Interview: Stuart Dean
What makes you confident in Indonesia’s potential and what medium-term challenges do you expect to encounter?
STUART DEAN: From a macro point of view, Indonesia is important. It has a balanced economy, big consumer market and huge infrastructure needs. Indonesia took longer to emerge from the Asian financial crisis and did not build infrastructure during that period, therefore the country will be catching up by upgrading airports, railways, power generation and water treatment over the next 10 to 20 years. Health care, particularly outside urban areas, requires huge investment. Aviation is growing again, but, due to airport capacity limitations, there is a restriction on aviation industry growth. Power demand is still huge, with more than 50 GW needed in the next five to 10 years. If you read the long-term planning, you can see that, without power, the growth of this country will not happen. Therefore we see the power sector as the best place to invest. In all cases, Indonesia represents somewhere between 30% and 50% of the total infrastructure market in ASEAN.
In terms of infrastructure development, besides the provision of equipment, what else can be done to improve the efficiency and investment potential of these sectors?
DEAN: In most ASEAN countries you find infrastructure that has been in place for more than 25 years and it has not always been adequately maintained and updated. Firstly, there are great opportunities to improve the efficiency of the existing public and private infrastructure. If you go into factories that have been operating for more than 10 years and they were built when fuel prices were half of what they are today, they are not energy efficient. In this area there are many opportunities to boost energy efficiency. For infrastructure that will be newly built, I think the biggest change is the phenomenal improvement in technologies that allow countries to build much more efficient infrastructure. The main driver there is $100-a-barrel oil. Using the example of an aircraft engine, half of the lifecycle cost of operating an aircraft engine over its lifetime is made up of oil costs. When you discount that back to the current value of the dollar, the cost of oil is now greater than the cost of the engine in the first place. As such, investments in fuel-efficient aircraft engines, locomotives or power generation equipment are worthwhile. Oil prices do not look like they are going to come down any time soon. Thus, I see two big opportunities to improve efficiency.
In terms of individual sectors, Indonesia’s roads are clogged and trucks are responsible for much of the crowding. So, if you can get the freight off of roads and onto railways, it can relieve congestion. Railways are more fuel efficient and, considering that many railways across ASEAN are outdated, they would provide great opportunity for investment.
How do you see the ASEAN landscape changing for investment once 2015 integration takes place, and how will Indonesia be impacted?
DEAN: There has been huge progress in terms of integrating the economy over the last 20 years and essentially, from a manufacturing point of view, it is a free trade area. Notwithstanding this progress, there is plenty of room to continue improving services, capital markets and cross-border investment, among other areas. Indonesia, given its large domestic market, has a different balance, so trade is a less important component of its overall economy.
I think the country needs to be more aggressive with identifying what their industrial strategy is; some senior people are beginning to take note. Some of them think about it in terms of protecting the economy as opposed to making Indonesia a force for exports in certain areas where they have competitive and comparative strengths. In my opinion there needs to be more awareness of the opportunities.
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