September 9, 2010 5:37 pm

Japan and Indonesia share an intimate bond

 
Construction workers build a new highway in Indonesia

Going up: construction workers build a new highway in Indonesia. The country’s failing infrastructure remains a concern for investors

At the foot of the Argopuro mountain range in Indonesia, construction has started on a $1.2bn thermal power plant that will supply electricity to some of the most densely populated islands on Earth. PT Paiton Energy, partly owned by Mitsui & Co and the Tokyo Electric Power Company, is building the 815MW Paiton expansion in East Java with funding from the Japan Bank for International Cooperation and a consortium of Japanese lenders.

For decades, Japan’s business in Indonesia has been driven by demand for natural resources – natural gas, coal and oil – and heavy manufacturing, mostly of motorcycles, cars and machinery. Roughly 80 per cent of Japan’s investment between 2007 and 2009 was in those sectors, according to Indonesia’s Investment Coordinating Board.

Japan has been the largest foreign investor in Indonesia, with $21.5bn invested between 1990 and 2009, according to the board.

While those industries are still important, many Japanese companies are positioning themselves to tap new consumer growth opportunities, such as electricity, in one of the world’s strongest emerging economies, Japanese trade officials say.

Under an agreement signed with the Indonesian government in March, Paiton will build the power plant and supply the national grid for 30 years, a period when demand is projected to rise by an annual 9 per cent, fuelled by the country’s robust economic expansion. The project also fits into the Japanese government’s aim to support more environmentally friendly technology.

Japan has one of just six bilateral trade agreements with Indonesia, where there are now more than 1,000 Japanese projects under way, worth more than Y2,700bn ($30bn).

Large portions of Japanese investment flow through the JBIC, the government’s international finance arm, which issued $2bn in loans after the 2008 global financial crisis. It funds import and export loans to all sizes of companies, and provides political risk guarantees on investments.

By the end of March, the JBIC had Y734bn in outstanding loans, making Indonesia the largest recipient, ahead of Russia, the US and Brazil.

When capital for new business evaporated during the 1997-98 Asian financial crisis and Indonesia’s banking system collapsed, the JBIC stepped into the void.

“At that time, we provided huge support to Indonesia,” says Takanori Satake, the JBIC’s chief country representative. Now “we are also providing a huge amount to power sector and natural resources development”, he adds.

The boom in power-generation projects began in 2006 with an agreement between the JBIC and the ministry of finance to promote independent producers. It made way for billions of dollars in Japanese investment in the sector.

Indonesia suffers from failing infrastructure that scares off some new businesses. Severe power failures have frustrated the manufacturing sector. These concerns – along with corruption, taxation and red tape – remain a major issue, but many fears have faded as Indonesia emerged virtually unscathed from the financial crisis with economic growth of roughly 6 per cent this year.

“Now that Indonesia’s economy is growing again, Japanese companies are showing their interests in Indonesia, especially in consumer goods, motorcycles and automobiles,” says Mr Satake.

Many of those manufacturers, which already make up 90 per cent of the sector in Indonesia, are considering ramping up production facilities. They were encouraged by domestic automotive sales that soared by 75 per cent in the first half of 2010.

Trade between Japan and Indonesia reached $28.4bn last year, making Japan a larger partner than China, at $25.5bn, or the US, at $17.9bn. Japan sources most of its coal and liquefied natural gas from Indonesia, while Indonesia imports large quantities of electronics.

Gita Wirjawan, the chairman of Indonesia’s Investment Coordinating Board, says the bilateral relationship puts Japan in a unique position. “Japanese investors have long understood Indonesia intimately, both its growth potential and opportunities for investment, as well as its risks,” he says.

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