Indonesia's growth story
Published on Apr 21, 2015
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FinanceAsia I 23 October 2014
By Chris Dodd
Indonesia’s growth story, coupled with its challenging topography, is forcing a wave of innovation in the power generation industry while creating huge opportunities for investors.
Asean’s biggest economy by GDP is an archipelago of more than 13,000 islands, with public access to electricity as low as 40% in some urban areas — an issue that holds back business and education.
“In this part of the world, electricity is still considered a luxury,” David Tendian, chief finance officer of Adaro Energy, told FinanceAsia at the company’s Jakarta head office. “We’re still experiencing blackouts.”
According to the Asian Development Bank (ADB), only about 60% of rural Indonesians have access to electricity, compared with 98% in Thailand and 94% in Vietnam.
Joko “Jokowi” Widodo, Indonesia’s president, has pledged to increase electricity generation by a further 35,000 megawatts to help address this.
And it is perhaps with this in mind that Indonesia in April relaxed the rules on foreign investment in power plants with generating capability of more than 10MW, which effectively allows 100% foreign ownership.
Foreign groups such as Sumitomo and Itochu of Japan and Brazil’s Vale operate or have stakes in plants, backed by foreign export banks such as Korea’s Kexim and the Japan Bank for International Co-operation. Sumitomo Mitsui Banking Corporation and Maybank have also provided financing.
More plants are being built to tap into this huge growth area, although some of these have been hit by delays due to land permit wrangles.
Transporting the power
However, transporting the generated power across conventional power lines is not only difficult in many areas but also very costly and can be bogged down in red tape in terms of securing permits to erect poles.
Adaro, a coal miner that has also been developing clean sources of energy, operates coal-fired power plants, an area it aims to expand in. It operates one plant in South Kalimantan, while partnering with J-Power and Itochu on another plant, and Korea EWP on a third.
The deeper move into power comes at a time when coal prices continue to plunge, heaping pressure on coal miners’ profits. Falling coal prices are good for the power generation industry, however, with 87% of Adaro’s production going to the power industry in 2013.
How to distribute this power is a challenge for the industry, which is leading to innovation and solutions that could well create a standard for other markets.
“The power sector is key to sustaining economic growth within Southeast Asia but the challenge power utilities face is in trying to add new generation capacity to meet demand growth and at the same time addressing the transmission and distribution bottlenecks,” Anthony Jude, senior adviser in the ADB’s regional and sustainable development department, told FinanceAsia.
MAXpower, one of Southeast Asia’s largest gas-power specialists, embodies this story with its focus on distributed power — meaning the generation of power locally without need for transmission lines.
Rather than rely on coal or diesel-fired power plants, MAXpower — formerly known as Navigat, based in Jakarta but incorporated in Singapore — uses gas-fired plants, often using locally sourced pockets of natural gas.
“If you go to West Papua — a seven-hour flight from Jakarta — the electrification rate is 40%,” Arno Hendriks, chief executive of MAXpower, told FinanceAsia at his office in Jakarta. “The education system is very poor, the health system is deficient and income is low. You can see there is a clear correlation between electricity consumption and economic development,” he said.
Hendriks is still ebullient following a $12.5 million investment in July from Indonesia Infrastructure Finance, a collaboration of various entities including Indonesia’s Ministry of Finance, IFC, the ADB and SMBC.
He said the equity injection was helpful but the strategy behind it was that the company wants to be able to sit down with the MoF as partners, while it also potentially opens up access to IFC and ADB funding.
Hendriks is quick to trumpet the “unique” business model, which effectively enables it to sell power generators to convert gas while also producing the end result — electricity.
He said it was a hard sell at first as banks, which mostly refused to buy into the story. Standard Chartered did, however, and the bank has provided financing for the group as well as an investment from its private equity fund.
“Standard Chartered increased its initial $150 million debt facility to $270 million in December 2013. In the next 12-24 months we will need financing again because we are starting to develop larger projects,” Hendriks said.
One of MAXpower’s key selling points, ironically, depends on that great bane of life in Indonesia — infrastructure, or rather the lack of it.
It is a huge opportunity for the group, which effectively depends on places being difficult to reach for conventional power providers.
According to Hendriks, setting up in Sorong, West Papua, is more challenging than setting up in Myanmar because even Yangon has better infrastructure — roads and a port at least — than the outlying parts of Indonesia.
A major challenge with distributed power is the lack of available skills required locally to operate the plants. This was a particular challenge in Sorong, West Papua, Hendriks said, forcing MAXpower to fly 20 to 30 people to Jakarta for training before they could start work.
One non-issue, it would seem, is access to financing with the energy industry as a whole proving a draw for banks and investors. Adaro, for example, underwent its own round of refinancing this year, raising $1 billion in spite of plunging coal prices. “To our surprise we received $9.2 billion in commitments from 14 international banks,” Tendian said. “That was beyond my wildest dreams.”
In spite of being a large diversified energy group, 22% of Adaro’s customers by revenue are domestic, its biggest chunk.
Tendian outlined the challenges of size in terms of building and operating power plants on a large scale. “We have a project to build two plants, which has been delayed for more than two years. We still haven’t cleared the land acquisition,” he said. “To erect one power plant probably takes five to 10 years.”
Two ends of the energy spectrum perhaps but they offer a picture of an industry that has weathered sizeable challenges but which is ultimately adapting to the changing needs and demands of a vast and unpredictable country.
“All the banks still believe in the Asia-Pacific economic growth story. If you believe that, everybody understands the need for power,” Tendian said.
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Indonesian stocks were heading for a record closing high on Friday, as the central bank's interest rate cut further underpinned risk appetite, while the Philippine index extended gains amid a stronger peso and higher large-caps.
Jakarta's composite index rose 0.4% to 5,413.11, above Wednesday's record close of 5,390.45.
Indonesia's central bank cut its benchmark interest rate by 25 basis points to 7.5% late on Tuesday.
It is on course for a third straight weekly gain.
Friday's gains were broad-based, with Bank Rakyat Indonesia and retailer Matahari Putra Prima among the actively traded.
Brokers expect near term profit-taking, with the market nearly overbought, while uncertainty over the Greek debt negotiations keep investors cautious.
The index's 14-day relative strength index was at 66.38, just short of the overbought territory of 70 or above.
"After the euphoria following unexpected Bank Indonesia's rate cut, we may see some profit-taking in the market. Global investors are now focusing on the Greece situation that is reaching injury time," Trimegah Securities said in a report.
The Philippine main index was up 0.3% on the day and 0.67% on the week, a ninth successive week of gains.
The market brought in foreign inflows over the past six sessions which lifted large-caps such as Robinsons Land Corp, stock exchange data showed.
The peso gained 0.1 percent to 44.175 per dollar, its strongest since February 6.
In Bangkok, the benchmark SET index edged up 0.2%, recovering some of Thursday's falls. It is heading for a modest loss on the week after two weeks of gains.
PTT, the country's largest energy firm, rose 0.3%, paring earlier gains. The company reported its worst quarterly loss for the fourth quarter of last year, hit by the plunge in oil prices.
Singapore and Malaysia, which remained shut for the Lunar New Year holidays, ended their shortened trading week up 0.3% and 0.4%, respectively. Vietnam was closed the whole week, and reopens on February 24. – Reuters, February 20, 2015.
How does an individual choose to pursue tertiary education in Indonesia in an era of mass tertiary education? What factors affect this decision? In this article, we analyze the determinants of access to tertiary education in Indonesia from the demand side using household survey data. We also examine the impact of regional and family background factors on inequity of access to tertiary education. In order to analyze the demand side factors for tertiary education, we use a multi-nominal logit model to examine what factors influence an individual’s decision to pursue a sarjana (bachelor’s) program,diploma program, or work after s/he graduates from high school. The data used is from the fourth Indonesia Family Life Survey (IFLS4) which was conducted by the RAND Corporation and others between 2007 and 2008. Key findings of the analysis are as follows: (1) the education level of the head of household and family income per household member have significant positive effects on the choice of pursuing tertiary education; (2) in urban areas, the education level of household spouse and students’ test scores in high school are positively significant; (3) living in urban areas per se does not have a correlation with entry into tertiary education; (4) access to bachelor’s programs for urban residents is most likely affected by the family background factors; (5) holding everything else constant, the tendency is for females to enroll in diploma programs, but not for bachelor’s programs.