Eastern promise: Working to attract further investment into East Java

With the province’s GDP growth hitting 6.49% in the third quarter of 2013, outpacing the national rate of 5.62%, it is clear that East Java’s commitment to boosting foreign and domestic investment is paying off. To support investors, the East Java branch of the Indonesia Investment Coordinating Board (BKPM) offers a one-stop service, which allows business licences to be issued within just 14 days in 2013, down from 17 days the previous year. However, it should be noted that this service is currently only available to domestic companies; all foreign companies seeking to invest in East Java have to apply through the BKPM’s head office in Jakarta.

Leading From The Front

To further maximise domestic potential and mitigate the effects of the global economic slowdown, the East Java provincial government is focusing on expanding inter-province trade and commerce via the establishment of 24 representative offices across Indonesia. However, the government will also continue to look abroad as well, focusing primarily on neighbouring Asian and Oceanic markets through its existing offices in Japan, South Korea, China and Australia.

Given the province’s location, the development of multiple new port and shipping terminals remains a goal, although the strategic focus of both the BKPM and the provincial government increasingly centres on connecting the second- and third-largest strands of the local economy. According to Statistics Indonesia, these consist of the manufacturing industry (26.79% of GDP) and agriculture (16.46% of GDP), whose mutual development should stimulate the entire economy and enfranchise the province of 38.05m people’s young yet underutilised workforce.

With regards to agriculture, reliable production of horticultural commodities, particularly during the high-demand Ramadan and Eid Al Fitr periods, has also contributed to helping the province to reduce overall inflation. In August 2013 East Java’s inflation rate was 8.06%, which is lower than the national average of 8.79%, according to figures from Bank Indonesia, the country’s central bank.

Higher Yields

With aspirations of becoming a centre for agricultural activity, the government is targeting investment in compatible downstream industries, such as food and beverage factories, which will in turn have multiplier effects for the local economy. With an estimated 14% of the province’s population living below the poverty line at the end of 2013, the government is now committed to reducing this at the ambitious but achievable rate of one percentage point per year.

Cargill’s $100m investment in a plant in Gresik, East Java, which is scheduled to start production in mid-2014, is a good example of the sort of investment the government aims to attract. The factory, which is the first of its kind in Asia, will be capable of processing around 700,000 tonnes of cocoa beans annually into products such as butter, powder and liquor. In terms of the positive effects that will be felt within the province, Cargill will double existing purchases from local farmers and also aims to train 1300 smallholders by 2015 by setting up educational centres, a move that is expected to improve cocoa bean quality, integrate best practices and boost yields.

Furthermore, state-controlled fertiliser company Petrokimia Gresik has announced plans to set up a new ammonia and urea production plant in the same area; the facility will cost an estimated $580m and should be completed by mid-2016. The plant is expected to have an annual production capacity of around 825,000 tonnes of ammonia and 570,000 tonnes of urea fertiliser. Indonesia currently imports more than 400,000 tonnes of ammonia per year, and it is envisioned that the plant will help to significantly reduce the country’s dependence on imports.

Cigarette manufacturer Sampoerna also opened its seventh hand-rolled cigarette factory in Jember, East Java in mid-2013, and it now employs 4500 workers at the plant. The new factory joins the firm’s six others in Surabaya, Malang, Probolinggo and Lumajang, all of which are in East Java.

Plug & Play

A common obstacle for investors looking to build downstream or value-added plants in Indonesia is the shortage of power, but this is not an issue in East Java, as the province actually runs a surplus of around 4250 MW. While this is a definite achievement in a country where shortfalls are common, it also gives the province breathing room and an opportunity to further boost capacity by developing alternative energy sources. This will likely include the exploitation of its nascent geothermal energy potential, estimated at around 1500 MW, which so far has been largely untapped. However, with the state-owned electricity provider, Perusahaan Listrik Negara (PLN), estimating that Indonesia will need to add some 5.7 GW of additional capacity per year to meet the growing demand for power, the province cannot afford to rest on its laurels.

Industrial Parks

Progress is being made on the development of much-needed industrial park areas as well. Located in Mojokerto outside of Surabaya, Ngoro Industrial Park, which is a joint venture between domestic developer Intiland Development and Taiwan-based RSEA Engineering Corporation, will complete stage two of its expansion plan in mid- to late 2014. With the current park spanning 220 ha, stage two of the expansion plan will increase land area by another 223 ha; further augmentation to a final site size of 650 ha is planned over the course of the next decade. With 80% of the second stage of the development already sold in early 2014 and sales of stagethree space beginning at the end of the year, the demand for such sites is tangible.

Wihardi Hosen, the general manager of Ngoro Industrial Park, told OBG, “70% of tenants are foreign direct investors. While Jakarta increasingly appears as a portfolio investor destination, Surabaya is a location where genuine foreign direct investment is being realised in the form of downstream factories and processing plants being developed.” He went on to cite the early 2014 completion of a 20-ha Unicharm factory as one such example.

Home Of Industry

In line with such expansion efforts, Surabaya appears ready to welcome largescale industrial investment with open arms. The city, Indonesia’s second largest, was rated “intermediate plus” in a financial management assessment conducted by Standard & Poor’s in 2011, which identified the city as “one of the best among South-east Asian local governments that Standard & Poor’s assessed”.

Subsequently, PLN has begun to champion the province as a site for the wave of new smelters set to be built over the next three years. The controversial 2009 Mining Law, which took effect in January 2014, bans exports of unprocessed ore and requires ore to be processed domestically. The availability of power and economic competitiveness have since been cited as the key factors in the firm’s endorsement of East Java, with Nur Pamudji, the president director of PLN, emphasising his confidence in the province’s ability to provide enough power. He told local press that, “Every day, around 3000 MW of electricity from East Java is transferred to Jakarta. In the near future, new power plants will also go onstream in Paiton, Tanjung, Awar-Awar and Pacitan.”

Companies looking to comply with the new regulation include Freeport Indonesia, the local subsidiary of US giant Freeport-McMoRan Copper and Gold, which formalised its commitment to supplying smelters in the province via a memorandum of understanding signed with Indosmelt and Indovasi Mineral Indonesia in August 2013. Indovasi’s $1.5bn copper cathode plant, which is to be located in either Tuban or Gresik, is set to begin production in 2017 with an output of 200,000 tonnes per year. At present, Freeport supplies 40% of its annual production of 2.5m tonnes to Smelting’s Gresik-based smelter (of which Freeport owns 25%), which produces over 300,000 tonnes of copper cathode.

Getting Attention

Following a peak in investment of $14.03bn in 2012 and a similar performance in 2013, East Java continues to attract investor attention both at home and abroad. While the forecasts for 2014 for both investment and provincial economic growth will likely be somewhat less rosy in light of the wait-and-see attitude being adopted by many investors at present, the provincial authorities’ proactive and supportive approach is certainly encouraging. As such, it can reasonably be envisioned that any temporary delays relating to the presidential and parliamentary elections scheduled for July 2014 will likely be mitigated in the period which follows.

In the meantime, East Java must not lose sight of the importance of implementing measures to encourage investment, including boosting the power supply, pushing through infrastructural improvements and strengthening links with investors. The need for further investment is clear: according to the minister of national development planning, Armida Alisjahbana, consumption accounts for 60% of growth in the province and investment less than 20%, against 55% and 32% on the national level.

While new investments are gradually coming to fruition, significant challenges remain. Licensing procedures in the province are arduous and private land acquisition outside of the dedicated industrial parks continues to be a major obstacle. The prospects for Indonesia’s second-largest province seem bright, but only time will tell if it really is as easy to invest in East Java as the provincial authorities suggest.

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The Report: Indonesia 2014

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