limited tender and announced broadly through mass media and official billboard by
mentioning suppliers of goods/providers of services believed capable, to open opportunity for suppliers of
goods/providers of services that fulfill qualification.
In the case of public or limited tender being deemed inefficient financially, suppliers of goods/providers of ser-
vices can be selected by method of direct appointment, namely selection of suppliers of goods/providers of ser-
vices by means of comparing bids as many as possible, at least 3 (three) bids and suppliers of goods/providers of
services already passing pre-qualification as well as negotiating technically and financially and it must be an-
nounced through at least one official billboard for public information and the internet, if possible.
In certain and special conditions, suppliers of goods/providers of services can be selected by means of direct
appointment of one supplier of goods/provider of services by negotiating technically and financially so as to ob-
tain a reasonable price and be accountable technically.
Submission of Bid Documents
In selection of suppliers of goods/providers of contract services/other services, any of the three methods of sub-
mission of bid documents can be chosen on the basis of types of goods/services to be procured and the method
must be mentioned in the tender document. They include:
a. single-envelope method;
b. double-envelope method;
c. two-phase method.
The single-envelope method is the submission of bid documents, consisting of administrative, technical require-
ments and bid price, which are inserted into one covered envelope, to Procurement Committee/Procurement Of-
ficial. The double-envelope method is the submission of bid documents, wherein administrative and technical
requirements are inserted into the first envelope, while the bid price is put into the second envelope and later the
first and second enveloped are inserted into one envelope (covering envelope) and conveyed to procurement
committee/official. The two-phase method is the submission of bid documents, wherein administrative and tech-
nical requirements are inserted into the first covered envelope, while the bid price is put into the second covered
enveloped, which are conveyed in two phases separately and in different time.
Evaluation of Bids
In selection of suppliers of goods/providers of contract services/other services, any of the three methods of
evaluation of bids can be chosen on the basis of types of goods/services to be procured and the method must be
mentioned in tender documents. They include:
a. competitive system;
b. value system;
c. cost evaluation system during the economic period.
The competitive system is evaluation of bids by means of examining and comparing bid documents to the ful-
fillment of requirements already stipulated in the documents of selection of suppliers of goods/providers of ser-
vices with of goods/providers of services with sequence of evaluation starting from evaluation of administrative
requirements, technical requirements and reasonability of price and suppliers of goods/providers of services fail-
ing to pass the evaluation in every phase are declared failed. The value system is evaluation of bids by means of
scoring every element which is evaluated on the basis of criteria and value already stipulated in document of
selection of suppliers of goods/providers of services, later comparing the total score of every bid of participants
to bids of other participants. The cost evaluation system during the economic period is evaluation of bids by
means of scoring technical elements and price is evaluated according the economic period of the offered goods
on the basis of criteria and value stipulated in document of selection of suppliers of goods/providers of services,
later the value of the elements is converted into unit of certain currency and the total of every bid participants is
compared to bids of other participants.
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EU – Asia-Invest
In evaluating bid documents, Procurement Committee/Procurement Official selecting suppliers of

goods/providers of services are not allowed to change, supplement and reduce the criteria and procedures for
evaluation by whatever reason and/or take other post-bidding actions.
Participants, the Use of Domestics Goods/Services and Price
As a general rule in procurement of goods and services, government institutions are obliged:
to maximize the use of domestic goods/services including national design and engineering in the procurement of
goods/services;
a. to maximize the use of national suppliers of goods/providers of services;
b. to maximize the provision of packages of jobs for small-scale businesses, including small cooperatives and
community groups.
The obligation of government institutions as described above is executed in every phase of procurement starting
from preparation to completion of agreement/contract. In light of that the agreement for procurement must men-
tion requirements for using:
a. Indonesian National Standard (SNI) or other standards in force and/or equivalent international standard
stipulated by the authorized institutions;
b. domestic production in accordance with the capability of national industry;
c. domestic expert and/or suppliers of goods/providers of services.
Procurement through international tenders should involve national suppliers of goods/providers of services maxi-
mally.
Procurement financed by export credits or other credits must be done by fair competition with the requirements
most benefiting the state financially and technically by maximizing the use of domestic components and national
suppliers of goods/providers of services. Selection of suppliers of goods/services financed by export credits or
other credits must be done in the country. In the case of export or overseas grants being accompanied by condi-
tion that procurement of goods/services only can be done in countries providing the export credits/grant, efforts
to use domestic goods/services only can be done in countries providing the export credits/grant, efforts to use
domestic goods/services and involve national suppliers of goods/providers of services must be made maximally.
Foreign companies can take part in the procurement of goods/services with the value of:
a. above Rp. 50,000,000,000.00 (fifty billion rupiahs), in the case of contract services;
b. above Rp. 10,000,000,000.00 (ten billion rupiahs), in the case of contract services;
c. above Rp. 5,000,000,000.00 (five billion rupiahs), in the case of contract services;
Foreign companies executing the jobs as described above must promote business cooperation with national com-
panies, in the form of partnership, sub contract and others, if capable national company exists in the said field.
Exception can only be made for the procurement of defense materials and equipment within the Defense Minis-
try/Military stipulated by the Minister of Defense/Military Commander/Chiefs of Staff.
Price preference of domestic production and national providers of contract services must be mentioned in docu-
ments of procurement. In the case of the procurement of international goods/services being financed by overseas
loans, the price preference of domestic production is maximally amounting to 15% (fifteen percent) above the
bid price of imported goods, excluding import duty. The preference price of contract services executed by na-
tional contractors is amounting to 7.5% (seven point five percent) above the lowest bid price of foreign contrac-
tors.
Procurement of goods/services should refer to the list of inventory of domestic goods/services based on certain
criteria, fields, sub-field, types and groups of goods/services. Regulation of the list of inventory and dissemina-
tion of information on the domestic goods/services are issued by the ministry overseeing the industry and trade.
The Guidance on Procurement stipulates that the value of procurement of goods/contract services up to Rp.
1,000,000,000.00 (one billion rupiahs) is designated to small-scale businesses, including small cooperatives,
except jobs demanding technical competence which cannot be fulfilled by small-scale businesses, including co-
operatives.

ANNEX B: Tender Procedures for Infrastructure

For each infrastructure project in Indonesia, every private company which intends to participate must follow a
very important procedure, namely bidding requirement as regulated under Presidential Decree Number 7 of 1998
concerning the Cooperation between the Government and Private Companies in the Scheme of Development and
Management of Infrastructure (“Decree No. 7”).
The following is the general procedure of bidding requirement pursuant to Decree No. 7 (a detailed procedure
will be also described below):
Each Minister, who is responsible for each infrastructure project, must firstly convene a pre-qualification of pri-
vate companies by taking into consideration the experience of the bidders, past performance and capability (fi-
nancial and otherwise). Those companies which pass the pre-qualification will then be eligible to participate in a
tender. The Minister will then submit the result of the tender appraisal, along with its recommendation, to the
Coordinating Minister of Economic Affairs, as the Chairman of the Procurement Evaluation Team, to obtain
their approval. Once the Procurement Evaluation Team approves the winning bidder of the relevant project, then
they have to enter into a cooperation agreement with the relevant Minister. The cooperation agreement must at
least contain certain basic provisions: the scope or works, term, tariff, the rights and obligations, default sanc-
tions, dispute settlement clause, termination and the re-transfer of the infrastructure and/or its management to the
Indonesian Government or State/Regional Owned Companies.
Please note, however, that pursuant to Presidential Decree Number 81 of 2001 concerning the Committee for the
Acceleration of Infrastructure Development Policy (“Decree No. 81”), Decree No. 7 shall no longer be valid
insofar matters therein are already stipulated or contradictory to Decree No. 81. Decree No. 81, however, does
not provide for provisions on the tender procedure and therefore such tender procedure in Decree No. 7 shall still
apply insofar its provisions are not contradictory to Decree No. 81.
Under Decree No. 81, a committee, which consists of several Ministers and Secretary Generals from several De-
partments, has been established in order to accelerate the development of infrastructure projects (including
power projects) (the “Committee”). The Committee has the tasks to develop and issue policies, propose solutions
for problems relating to the development of infrastructure projects. Decree No. 81 requires further actions to be
done by the Committee in order to implement its tasks, such as the amendments of Decree No. 7, issuance of
new policies, establishment of sub committees, etc. Further, Decree No. 81 requires the Committee to complete
the amendments of Decree No. 7 within 6 months after 21 June 2001.
Status of Decree No. 7:
Based on our research with the Committee, we were informed that the amendments of Decree No. 7 is currently
being drafted and submitted to State Secretary. There are still further steps to be taken before the issuance of the
new regulation. Furthermore, we have also received a formal letter from the Committee providing, along the
lines that, despite the revocation of Decree No. 7 by Decree No. 81, the existing tender requirement for govern-
ment related projects is still applicable, as regulated under Decree No. 7, since Decree No. 81 does not substan-
tially regulate the tender procedure.
Detailed Procedure of Bidding Requirement:
The following is the detailed of tender procedure as required by Decree No. 7:
Step I. Determination of the Cooperation Projects and Selection of Private Companies
1. The obligations of minister responsible for each infrastructure project (“Minister”):
(a) The Minister shall be required to carry-out or manage the implementation of the pre-feasibility studies of the
respective projects to be proposed to Bappenas which will be further considered for inclusion into the list of
(b) Before proposing cooperation projects, the Minister shall be required to evaluate whether the said pre-
feasibility studies have fulfilled the requirements needed, wherein the said projects are technically and eco-
nomically feasible, and follow the following principles:
(1) the technical explanation identifying and covering all relevant aspects of the projects;
(2) the estimation of the initial costs including all relevant aspects of the projects;
(3) the financial analysis according to the scope of the projects and the public to be served;
(4) the adequate identification and specification of designs and standards of performance;
(5) the complete identification of the regions and public to be served by the projects;
(6) the identification of the project locations which shall be in accordance with the prevailing spatial plans;
(7) the analysis of the demand according to the scope of the projects and public to be served by the pro-
jects;
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(8) the clear identification and the estimates of the costs in accordance with all steps of projects develop-
ment, including, subsidies, contracts with the government and financial concessions;
(9) the environmental considerations fulfilling relevant requirements as well as identification of all antici-
patory steps suitable for overcoming all negative impacts of the projects;
(10) the extensive study on the social aspects of the eviction of and compensations to be paid to the public
affected by the projects;
(11) the time period of implementation, by taking into consideration the scope and degrees of difficulty of
the projects;
(12) the identification of socio-economic benefits by using appropriate methodology;
(13) the extensive study on why the projects are attractive to private parties;
(14) all required approvals as pre-requisites to the implementation of projects, including consents on envi-
ronmental analysis, procedures for evicting the community affected by the projects, approvals from
PKLN, government licenses and permits; and
(15) the most appropriate method in selecting private parties (either one-step competitive tender, two-step
competitive tender or simplified competitive tender), and justification of the recommended method.
2. The obligations of Bappenas shall be the following:
(a) examining whether all proposals of the projects are accompanied by pre-feasibility studies.
(b) re-reviewing the pre-feasibility studies independently and studying the supporting documents. The said
review shall be executed to determine whether the said pre-feasibility studies have fulfilled the require-
ments as elaborated above.
(c) providing input to the Minister whether or not the said project proposals can be included into the list of
(d) Bappenas shall include the proposals fulfilling the requirements into the list of infrastructure projects.
(e) Bappenas shall periodically renew and issue the list of the approved infrastructure projects and provide
the copies of such list for the parties requiring such list.
3. The projects in the value of Rp. 50,000,000,000 or higher, must be done through an open tender process.
4. The projects with clear technical specifications shall be processed by one-step tender.
5. The two-step tender shall be applied to the large-scale projects whose technical specifications still need to be
developed, wherein:
(1) the technical specifications available are inadequate and incomplete for a competitive bidding, however
there is clear technical criteria to evaluate the technical proposals;
(2) there are more than one technical qualification.
6. The decision to apply one or two-step tender shall be made by the Minister after consulting with Bappenas,
following the fulfillment of the requirements for pre-feasibility studies and before issuing the pre-
qualification invitations.
Step II. Pre-qualification
1. The Minister shall evaluate all potential candidates on the basis of the following pre-qualification proce-
dures:
a. Before conducting pre-qualification, the Minister shall invite any parties through advertisement. The
advertisement shall indicate the following:
- names and location of projects;
- names, addresses, telephone and facsimile numbers of the Minister;
- names of contact persons and venues where the documents of pre-qualification can be obtained;
- the period and date of the closing of pre-qualification and procedures which must be undertaken by the
interested parties to file applications for pre-qualification; and
- the provisions on whether tenders are executed in accordance with the one and two-step system.
b. Within a period of 7 days after the applications for pre-qualification are received, the Minister shall ad-
vertise the invitations through mass media.
c. After the Minister has advertised the invitations, the Minister shall be required to provide the pre-
qualification documents for interested parties. Such pre-qualification documents shall indicate:
- names and locations of projects;
- scope and cost estimates of the said projects;
- names, addresses, telephone and facsimile numbers of the Minister;
- time period and date of the closing of pre-qualification (not less than 60 days from the date of advertise-
ment) as well as procedures that must be followed by private parties to file applications for pre-
qualification.

d. The potential bidders shall be required to complete the documents of pre-qualification, concerning the
following matters:
- the experience in the said sector;
- the performance in the similar projects, including references from previous clients of the same projects;
- the similar experience in the same geographical, topographical and climate conditions;
- the capacity relating to personnel affairs and equipment; and
- the financial capability of project implementation.
e. The Minister shall be required to conclude pre-qualification of potential bidders within a period of 30
days after the closing date of pre-qualification.
f. The Minister shall evaluate whether potential bidders are capable to implement the projects in accor-
dance with criteria of pre-qualification.
g. The Minister shall notify in writing all potential bidders passing pre-qualification and at the same time
inform those failing to pass the pre-qualification along with the relevant reasons. The Minister shall pro-
vide copies of pre-feasibility studies for all participants passing pre-qualification.
h. The disqualified bidders may submit requests to the Procurement Evaluation Team in connection with
the decision of the Minister on their disqualification. The said request must be received by the Procure-
ment Evaluation Team within a period of 15 days after the disqualified bidders receive the decision on
the disqualification from the Minister. The Procurement Evaluation Team shall make decisions on the
said requests within a period of time stipulated later. The decision of the Procurement Evaluation Team
on the said requests shall be final and binding.
i. The Minister shall be required to deliver the list of all pre-qualification participants to the Procurement
Evaluation Team.
2. In the case of a two-step tender system being applied, the Minister shall be required:
a. to determine technical criteria and specifications clearly indicating the minimum requirements for opera-
tion and performance of the projects, as well as to request the candidates passing pre-qualification to file
technical proposals;
b. to discuss the said technical proposals with participants of pre-qualification on the basis of technical stan-
dards and parameters of the projects;
c. to invite pre-qualification participants to deliver their bids on the basis of standard form and technical pa-
rameter by observing the tender requirements as regulated in the tender documents.
3. (a) Foreign companies may be involved in pre-qualification.
(b) Foreign companies passing the pre-qualification shall be entitled to participate in the tender.
(c) In the case of the said foreign companies winning the tenders, the relevant companies shall be required to
set up an Indonesian legal entity to implement the development and/or management of the said infra-
structures, according to Government Regulation No. 20 of 1994.
Step III. Tender Documents
The Minister shall be required to prepare and deliver tender documents to all participants passing pre-
qualification (“Successful Pre-qualified Bidders”):
1. The tender documents shall clearly determine the tender rules and shall attach the following:
(1) the invitation for tender;
(2) the directives for the Successful Pre-qualified Bidders, covering:
a. general explanation and objectives of the projects, including a clear statement on the objectives,
scope, expected results, public to be served, designs and minimum standard of performance and
environmental standards;
b. procedures for filing bids, including the date, time period and location for filing the bids, guaran-
tees for bids, and validity periods of the respective bids as well as the allowed procedures for deliv-
ering bids;
c. date of the opening of the tenders proposal;
d. principles of determination and adjustment of tariffs, charges, costs and rental fees;
e. guarantees provided by the Minister;
f. the need for establishing a legal entity, if necessary;
g. the share of the Minister and/or other agencies in financing part of the projects;
h. assistance or enhancement to be provided by the Minister;
i. tables clearly indicating the risks to be allocated to the Minister, private parties and users.
(3) the tender application forms;
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(4) the general and specific requirements to be applied in the contracts;

(5) the copies of pre-feasibility studies;
(6) the copies of the contract concept describing the forms of cooperation (such as: BOT, BOO, concession
granting, etc.) and the maximum period of the construction;
(7) the guarantees for pro forma bids;
(8) the guarantees for pro forma implementation;
(9) the attachments, including relevant additional information, such as: economic, social, demographic and
environmental data required to improve the quality of the bids; and
(10) other documents that the Minister considers useful for the bidders.
2. The bids and other documents delivered by the Successful Pre-qualified Bidders and matters relating to the
bids shall be made in the Indonesian language or English. In the case of dispute arising from the implemen-
tation, the documents in Indonesian language shall prevail.
3. Additional information, explanations, rectifications and amendments to the tender documents shall be for-
mally delivered in writing to the Successful Pre-qualified Bidders.
4. All Successful Pre-qualified Bidders may be given additional time to the length of the period agreed in the
tender process, in the case of amendments to the tender documents are urgently required.
5. Bid guarantees under the name of investors shall be required in the tender. The amount of bid guarantees
shall reflect the amount of the losses that are borne by the Minister which might arise in the case where the
Successful Pre-qualified Bidders resign or fail to sign the contracts. Total bid guarantees shall be determined
by the Minister.
6. All bids shall be, to the greatest extent, used the Indonesian Rupiah.
7. The tender documents shall clearly indicate whether the adjustments to the project financing are permitted,
and events and/or conditions where the cost adjustments are permitted.
8. The tender documents shall indicate clearly that the Successful Pre-qualified Bidders are required to deliver
guarantees of performance in forms of bank guarantees under its name in the amount equivalent to 5% of the
estimated contract value. Bank guarantees can be obtained from a bank in Indonesia or international banks
having branch offices in Indonesia. The guarantees shall be held by the Successful Pre-qualified Bidders and
have a validity period until:
(1) the physical completion of the projects; and
(2) 12 months after the projects start operation.
9. Unless specified otherwise, the delivery of bids shall be not later than 90 days as of the date the documents
is issued.
10. The bids submitted after the time and date stipulated shall be returned without being opened.
11. The Successful Pre-qualified Bidders can be requested to extend the validity period of their bids without
modifying their bids letter. The Successful Pre-qualified Bidders’ bid failing to fulfill the said matter shall
be returned along with the guarantees of their bids:
12. The Minister shall conduct pre-tender process, not less than 21 days and not later than 45 days after the ten-
der documents are issued.
13. The date, time and location of pre-tender process shall be given to the Successful Pre-qualified Bidders. All
changes in the time and location of pre-tender process will be informed to the Successful Pre-qualified Bid-
ders through letters and facsimile.
14. None of the provisions stated in the said pre-tender process shall change the limitations and the conditions
of the tender documents, unless they are made as written supplements from the Successful Pre-qualified
Bidders. The Minister will issue the additional explanation in writing to all Successful Pre-qualified Bidders.
15. The Successful Pre-qualified Bidders may file written questions to the Minister to gather explanations on the
tender documents, or data or information relating to the tenders. The Minister will send additional notifica-
tions in writing to the Successful Pre-qualified Bidders and the Procurement Evaluation Team through fac-
simile or other electronic media.

16. The Successful Pre-qualified Bidders shall be responsible for its evaluation and understanding over all re-
quirements, terminologies and condition of tender documents or other documents issued by the Minister.
17. The final time, date and venue of the delivery of bids shall be included in the tender documents. The tender
documents will be opened publicly at a designated time and place.
18. The Successful Pre-qualified Bidders cannot amend, change or substitute their bids after the bids are
opened.
Step IV. Bids Evaluation
1. Evaluation of the bids shall be performed as follows:
(1) After the bids are opened, the Minister is required to ensure their conformity to all terminologies
and requirements of the tender documents.
(2) All bids shall be further evaluated to ensure that the said bids are fully complied with the required
technical criteria:
a. The basic designs at least shall fulfill the technical requirements and environmental standards stipu-
lated in the tender documents.
b. The organizational and operational structures proposed to the projects.
c. The financing plans shall be completed with the calculation of all financing of project development,
and its start-up operations. The uncertainty in the financial planning shall become the basis for re-
jecting a bid. It should also be calculated the availability of the reserve fund to cover the possi-
bilities of excessive cost or cash flow deficits in the start-up operation.
(3) The evaluation of financing shall only be examined to the bids having passing technical evaluation:
a. The comparison and evaluation of the financial proposals must be performed by using the “present
value of financial discounting” method. Discount tariffs applied to this evaluation shall be tariffs of
Bank Indonesia Certificate for three months effective on the day the tender is opened, or any other
tariffs approved by the Procurement Evaluation Team to evaluate the financial condition of the co-
operation projects between private companies and the government;
b. The financial flows used in tender documents shall be in accordance with minimum technical de-
signs and standards of performance, planning and specifications stipulated in the tender documents;
c. The financial flows of all bids shall be evaluated at the same period as stipulated in the tender
documents. The bids showing the financial flows that are less or larger than the period stipulated in
the tender documents will be disqualified;
d. The currency used in the bids evaluation shall be Indonesian Rupiah;
e. All bids shall be evaluated extensively, to ensure that all calculations are included, covering:
i. the placement of staff and their financing;
ii. the costs of operation and maintenance;
iii. the adequate working capital (including among others, cash revenue, inventory of spare parts,
other inventories, rental fees and down payments);
iv. the replacement and renewal of equipment during the development and operational period;
v. the licenses, permits and payments related to the licenses of technology;
vi. the tax income and other taxes.
f. All bids must be evaluated accurately to ensure that the projection of demand and growth rate -
stipulated in analysis is reasonable and widely consistent with the projection of demand con-
tained in pre-feasibility studies and/or tender documents. In the case the projection of demand
covered as part of tender documents, this version will also be valid for pre-feasibility studies;
g. The calculation of tariffs shall be in accordance with those stipulated in the tender documents;
h. All supports gained from the public, including those contained in the financial proposals must
be clearly and reasonably indicated and included in the analysis;
i. The timetable of the projects implementation shall be consistent with the financial flows as
contained in the financial analysis;
j. All debts repayment, financial arrangement, interest and debts amortization must be clearly in-
dicated and calculated in the financial analysis;
k. In accordance with the matters above, the Minister will recommend the Successful Pre-qualified
Bidders whose bid fulfill the requirements, technical evaluations are satisfactory and who make the
financing proposals:
(i). the proposals for subsidized tariffs, charges and costs and rental fees proposed in the forms of
Build Operate Transfer (BOT), Build Own Operate (BOO), Develop Operate Transfer (DOT),
Rehabilitate Operate Transfer (ROT), Rehabilitate Operate Own (ROO), and other similar
forms, resulting in the lowest deduction from the present value;
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(ii). the proposals for amortization payment timetable in the forms of Build Transfer (BT), Build
Lease and Transfer (BLT), Build Transfer and Operate (BTO), and other similar forms, result-
ing in the lowest deduction from the present value; or
(iii). the proposals for the timetable of the financing to parties in charge in leasing and other similar
forms resulting in the highest deduction from the present value.
2. In the case the private party serving as the initiator of a project and if such project is offered to the public,
the initiator shall be entitled to obtain additional value in the tender evaluation whose amount is determined
by the Minister, by fulfilling the following requirements:
a. the bidder has submitted the project proposal to the Minister based on the relevant private party’s initia-
tive;
b. the bidder has performed the pre-feasibility study resulting in the project listed in the list of infrastruc-
ture projects;
c. the pre-feasibility study is opened to all other participants;
d. the bidder has passed the tender pre-qualification and his/her bid has fulfilled the technical require-
ments;
e. There are more than one bids that fulfill the technical requirements.
V. The Rejection of Bids
1. The Minister may reject the existing bids, and can also repeat the tender.
2. Repeating tender shall be based on the following considerations:
(1) the submitted bids do not fulfill the requirements stipulated in the tender documents; or
(2) the tender requirements are not fulfilled, where there are only less than two bids complying with the re-
quirements.
3. In case there is only one bid that technically fulfills the requirements and the Minister proposes to make a
negotiation with the said single bidder. Prior to the negotiation, the Minister is required to obtain an ap-
proval from the Procurement Evaluation Team.
4. The negotiation as mentioned in point 3 above must ensure that the bid has a goal to achieve the best result
for the interest of the public and the State of Indonesia.
5. If the Procurement Evaluation Team approves the negotiation with single bidder fulfilling the said require-
ments, then all other bids shall be rejected.
6. The abovementioned single bidder can be a company or a group of companies or a combination of compa-
nies proposing a tender collectively.
7. Within a period of 120 days from the closing date of the tender, the Minister shall deliver the following mat-
ters to the Procurement Evaluation Team for further observation:
(1) The report of evaluation results and recommendations of the Minister to make contracts.
(2) The draft of contracts with the Successful Pre-qualified Bidders.
8. Within a period of 28 days after the Minister delivers the documents set out in point 7 and in the case the
Procurement Evaluation Team approves the tender process and knows that all principles, procedures and
government policies contained in the attachment of Decree No. 7 have been fulfilled, the Procurement
Evaluation Team shall approve the recommendations of the Minister on the results of the tender.
9. The Procurement Evaluation Team shall not issue any approval for the projects which do not fulfill the pro-
visions under Decree No. 7.
Step VI. Simplified Competitive Tender
1. The procedures for tendering the infrastructure projects with an estimated cost less that Rp. 50,000,000,000
can be executed in a simpler way.
2. The simplified tender procedures shall be stipulated by the relevant Ministers, Governors or Heads of Sec-
ond level regions (Regents or Majors).
3. The simplified tender procedures shall refer to the following provisions:
(i) Bids shall only be allowed to be carried out by the Successful Pre-qualified Bidders.
(ii) Pre-qualification will be executed through a transparent and consistent process.
(iii) All invitations to join pre-qualification will be delivered to the Chamber of Commerce (Kamar Dagang
Industri or “KADIN”), the National Association of Indonesian Consultants (Ikatan Konsultan Indone-
sia or “INKINDO”) as well as the Group of Indonesian Construction Entrepreneur (Gabungan Pen-
gusaha Konstruksi Indonesia or “GAPENSI”) and will be advertised in:
a. mass media

b. printed media, including newspapers, commercial publications;

c. business news.
(iv) All parties delivering the pre-qualification documents before the closing date of bids will be considered,
and the results will be informed.
(v) At least five of the lowest bidder will be allowed to participate in tenders.
(vi) The opening of bids will be publicly done and all Successful Pre-qualified Bidders are invited to be pre-
sent.
(vii) All bids will be evaluated, whether it is responsive and technically fulfills the requirements. The tender
committee will evaluate the financing proposals on the basis of criteria of evaluation.
(viii) The Minister will report the result of bids to the Procurement Evaluation Team.
Step VII. Procedures for Notifying the Successful Bidder
After the Procurement Evaluation Team approves the results of the selection of private party:
1. the results of selection shall be published and announced to the public;
2. the Minister shall inform all un-successful pre-qualified bidders regarding the results of evaluation along
with explanations;
3. within a period of 14 days after the publication or 15 days after the written notification of the unsuccessful
bids, the un-successful pre-qualified bidders may file objections to the Procurement Evaluation Team;
4. in relation to the objection set out in point 3 above, the Procurement Evaluation Team shall issue its decision
within a period of 30 days after the date the said objection is received. The decision of the Procurement
Evaluation Team shall be final.
5. in the case that any objection arise, the Minister is not allowed to decide anything on the said project, in-
cluding signing contracts with the successful bidder, but shall wait until the decisions of the Procurement
Evaluation Team is issued.
6. after the decision of the Procurement Evaluation Team is delivered to the successful bidder, the Minister
will take required steps to finalize the contracts and afterwards notice the successful bidder to start their ac-
tivities.
7. the rights and obligations of parties in the infrastructural development cooperation projects shall be ex-
plained in detail in a contract, in accordance with Decree No. 7.
8. the amendments and supplements to provisions on the scope of the contract can be made at any time on the
basis of mutual agreement by notifying the private parties in writing and vice versa. The addition and reduc-
tion of the works as a result of the changes of the contract shall be adjusted to the changes in project costs
and/or the completion period of the project.
Step VIII. Monitoring and Evaluation
1. The Minister shall be responsible for the administrative affairs and the monitoring of the project’s imple-
mentation and shall report the results to Bappenas every six months.
2. The Minister shall be required to perform financial audits on the implementation of development and opera-
tion of the projects annually, and such audit shall be performed by independent auditors.
3. Within a period of six months after the completion of projects, the Minister shall report the projects comple-
tion to Bappenas, containing recommendations and other matters that can be obtained during the implemen-
tation of the projects starting from the report of preparations, development up to the operation of the said
facilities. .
4. Except stipulated in the contracts, as of the date of signing the contracts until the completion of projects, or
if otherwise determined, the Minister and/or private parties may file objections relating to the physical im-
plementation of the projects, or other matters relating to the implementation of the contracts, to the Pro-
curement Evaluation Team for its considerations.
***
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Annex 2.
Directory of Major Indonesian Companies in
the Infrastructure Sector.
This directory focuses mainly on State-owned Enterprises active in various infrastructure
sectors infrastructure. A limited sample of private Indonesian companies is mentioned as
well. Financial key figures are derived from various public sources and the information is in-
dicative only.
The selection is ranked by highest profit to lowest profit, or loss.
Banking PT Bank Mandiri

Headquarters : DKI Jakarta; founded : 1998
General Banking services. The bank is the result of a merger of 4 state banks which were all
heavily affected by the financial crisis of 1997.
Website : http://www.bankmandiri.co.id
Revenues : Rp 27231 bn Profit : Rp 4586 bn (financial report of 2003)
Assets : Rp 249436 bn Liabilities : Rp 229041 bn (excl. equity)
Power PT PLN
Headquarters : DKI Jakarta
Electricity power supply: generation, transmission and distribution, and its supporting services
all over Indonesia.
Website : http://www.pln.co.id
Telecoms PT Telekomunikasi Indonesia Tbk

Headquarters : Bandung City, West Java
National telecommunication company.
Website : www.telkom.co.id
Revenues : Rp 16109 bn Profit : Rp 2875 bn (financial report of 2004 H1)
Banking PT Bank BRI

Delivering the best banking services with emphasis on the services to micro, small, and me-
dium enterprises, to support their economic development.
Website : http://www.bri.co.id
Telecoms PT Indosat Tbk

On November 2003, following the signing of the Merger Deed to merge Satelindo, IM3 and Bi-
magraha into Indosat, Indosat emerges as a cellular focused Full Network Service Provider
(FNSP). By consolidating its cellular, fixed telecommunications and MIDI services into a single
organization, Indosat is well-positioned to be the telecommunication service provider with the
comprehensive range of products offering in Indonesia.
Website : http://www.indosat.com0
Gas PT Perusahaan Gas Negara

PGN manages 4,140km of transmission and distribution pipelines situated in six major distribu-
tion markets and two major transmission markets to serve industrial, commercial, and house-
hold customers.
Website : www.pgn.co.id

Ports PT Pelabuhan Indonesia II

Managing port and its supporting services, such as logistic services, terminal, hospital, port in-
formation system, etc, in Jakarta harbour
Website : http://portal.inaport2.co.id
Banking PT Bank BNI Tbk

Banking Services: Corpoparte Banking, Consumer Banking, Commercial Banking, Treasury
Banking business.
Website : http://www.bni.co.id
Airports PT Angkasa Pura I

Airport services company which are providing direct and indirect services for airport business
and its acitivities such as: supplying, development, and supporting facility for airplane, terminal,
cargo, airfare services, electricity, water treatment and drainage, hotel, restaurant, etc.
Website : http://www.angkasapura1.co.id
Banking PT Bank Ekspor Indonesia

Headquarters : DKI Jakarta; founded :
Export finance institution.
Website : http://www.bexi.co.id0
Airports PT Angkasa Pura II

Airport and Air Traffic Services.
Website : http://www.angkasapura2.co.id
Toll Roads PT Jasa Marga

Planning, building, maintaining and operating toll roads and related infrastructure amenities.
Website : http://www.jasamarga.com
Ports PT Pelabuhan Indonesia III

Headquarters : Surabaya City, East Java; founded :
formation system, consutancy, training and education, etc, in Surabaya harbour
Website : http://www.pp3.co.id
Ports PT Pelabuhan Indonesia I

Headquarters : Medan City, North Sumatera
formation system, consutancy, training and education, etc.
Website : http://www.inaport1.co.id
Toll Roads CMNP

Headquarters : DKI Jakarta; founded : -- (private company)
Toll road construction, maintenance and operations (BOT)
Website : N/A
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Construction PT Adhi Karya

Indonesia's largest construction firm. The company presently comprises 6 divisions, 11
branches, 3 subsidiaries, and 4 joint operation.
Website : http://www.adhikarya.com/new
Construction PT Wijaya Karya

Known as WIKA and providing engineering and general contracting, including EPC contracting.
Also active in the manufacturing and trade of building materials and in real estate development.
Website : http://www.wika.co.id/12
Construction PT Hutama Karya

Construction services in Civil Works, Mechanical, Electrical, Telecommunication and Instrumen-
talization. Also building maintanance and renovation. 25 subsidiary companies throughout In-
donesia.
Website : http://www.hutama-karya.com
Revenues : Rp 1329 bn Profit : Rp 32.5 bn (financial report of 2003)
Ports PT Pelabuhan Indonesia IV

Headquarters : Makassar City, South Sulawesi
formation system, etc, in Makassar harbour
Website : N/A
Energy (private)
Medco Energy International
One of the first Indonesian drilling contractors, MedcoEnergi has transformed into an integrated
energy company with business involvement in oil and gas exploration and production, drilling
services, methanol production and most recently power generation.
Website : http://www.medcoenergi.com
Shipping Djakarta Lyod

Shipping
Website : http://www.dlloyd.co.id
Industrial Est. PT Kawasan Berikat Nusantara

"Berikat" regional management, Industrial Park Management, Logistic Services
Website : http://www.kbnepz.com
Construction PT Pembangunan Perumahan

PP is a leading company in designing and constructing high-rise buildings and also other civil
works (fossil power plant, dam, tunnel, port and cable bridges). ISO 9001 : 2000 certified, the
first Indonesian contractor earning this certificate in 1994.
Website : http://www.pt-pp.com
Revenues : Rp n/a bn Profit : Rp 20 bn (financial report of 2002)

Transport Perum PPD

Bus public transportation services in DKI Jakarta and its surrounding area.
Website : N/A
Industrial Est. PT Jakarta Industrial Estate Pulogadung

Selling and renting land industry and its supporting services
Website : www.jiep.co.id
Construction PT Waskita Karya

General civil works contractor engaging in roads, bridges, harbors airports, buildings, sewer-
ages, cement and power plants, factories and other industrial facilities.
Website : http://www.waskita.co.id
Construction PT Nindya Karya

Engineering, general construction and real estate.
Website : N/A
Construction PT Istaka Karya

Headquarters : DKI Jakarta; founded : ca.1980
Originally set up as PT Indonesian Consortium of Construction Industries, for large projects
mainly in Indonesia, but also in Saudi Arabia. In 1986, changed its company name to Istaka
Karya, active in general contracting and constructing services.
Website : http://www.istaka.net
Industrial Est. Kawasan Industri Jababeka

Headquarters : DKI Jakarta; founded : ca.1990 (private company)
1,300 ha industrial estate operation to the east of Jakarta. The site's major components include
the Jababeka Industrial Estate (JIE), the Cikarang Baru Kota Hijau residential community and
will also include a high technology park.
Website : http://www.jababeka.com
Consulting PT Indah Karya

Headquarters : Bandung City, West Java; founded : 1961
Provides construction services, including surveying, planning, design, engineering and project
management. Core business are government projects, but it will also associate for private-
sector projects.
Website : http://www.indahkarya.co.id
Railways PT Kereta Api Indonesia

Headquarters : Bandung City, West Java
Train services for passangers and goods.
Website : http://www.kereta-api.com
Guidebook page 151

EU – Asia-Invest
Water Perum Jasa Tirta I

Headquarters : Malang City, East Java
Providing services for water management, water resources management, and managing its wa-
ter infrastructure for Brantas and Bengawan Solo river
Website : http://www.jasatirta1.go.id
Construction Bukaka Teknik Persada

Headquarters : Cileunsi, Bogor, West Java (private)
Services for design and engineering, construction and manufacturing related to infrastructure
sector particularly in the energy, transportation and telecommunication fields. Specialisations in
steel construction, airport equipment and machinery for construction.
Website : www.bukaka.com
Industrial Est. PT Kawasan Industri Medan

Headquarters : Medan City, North Sumatera
Selling and renting land industry and its supporting services
Website : N/A
Water Perum Jasa Tirta II

Headquarters : Purwakarta District, West Java; founded : 1999
Sales of hydro-power and water from the West Java Jatiluhur dams.
Website : http://www.jasatirta2.co.id
Transport Perum DAMRI

Inter-city bus transportation services
Website : http://www.damri.co.id
Construction PT Brantas Abipraya

Constructors services in Civil Engineering, Mechanical-Electrical and Maintenance. Rental of
construction equipment.
Website : N/A6
Shipping Angkutan Sungai Danau & Penyeberangan

Shipping transportation services and ferry terminal management
Website : http://www.ferry-asdp.co.id2
Consulting PT Virama Karya

Technical and management consulting services.
Website : N/A
Industrial Est. PT PDI Pulau Batam

Headquarters : Batam City; founded : 1973
Warehousing, Expedition and Documentation, Transportation and Loading Services
Website : http://www.perserobatam.go.id

Construction PT Amarta Karya

Headquarters : Bekasi District, West Java; founded : 1962
Construction in civil works, including steel structures and Mechanical & Electrical, as well con-
struction service delivery. Certified ISO 9001:2000.
Website : http://www.amartakarya.com
Industrial Est. PT Kawasan Industri Wijaya Kusuma

Headquarters : Semarang City, Central Java
Selling and renting land industry and its supporting services. Shareholders: Central Gov. (60%);
East Java Province (30%); Kab. Cilacap (10%)
Website : N/A
Shipping
Pelayaran Bahtera Adiguna
Shipping transportation and supporting services, such as training and education for shippers,
consultancy, expedition, forwarding, etc.
Website : http://www.bahteradhiguna.co.id
Revenues : Rp 97 bn Profit : Rp -1 bn (financial report of 2003)
Telecoms Excelcomindo Pratama

Headquarters : DKI Jakarta; founded : 1996 (private)
Providing GSM cellular network service in Indonesia by using a GSM 900 technology base
which was subsequently complemented with a 1800 technology base
Website : http://www.xl.co.id
Shipping Pelayaran Nasional Indonesia

Headquarters : DKI Jakarta:
Shipping transportation, especially passanger shipping
Website : http://www.pelni.co.id
Guidebook page 153

EU – Asia-Invest
Annex 3.
Selected List of Consulted Persons, Compa-
nies and Institutions.
A full list of European companies present in Indonesia can be accessed via the directory
of Eurocham : “EuroBusiness 05; European Indonesian Business Directory 2005”
(www.eurobusinessindo.com).
ADPI (Association of Indonesian Fund Pension)

Drs. H. Satino, chairman
Email : n/a
Alcatel Asia Pacific
Christian Reinaudo, President
Email : [email protected]
Alcatel Indonesia
Jan Glinski, President Director
Alstom
Kus Prakoso, Business Development Manager
Amsterdam Schiphol Airport
Mr. A J Vogels
Email:[email protected]
Bank BNP PARIBAS Indonesia, PT
Francois FICHAUX, President Director, Country Manager for Indonesia Email: jean-
[email protected]
Bank Indonesia
Miranda S. Goeltom, Senior Deputy Governor
BAPPENAS
Dr. Ir. Suyono Dikun, MSc, Deputy Minister of Infrastructure
BCEOM
Oliver Bechet, Country manager for Indonesia
Email: [email protected]; [email protected]
Bouygues Construction
Dominique Gazal (Ms), Vice President Business Development for A
Bukaka Marga Utama, PT
Handoko P. Anggraito, Chief Operating Officer
Email : n/a
Calyon
Pierre Zerdoun, Country Manager
Degremont (Indonesia), PT
Eric Van Den Berghe, President Director

Directorate General Electricity & Energy Utilization

Yogo Pratomo, Director General
Email : n/a
EKONID
Jan Ronnfeld, Director
Embassy of the Federal Republic of Germany
Wolfgang Piecha, Minister Counsellor, Deputy Chief of Mission, Head of Economic Section
Ericsson Indonesia, PT
Gaspar Woza, Manage Services Task Force Global Services - South East Asia Region
Fratekindo, PT
Alain Pierre Mignon, President Director (Chairman of IFCCI)
German-Indonesian Chamber of Industry and Commerce
Jan H. Ronnfeld, Managing Director
Glendale Partners
Rod Williams, Director
Glendale Partners
Scott Younger, Commissioner
Groupe Agence Francaise De Developpement
Roger Goudiard, Director – Asia Department
Halcrow Group Ltd
Indro Harry, Country Manager
HSBC Securities Indonesia, PT
Eddy Soeparno, Director and Head of Cooperate Finance and Advisory, Indonesia
INA (Indonesia Netherlands Association)
Elmar Bouma,
International Finance Corporation (IFC)
German Vegarra, Country Manager
International Finance Corporation (IFC)
Saud Siddique, Principal Investment Officer –Infrastructure, East Asia & Pacific Department
Jardine Matheson
Leonard van Hien, Country Chairman
KKPPI
Bambang Susantono, Ph.D., Asst. to the Deputy for Transportation & Telecommunication Infra-
structure Development
Ministry of Energy & Mineral Resources
Luluk Sumiarso, Secretary General
Email : n/a
Motorola Inc
Amit Sharma, Vice President
Guidebook page 155

EU – Asia-Invest
Mott MacDonald Indonesia, PT

David Parry, President-Director
Email : [email protected]; [email protected]
ONDEO Services
Bernard Lafrogne
Paiton Energy, PT
Ronald P. Landry, President Director
Perusahaan Pengelolaan Aset, PT (State-Owned Asset Management Company)
Raden Pardede, Vice President Director
Pirelli Cables ASEAN
Mr. Stefano Poli, Chief Executive Officer
Pirelli
Luigi Carlo Gastel, General Representative, Regional Representative Office Indonesia
PLN
Bambang Hermawanto, Deputy Director for System Planning
Rolls-Royce International Ltd
Mike F. grey, Regional Director-Indonesia
Royal KPN N.V.
Drs. Nico Noort, Senior Advisor Europen Affairs
Email: [email protected]; [email protected]
RWE Power Aktiengesellschaft
Manfred Lang
RWE Solutions Indonesia
Iwan Surjosukotjo, Chief Representative
Siemens Indonesia, PT
Juergen Lagleder, President Director & CEO
Sofrecom
Frederic Huet, President Director
SUEZ
Pascal Roger
Thales
F. Honore, Delegate for Indonesia
Thames PAM Jaya
Ian Menzies, Head of Structured Finance, International Region
Thames PAM Jaya
John Trew, President Director
The Hongkong and Shanghai banking Cooperation Limited
Mervyn Fong, Deputy Chief Executive Officer

The Jardine matherson Group

Leonard van Hien, Chairman
The University of Indonesia
Prof. DR. Dorodjatun Kuntjoro-Jakti
The World Bank
Keshav Varma, Sector Director
Email: Kvarma @WorldBank.org
The World Bank
Migara Jayawardena, Senior Infrastructure Economist, World Bank office, Jakarta
Total E & P Indonesie
Roland Festor, President & GM
Tractebel
Katja Damman, External Communication Department
Vivendi Water Systems
Jean de Vauxclairs,--
WMD Water Waterleidingmaatschappij Drenthe
K.J. Hoogsteen, Director
WSP International
Michael Ellis, Country Director
Email : [email protected]; [email protected]
Guidebook page 157

EU – Asia-Invest
Annex 4.
Bibliography and Sources of Information.
ADB (2002)
Regulatory Framework for Private and Public Water Supply and Wastewater Enterprises. Design of a Regulatory and In-
stitutional Strategy (Final Interim Report).
Jakarta : ADB (Shaw, Stone & Webster Consultants)
AIRPORT (2005)
The Flight to Boosting Mobility - Strategic Direction for the Airport Sector in Indonesia.
(Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January; paper for discussion purposes)
ANNUAL ECONOMIC REPORT (2004)
Annual Economic Report December 2004. Accelerating the Momentum of Economic Growth.
Jakarta : Coordinating Minister of Economic Affairs
ANWAR, J. (2005)
Indonesia Infrastructure Summit 2005.Bridging the Financing Gap.
Jakarta : Ministry of Finance of the Republic of Indonesia
(Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)
BAIETTI, A. (2001)
Private Infrastructure in East Asia. Lesson Learned in the Aftermath of the Crisis.
Washington, D.C. : World Bank
BAIRD, M. (2005)
Infrastructure Development in East Asia : Lessons for Indonesia.
Jakarta : World Bank
BAPPENAS (2004)
List of Projects and Technical Assistance Proposals.
Jakarta : Ministry of National Development Planning / National Development Planning Agency
BAPPENAS (2005)
Indonesia : Notes on Reconstruction. The December 26, 2004 Natural Disaster.
Jakarta : Bappenas
BAPPENAS (2005a)
Indonesia : Preliminary Damage and Loss Assessment.
Jakarta : Bappenas
BAPPENAS (2005b)
Infrastructure Road Map.Strategic Initiatives to Accelerate Infrastructure Development in Indonesia.
Jakarta : State Ministry of National Development Planing / Bappenas
BKPM (2005)
Trend of Investment Approvals & Permanent Licences, Januari 2005.
Jakarta : Biro Perencanaan dan Informasi Badan Koordinasi Penanaman Modal
(Monthly Report)
BPS (2000)
Building Construction Statistics for Member of the Indonesian Contractors Association 1998.
Jakarta : BPS-Statistics Indonesia
BPS (2000a)
Building Construction Statistics for non Member of the Indonesian Contractors Association 1998.
BPS (2000b)
Economic Indicators August 2000.
BPS (2000c)
Expenditure for Consumption of Indonesia Per Province 1999.
BPS (2000d)
Welfare Indicators 1999.
BPS (2001)
Hasil Sensus Penduduk tahun 2000.Estimasi Fertilitas, Mortalitas dan Migrasi.
BPS (2001a)
Statistical year book of Indonesia 2000.

BPS (2002)
Construction Statistics 2001.
BPS (2002a)
Proyeksi Penduduk Indonesia per Propinsi. Menurut kelompok umur dan jenis kelamin 2000 - 2010.
BPS (2003)
Statistical year book of Indonesia 2003.
BPS (2003a)
Environmental Statistics of Indonesia 2002.
BPS (2003b)
Proyeksi Angkatan Kerja Indonesia 2003 - 2010.
BPS (2003c)
Transportation and Communication Statistics 2002.
BPS (2004)
Construction Statistics 2003.
BPS (2004a)
Economic Indicators November 2004.
BPS (2004b)
Expenditure for Consumption of Indonesia Per Province 2004.
BPS (2004c)
Labor Forces Situation in Indonesia August 2003.
BPS (2004d)
Laporan Perekonomian Indonesia 2003.
BPS (2004e)
Welfare Statistics 2004. National Socio-Economic Survey.
CALLAHAN, T. (ed.) (2001)
Lights on / Light out. Indonesia Energy Future. Conclusions Paper.
(Conference at Grand Hyatt Jakarta, 19 June 2001 organised by CastleAsia and Indonesian Business Club)
FULLER, D.E. (2005)
Mobilising Capital for Domestic gas Supply under the Constraints of Customer Credit Quality or " Credit Where Credit is
Due ".
(Paper presented at: IndoGas 2005, the 2nd International Conference & Exhibition, Jakarta Convention Center, 17-20
January 2005)
GOELTOM, M. (2005)
Indonesian Macroeconomic outlook and Financial Institution's View on Indonesia Country Risk.
nd
(Paper presented at: IndoGas 2005, the 2 International Conference & Exhibition, Jakarta Convention Center, 17-20
January 2005)
HARRIS, C.; HODGES, J.; PADMESH SHUKLA (2003)
Infrastructure Projects - A Review of Canceled Projects.
Washington DC : World Bank
(PPI Advisory Facility, Note Number 252, January 2003)
HARRIS, E. (2003)
Private Participation in Infrastructure in Developing Countries. Trend, Impact, and Policy Lessons.
HASTINGS, A. (2005)
Opportunities/Challenges for Domestic Gas Commercialization in Indonesia.
Jakarta : PT Indomedia Gemilang Komunikasi
nd
(Paper presented at: IndoGas 2005, the 2 International Conference & Exhibition, Jakarta Convention Center, 17-20
January 2005)
IBBA (ca. 1999)
Infrastructure Indonesia. A Study. 1997-8.
Jakarta : IBBA
INDUSTRIAL ESTATES (ca. 1996)
Directory 1994 - 1995 Guide book for Investor. Indonesian Industrial Estate and Export Processing Zone.
Jakarta : Indonesian Industrial Estate Association
Guidebook page 159

EU – Asia-Invest
INFRASTRUCTURE AGENDA (2004)

100-day Infrastructure Agenda of the United Indonesia Cabinet.
in: Media Infrastruktur, Vol.1 No.5, Nov.-Dec. 2004, pp.4-6)
INFRASTRUCTURE DEVELOPMENT (2005)
Infrastructure Development in Indonesia. Investment Opportunities. Supplementary Information
(Publication presented at the Infrastructure Summit 2005, Jakarta, 17-18 January)
INFRASTRUCTURE DEVELOPMENT (2005a)
A Perspective on Infrastructure Development in Indonesia.
INFRASTRUCTURE DEVELOPMENT (2005b)
Infrastructure Development in Indonesia. An Investment Opportunity.
INVESTMENT (ca. 2005)
Indonesia : Scaling Up Private Investments in the Power Sector A Risk Management Framework.
Jakarta : Draft for Discussion
IRAWAN, P.B. ; IFTIKHAR, A.; ISLAM, I (2000)
Labour Market Dynamics in Indonesia. Analysis of 18 Key Indicators of the labour Market (KILM) 1986-1999.
Jakarta : International Labour Office - Jakarta
IUIDP (ca. 1990)
Instructions for Using the 1988-1989 IUIDP Manual.
Jakarta : Ministry of Public Works; the Second Permanent Working Group for Programme Implementation Urban Devel-
opment Coordinating Team
JAMSOSTEK (2004)
Annual Report 2003. PT Jamsostek (Persero).
Jakarta : PT Jamsostek (Persero)
KPPOD (2003)
Regional Investment Attractiveness, 2003. A Survey of Business Perception.
Jakarta : Regional Autonomy Watch (KPPOD), The Asia Foundation
KUSUMA, A. (2005)
Impact of the Indonesia Regulation for the New Oil and Gas Law to the Indonesia gas Business Opportunities.
January 2005)
LERCHE, D. (1999)
Industrial Estates in Indonesia. A Guide for the Investor.
Koln (Germany) : DEG
MERRILL, S. and SOEROTO, E. (2001)
Improvements in the Housing Finance Sector.
Jakarta : Republic of Indonesia Ministry of Settlements and Regional Infrastructure
(Project Report)
PEUI (2004)
Indonesia Energy Outlook & Statistics 2004.
Depok (Indonesia) : Pengkajian Energi Universitas Indonesia Universitas Indonesia (PEUI)
PGN (2004)
Annual Report 2003. Gas Negara.
Jakarta : PT Perusahaan Gas Negara (Persero)
PGN (2005a)
Duri - Dumai - Medan Phase I - Gas Transmission Project.
Jakarta : PT Perusahaan Gas Negara (Persero)
PRIVATIZATION (2001)
National Privatization Conference. Conclusions Paper.
(Conference at Regent Jakarta, 2 October 2001, organised by CastleAsia and InterMatrix Communications)
PUBLIC WORKS (2005)
Regulatory Reform and Potensial - Private Investment in Toll-Road.
Jakarta : Minister of Public Works
PUBLIC WORKS (2005a)
Regulatory Reform and Potential Private Investment in Water Supply and Sanitation.
Jakarta : Minister of Public Works Republic Indonesia
(Paper Presetation on the Infrastructure Summit 2005, Jakarta, Januari 17-18)
PUBLIC WORKS (2005b)
Toll Road Investment Opportunities in Indonesia.
Jakarta : Directorate General of Ministry of Public Works
RADELET, S.; SACHS, J. and JONG-WHA LEE (1997)
Development Discussion Papers.Economic Growth in Asia.
USA : Harvard Institute for International Development

RANTETODING, PATANA. (2005)

Policy Program, and Public-Private Partnership Opportunity in Water Supply Development in Indonesia.
Jakarta : Ministry of Public Works
REGULATORY REFORM (2005)
Regulatory Reform for Securing Certainty and Predictability.
Jakarta : Ministry of justice and Human Rights
RIAU (2004)
Presentation to the Gubernur Riau - Pekanbaru-Dumai Toll Highway Indonesia.
(Report produced by Kumpulan Darul Ehsan Berhad, Selangor-Malaysia and presented on 20 January 2004)
RIAU (2004a)
Presentation to Gubernur Riau - Water Supply Project - Riau Province, Indonesia.
(Report produced by Kumpulan Darul Ehsan Berhad, Selangor-Malaysia and presented on 20 January 2004)
RIAU (2005)
Laporan Gubernur Riau pada Infrastructure Summit 2005.
(unpublished document)
SCOTT, B. (2005)
Future Gas Utilisation in Indonesia : Regulation Beyond the Upstream Sector.
January 2005)
SEAPORTS (2005)
The Voyage to Increasing Trade - Strategic Direction for the Port Sector in Indonesia.
(Paper presented at the Infrastructure Summit 2005, Jakarta, 17-18 January; paper for discussion purposes)
SUGIHARTO (2005)
Indonesia Infrastructure Summit : "Public Private Partnership for Infrastructure Development".
Jakarta : Ministry of State-Owned Enterprises, Republic of Indonesia
SUKARMA, R. and POLLARD, R. (2002)
Indonesia - Overview of Sanitation and Sewerage Experience and Policy Options.
Jakarta : World Bank (Urban Development Sector Unit Indonesia, Country Management Unit, East Asia and Pacific Re-
gion)
TRANSPORT (1997)
Sector Summary : Transport Infrastructure in Indonesia.
Jakarta : British Embassy, Jakarta
UNITED NATIONS (2005)
Indian Ocean Earthquake - Tsunami 2005. Flash Appeal.
New York : United Nations
WHITELEY, D.E. (2001)
Mortgage Insurance Feasibility Analysis Indonesia.
(Project Report)
WIDIARTO and HOEK-SMIT, M. (2001)
Institutional Arranggement and funding Mechanism for Housing Assistance Program.
(Project Report)
WMD (2004)
In close Cooperation - A Framework for the WMD project "Drinking water supply East Indonesia”.
(Unpublished report for Waterleidingmaatschappij Drenthe NV (WMD), Assen, the Netherlands, Version 1, Augsut 2004)
WORLD BANK (2003)
Indonesia Country assistance Strategy for years 2004 - 2007.
WORLD BANK (2003)
The Water Resources Sector Strategy : An Overview.Managing and Developing Water Resources to Reduce Poverty.
WORLD BANK (2003)
Urban Poverty in East Asia a review of Indonesia, the Philippines and Vietnam.
WORLD BANK (2004)
Combating Corruption in Indonesia. Enhancing Accountability for Development.
WORLD BANK (2004)
World Development Report. Making Service Work for Poor People.
WORLD BANK (2005)
Indonesia : New Directions.
(The World Bank Brief for The Consultative Group on Indonesia, January 19-20, 2005)
Guidebook page 161

EU – Asia-Invest
WORLD BANK (2005a)

nd
Averting an Infrastructure Crisis. A Framework for Policy and Action. 2 Edition.
Jakarta : World Bank (East Asia and Pacific Regon Infrastructure Department)
WORLD BANK (2005b)
Connecting to Economic Growth. Strategic Priorities for the Telecommunication in Indonesia.
Jakarta : World Bank, JBIC, ADB
(Infrastructure Policy Brief)
WORLD BANK (2005c)
Energizing Economic Growth. Strategic Priorities for Power Gas Sector in Indonesia.
WORLD BANK (2005d)
Indonesia : Averting an Infrastructure Crisis.
WORLD BANK (2005e)
Making Economic Growth Flow. Strategic Priorities for Water Suplpy & Sanitation in Indonesia.
WORLD BANK (2005f)
The Road to Economic Growth. Strategic Priorities for the Road Sector in Indonesia.
WORLD BANK (ca. 2001)
Private Infrastructure - A Review of Projects with Private Participation, 1990 - 2000.
Washington D.C. : World Bank
(PPI Advisory Facility, Viewpoint)
YUSGIANTORO, P. (2005)
Gas Regulation and Utilization in Indonesia.
Jakarta : Department of Energy and Mineral Resources
YUSGIANTORO, P. (2005a)
Policy Reform and Priority Infrastructure Projects for Private Participation.
Jakarta : Department of Energy and Mineral Resources

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Investing in Indonesian Infrastructure

A Guidebook for European Companies

Consultants and Authors of this Report:

The Asia-Invest II Programme is an initiative of the European Commission to promote and

The European Business Chamber of Commerce in Indonesia (Eurocham) was established in

EUROCHAM - The European Business Chamber in Indonesia

The 2005 – 2009 agenda.

The legal and regulatory framework for investment in infrastructure

Water and sanitation

EU’s position in the Indonesian infrastructure sector.

Key issues in enhancing investment in infrastructure.

Recommendations for prospective EU investors.

II. Table of Contents.

Chapter 1. Indonesia’s Economy: Review and Outlook. ......................................................... 15

Chapter 2. Infrastructure Investment in Indonesia. ................................................................. 27

Chapter 4. Sector Profiles. ...................................................................................................... 59

Chapter 5. Positioning of EU companies in the Infrastructure Sector. ................................. 101

Chapter 6. Key Issues in Enhancing Investment in Infrastructure......................................... 105

Chapter 7. Recommendations for Prospective European Investors. .................................... 109

Annex 1. Legal and regulatory framework............................................................................. 115

Annex 2. Directory of Major Indonesian Companies in the Infrastructure Sector.................. 148

Annex 3. Selected List of Consulted Persons, Companies and Institutions.......................... 154

Annex 4. Bibliography and Sources of Information. .............................................................. 158

III. List of Acronyms.

1. The 2005 Agenda : From Recovery to Reconstruction.

Table 1-1. Macro-Economic Indicators. (various sources)

1.2 Goals of the New Cabinet versus External Expectations.

Figure 1-1. (Standard and Poor; OECD)

Regional Sovereign Credit Ratings and Country Risk

CCC CCC Indonesia 7

Box 1-2. Long-term issues :

Figure 1-2. (Various Sources)

tion and investment declined. Meanwhile, Indonesia’s manufacturing competitiveness vis-à-

Figure 1-3. (World Bank 2005)

policy uncertainty PMA

finance tax administration

Table 1-3. Investment Indicators. (Various Sources)

Box 1-3. Compounded problems.

1.4. Bright Spots.

Jakarta Stock Exchange Indices

surges have been speculative, with regard

Indonesia Export-Import Balance

1.5. Present Budgetary and Monetary Conditions.

Box 1-4. Government Debt versus Private-Sector Debt.

1.6. In Short: Which Boom Next ?

• households and firms will also 200%

need to invest in education and 150%

the young, while experience of 50%

liability on human capital devel- 1992 1995 1998 2001 2004

2. The 2005-2009 Agenda: an Outlook.

Box 1-5.The Government Programme (2004-2009) (Bappenas 2005)

Improving Accelerating Infrastructure In- Support and Widen Rural Devel-

2.2. Work Ahead: Improving Indonesia’s Fundamental Structure.

Text Box 1-6. The on-going transformation of the Indonesian economy.

1. Rationale for Private Investment in Infrastructure Development.

Table 2-1. Indonesia’s Service Provisions Compared (World Bank 2005a)

household” suggest. Especially in high-density areas, for instance in Java, such

Table 2-2. Development Spending in Indonesia (World Bank 2005a)

1994 2002 2004*