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Financing Complex Projects in Indonesia

Indonesia-Belgium Maritime Summit

Jakarta, 16 March 2016

Rio Praaning Prawira AdiningratManaging Partner PA Europe

Managing Partner PT PA CSR/PA Asia Jakarta

Secretary General Industrial Dialogue Group

Adviser on Port and Infrastructure Development

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Some PA Signature Projects

• Support to multi-billion greenfield and brownfield investment projects including Port of Sohar/Oman, LNG terminal/Wales, Mining/Indonesia

• Major M&As including AB InBev, DSM, KLM

• Prevention of a ban on fish imports into the EU from Indonesia

• Repairing the EU-Indonesia airline ban

• 20 years of regulatory-political-ICV-CSR support to many industrial sectors

• Preparing holistically integrated agri-infra port project in South West Java

• Innovative rDNA, energy, water, food, feed, etc projects throughout EU and China incl Melamine crisis, AMR crisis

• High tech projects in Russian incl Lifting of SSN Kursk

Where is Economic Growth?

European Commission Vice-President Katainen:

“90% of Global Economic Growth is Outside the EU”

Hearing at European Parliament, 7 October 2014

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8 trlUSD

31,11

in tn USD*

Inside theEU

Outsidethe EU

*source: Studies by McKinsey and four other sources as quoted in an external working paper of the EIB

Infrastructure Projects

Inside and Outside the EU in the Next 10 Years

• The Asian Development Bank has estimated that the East Asia region needs infrastructure investment of $8tn over the next decade

• The Indonesian Sea lanes/port projects include 53 bn USD

High-Level Roundtable on Global Infrastructure Investment Strategy: Integrated All-Stakeholder Road to Profitability and Peace

24 February 2016, Belgian Senate, Brussels

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Extra EU funding/guarantees for Infra Investment in Indonesia?

“Rule based investments in a level playing field are the background for the European Council Decision of March 2014 to strengthen the European companies' internationalisation and competitiveness. … in open consultation and cooperation with both our Atlantic and Asian partners. ..The time of inward looking should be over. “

EU Council President Emeritus Herman Van Rompuy, IDG High-Level Roundtable, 24 February 2016

“Indonesia is craving for high-quality European investment. We will change the tendering criteria so that the long-term economic value of European infrastructure investment will weigh more against the low short-term cost of investment by certain other countries. Indonesia and many other countries need European investment, with no geopolitical interest but instead with high In-Country Value and indeed ethics for the receiving country and positive return on investment for European companies.”

HE Dr Rizal Ramli, IDG High-Level Roundtable, 24 February 2016

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“We currently prioritize a free trade agreement with the EU over TPP with the US, we appreciate your support.”

HE Dr Rizal Ramli in discussion with Belgian Finance Minister HE Johan Van Overtveldt, IDG High-Level Roundtable, 24 February 2016

Lijst PwC met plaats Indonesia in 2050

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“... But ... European companies cannot go alone to countries like Indonesia....

...Therefore we ask them to build up strategic alliances with Indonesian companies, state owned or private, and to apply for tenders together....

This way they can cut down on the costs, making themselves more competitive, and create more In-Country Value and long-term sustainable development for Indonesia.”

HE Dr Rizal Ramli, IDG High-Level Roundtable, 24 February 2016

Multistakeholder Approach

Integrated Partnering/Funding Models

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Global and Regional Requirements

Food Safety and Food SecurityClean Water

Clean AirLow Carbon Economy

Interconnectivity/Market AccessRoad/Port Connections

Holistically Integrated All Food Chain ApproachFocused Education and Training

Enabling Authorities/CSR/Individual Responsibility

Indonesia’s offer

In the middle of Growth

• 255,46 million people (National Bureau of Statistics 2015)

• GDP 2,554 billion USD by PPP, 2014 (PWC Feb 2015)

• Annual GDP growth 5,73 percent in the last ten years.

(World Bank)

• World’s 4th largest economy by 2050 (PWC, Feb 2015)

• Median age 29,6 years old (CIA Factbook)

• ICT and innovation oriented

• World’s 4th largest in mobile phone users (CIA)

• World’s 2nd largest in text messaging

• World’s 4th largest in Facebook users (2014)

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Indonesia’s Ranking for

Infrastructure Funding

• Infrastructure Quality: 2nd among BRIC and 27th among EU member

states

• Doing business: 3rd among BRIC and 29th among EU

• FDI Regulatory Restrictiveness: 2nd in BRIC and 1st in EU

• Repatriation of Capital: 2nd among BRIC and 9th among EU

• Belgian Credit Insurance Agency Delcredere rates Indonesia as

Medium in terms of risk

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Indonesia’s Ranking if in EU

• 29th living cost among EU

• 6th GDP among EU

• 1st in lowest median age among EU

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Indonesia’s strengths

• Median age = 29,6 years old

• Large Productivity Growth Potential

• Large ICT/Innovation Potential

• Large Geothermal Energy Potential

• World’s No.1 Palm Oil Producer

• Large Safe Food Production Potential17

Indonesia’s Vulnerabilities• Lack of infrastructure – CONSTRUCT!

• Lack of legal security – EDUCATION/TRAINING IN EU BRUSSELS

• Lack of protection of investment – NEW INVESTMENT COURT

• Lack of balance between haves and haves not – ICV and CSR

• Weak education and training system – PRIOR EDUCATION/TRAINING

• Ranking low in “Ease of Doing Business Index”: 114 (improving) - PARTNERING

• Indonesian Rupiah dropped more than 18% against the dollar in 2015 - CHEAP

Repair Offers Unique Investment Opportunity

Jokowi Government is Destined to Make It Work

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Funding Indonesian Infra: for instance ChinaThe New Maritime Silk Road: One Belt One Road - OBOR

Six economic corridors

– 1) To the north - China, Russia and Mongolia

– 2) The Eurasia Bridge

– 3) Connecting China with West Asia through Central Asia

– 4) The BCIM Economic Corridor (The Greater Mekong Sub-region and BCIM will also link Yunnan with the Silk Road)

– 5) The China-Pakistan Economic Corridor

– 6) The Maritime Economic Corridor from China to SE Asia and LatAm 19

– Total 1,1 trillion USD to cover future needs through external investment• Projected budget of a.o. AIIB: 100 bn USD; Silk Road Fund: 40 bn USD; ‘Silk Road Gold Fund’: 16 bn

USD…

• 10 bn for India, 45 bn for Pakistan, a whisper of 85 bn for Indonesia

– BUT: Finance offer to OBOR participating foreign countries: • pro-Chinese involvement (Chinese dredgers beat EU dredgers in the Swansea Bay Tidal Lagoon tender

due to privileged UK-China agreement)

• no ‘in-country value’ (Chinese steel makers beat Belgians for lock gates for the Deurganckdok in Antwerp, Belgium)

• acceptance of (local) corruption (the funds include payments for middlemen)

• Chinese companies and workers prioritised

China’s OBOR Financing Model: 1,1 trillion

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21

A J

BIC

FU

ND

ING

EX

AM

PL

EFunding: For Instance Japan –

200 billion USD

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AN

OT

HE

R J

BIC

FU

ND

ING

EX

AM

PL

E

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Contributing to social unrest: exclusion promoted

•After ‘social media revolution’ and ‘Arab Spring’

trend towards instability in all forms of

Governments/societies

•Low income/high unemployment rates neglected

•Training/education deficit neglected

•Human health vulnerabilities neglected

•Negative perceptions neglected

•Negative communications neglected

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In-Country Value vs. Social Unrest (I)

Contributing to In-Country Value: inclusion promoted

• Investment preceded by multi-stakeholder research including

representatives of civic society, science institutions, NGOs, industries,

relevant international organizations and regional/national authorities

• All-inclusive facts and figures are analysed on local health, employment,

food/nutrition, housing, education/training problems and integrated in

ICV/CSR approach

• Multi-stakeholder approach identifies a phased program allowing both a

company’s bottom line and negotiating position and ‘social contract’ with

local citizens optimized while realizing an infrastructure project

• Potential for optimal local indirect or direct employment, improved housing,

city farming, local production catering to industries involved in the

infrastructure project (production of uniforms, tools, food, other services)

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In-Country Value vs. Social Unrest (II)

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• Prepositioning ICV/CSR included Project Proposal at Highest

Levels of relevant Government authority

• Identification Indonesian Partners

• Preparing in situ ICV and CSR incl 3rd party support

• Preparing funding by IFC, ADB, IDB, etc

• Positioning Project at Ministries of Maritime Affairs & Resources,

Transport, Coordinating Ministry of Economic Affairs, Public

Works, Bapenas and Environment

• Invite Chinese/Japanese/Korean/Gulf partners

New Model for Belgian

Infra Investment in Indonesia

New Indonesia-Belgium

Infra Investment Committee

• Proposed Establishment of Indonesia-Belgium Investment

Committee

• Members from Investment and Industries Communities

• Co-Chaired by Senior Former (Prime) Minister

• Ambassadors to Jakarta and Brussels invited to be Honorary

Patrons

• Subcommittees on specific issues such as legal, land, funding,

partnering; organised per sector

• Annual Meeting; Regular Subcommittee meetings through

Internet

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• Boosting Indonesia’s maritime economy and culture by improving the country’s port infrastructures, shipping industry and connections

• 24 new harbours

• 5 deep sea ports, including the Port of Kuala Tanjung (expected to become the biggest port on the Strait of Malacca); also regional initiatives such as Cikalong Port in Tasikmalaya

• General upgrade of port infrastructures

• Potential shortcomings and solutions:

• Lack of a specific fund to support infrastructure development

• International multi-stakeholder partnerships

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The ‘Maritime Axis’

New Economic Stimulus Packages Will Help

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Stimulus package Launch date Main points

1° package 9 September • Boost industrial competitiveness through deregulation

• Curtail red tape

• Law enforcement & business certainty

2° package 30 September • Interest rate tax cuts for exporters

• Speed up investment licensing (in industrial estates)

• Relaxation import taxes on capital goods in industrial estates

and aviation

3° package 7 October • Cut energy tariffs for labor-intensive industries

4° package 15 October • Simplification of the wage system (new formula)

5° package 22 October • Tax relief for asset revaluation

• Eliminate double taxation on real estate/infrastructure funds

• Deregulation of Islamic banking

6° package 5 November • Incentives for planned special economic zones (SEZs)

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• 3 Economic Policies:

1. Deregulation and red-tape curtailing to promote industrial competitiveness

2. Acceleration of strategic projects of national interest

3. Boost investments in the property sector and industrial estate

• Fast-Track Business Licensing for Major Investors (3 hours)– Investors seeking to sink money into industrial estates will be able to secure a principal business

license within just 3 hours

– “super-fast” processing available only for companies seeking to invest more than IDR 100 billion (USD 68 million), employing more than 1,000 people and setting up a base in an industrial estate

– Permit issued under this service include: principal BKMP investment permit, company deed legalized by the Law and Human Rights Ministry and tax identification number (NPWP)

Potential pitfalls: lack of implementation, deregulation ineffective in creating a friendly business environment 29

Most relevant elements for international investors

• Import Duty Facility– Exemption from import duty on the import of machines, goods and materials for

production for a period of 2 years. The imported goods must not be produced in Indonesia (or not available of needed quality/quantity)

– Granted to companies producing goods and services (including telecommunications, public transport, ports)

• Tax Allowance – Reduction of net income of 30% (thirty percent) of the investment, charged for 6

(six) years respectively at 5% (five percent) each year.

– Available for 129 business segments (other conditions apply)

• Tax Holiday – Tax relief facility for a 5 to 10 years period

– Granted to pioneering industries in a number of sectors (metal, oil refinery, machinery, renewable energy, communication). Minimum investment: USD 100 million

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Other existing investment facilities (BKPM)

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• Incentives for Special Economic Zones (SEZs) under 6th package– Investors can get a 20 to 100% tax discount for a duration up to 25 years

– Exemption of VAT for raw material imports

– Goods manufactured in SEZs are exempted from VAT in the domestic market

– Minimum investment required IDR 500 billion (USD 37 M) for a 15% years tax discount, IDR 1 trillion (USD 74 M) for a 25 years tax discount

• Fiscal incentives to encourage the development of industrial estate – Government announced in November new fiscal incentives to promote industrial estate

outside Java

– Fiscal incentives provided by the central government in the form of reductions in or exemption from corporate income tax (PPh), import duties and VAT

– The administration of President Joko Widodo aims to build at least 14 industrial estates outside the island of Java within 5 years to boost economic growth in all parts of the country.

– Total investment required: USD 14 billion. Expected to generate 930,000 jobs31

Incentives for Special Economic Zones and Industrial Estate

Not only multi billion projects...

A less than 100 million USD

potental holistically integrated agri-

infra modernisation project in a

strategically located resource rich

yet underdeveloped area in

South West Java with Gulf-China-

EU involvement

Ideal project to partner for medium

to latrger Belgian ports and

industries

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90 Million USD for a modest Bamboo-based Low Carbon Deep Sea Port at Java’s Promising Fertile and Clean Southern Coast; Expected ROI 10-15 years

• Pre-feasibility support of ADB; detailed economics/technicalities presentation available

• Funding: Islamic Development Bank, Asian Development Bank, International Finance Corporation, possibly EIB

• Off-take: Coverage of Oman’s Long Term Safe Food Security Needs through investment

• Chinese, Singaporean, Thai, Japanese off-take interest• Port of Antwerp?/Ghent?/Zeebrugge?/Port of

Duqm?/Oman Investment?/Construction/Partner Interest• Hinterland Bandung – planned start highway Bandung-Tasik

in 2015• Transparent Multi-stakeholder Landlord Port Management

Kabupaten Tasikmalaya and Sultanate of Oman Ready to Cooperate

“Insha’Allah we shall see the dawn of a new and inspiring

environment for bilateral and international cooperation.

I am committed to make this work. “ --- H. Uu Rushanul

Ulum, Bupati of Tasikmalaya

“This is reported to the Government of His Majesty the

Sultan. With the help of Indonesia’s Ministry of Foreign

Affairs and other departments we shall be able to move

forward effectively and rapidly to mutual benefit.”

--- H.H. Sayyid Nazar Al-Said, Ambassador of Oman for Indonesia

Source: ‘Foreword of Omani Ambassador and Bupati Tasikmalaya’ – Formal Report 14/8/14 High Level Seminar at UNSIL, Tasikmalaya

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Is Belgium ready to join?

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PA Organisational Chart

PA CompaniesPolitical/Regulatory Advice

Strategy DevelopmentImplementation

Strategic Communication

PA International FoundationHumanitarian Aid

EnvironmentSocial and Economic

Development

PA CSRCorporate Social Responsibility

Research/SWOTGlobal VisionLocal Strategy

Local ImplementationInternational Fund Raising

Civil Society Relations

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• The Silk Road is Back

• Indonesia is in the Middle

• Belgian Companies Can Step In

With Experience, Expertise,

Science, Persons and Products

• Bringing in: CSR, In–Country Value

PT. PA CSR Indonesia

Apartemen Eksekutif Menteng, Tanjung Tower, 9th floor, no. 1

Jl. Pegangsaan Barat no. 6-12, Jakarta Pusat 10320, Indonesia

Tel: +62 21 392 20 70, Fax: +62 21 392 16 86

CONTACT

Rio D. Praaning Prawira AdiningratManaging Partner PA Europe

Managing Partner PA CSR/PA Asia Jakarta

Secretary General Industrial Dialogue Group

Adviser on Port and Infrastructure Development

PA in China: No. 2407, Building 4, Taida Times Centre, No. 15 Guanghua Road, Chaoyang District

Beijing 100026, People’s Republic of China Tel: +86 10 8571 8830 / +86 8571 8832

PA in The Netherlands: Lange Voorhout 100, 2514 EJ Den Haag, Tel. +31 70 345 6210

PA in Belgium: Franklinstraat 106-108, 1000 Brussels, Tel. +32 2 735 83 96

PA in Indonesia: Apartemen Eksekutif Menteng, Tanjung Tower, 9th floor, no. 1-4, Jl. Pegangsaan Barat no. 6-12, Jakarta Pusat 10320, Indonesia, Tel. + 62 21 390 63 06