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Indonesia

Economic News

22 Jul 2010
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Last week, the central government provided essential guarantees to financiers of an important public transportation project in Indonesia's capital. Many welcomed the move as an important breakthrough in Indonesia's drive to improve and develop its infrastructure.



One day before Indonesia's Independence Day on August 17, the central government finally agreed to issue a letter of guarantee making certain the construction of a long awaited monorail network in the heavily congested city of Jakarta.



Inadequate infrastructure has been an impediment for development throughout Indonesia. The new government of Susilo Bambang Yudhoyono addressed this and organised a major infrastructure summit in January 2005, just months after they assumed office.



Expectations were high after the summit, which drew significant attention and attendance from international investors. However, tangible results did not materialise, partly due to slow implementation of reforms.



As a result, a subsequent summit originally planned for November 2005 was postponed to November 2006. Some analysts suspect that investors are waiting for the implementation of several policy reform packages and the passing of the new investment, tax and labour bills into laws.



In Jakarta in the meantime, one major infrastructure project seems to have lift-off.



With more than 14m movements per day and ever increasing traffic jams, the problem of obsolete and defective public transportation infrastructure is manifest in the capital. Calls for improvement and creating alternative transportation modes have been rising.



The Jakarta monorail project, which entails the creation of two monorail lines of respectively 14.3 and 13.5 km in length, is one of the planned solutions.



With the letter of guarantee, the central government has committed itself to jump in financially, together with the regional government in Jakarta, if the projected passenger numbers cannot be reached. The main financier behind the project, the Dubai Islamic Bank consortium, had requested such a guarantee from PT Jakarta Monorail (PT JM), the project developer.



The project, which was launched in 2004 and is estimated to cost $650m, experienced a tumultuous inception phase. PT JM also concession holder of the monorail, started out as a joint venture between PT Indonesia Transit Central (ITC) owning 55% and Singaporean consortium Omnico with the rest.



However, disagreement quickly arose on which technology to use. Omnico preferred South Korean Rotem technology using magnetic levitation (Maglev) while ITC invited a consortium of companies led by PT Bukaka Trans System to provide the cheaper wheels-on-rail technology.



In December last year, "ITC injected additional capital in PT JM via an internal placement of convertible bonds, thereby diluting the share of Omnico to 2%", Sukmawaty Syukur, director of PT JM told OBG last week.



"Omnico hadn't complied with the joint venture agreement by not paying up enough capital, causing PT JM to miss out on a deadline set by the Jakarta Regional Government."



Governor Sutiyoso of Jakarta extended the deadline, illustrating the flexibility and eagerness of his government to implement the project. In March 2006, he secured a $500m loan for the project from the Dubai Islamic Bank. One of the conditions that came with the deal entailed a guarantee from the government for the loan.



The issue of the guarantee initially led to significant delays in decision-making. Under prevailing regulations, regional administrations cannot issue blanket guarantees that could burden the provincial budget, so Jakarta's administration turned to the central government for their support.



The central government decided in early August that it also could not provide the guarantee requested. While in principal it is possible for the central government to issue blanket guarantees for private infrastructure developers, Presidential regulation No 67 (2006) determines that this can only be the case if the project has been publicly tendered.



However, Syukur added that "PT JM was directly appointed by the Jakarta administration before Presidential regulation 67 was in place, so they cannot cancel the contract".



"In the concession agreement it is arranged that we are entitled to have a minimum passengers guarantee" she said to OBG. This appeared to be the key to the apparent deadlock.



As the financial deal will consist of a sukuk, an Islamic funding instrument prohibiting the payment of interest but giving part of the profit to the financier, the guarantee requires a minimum of 160,000 passengers per day.



"In this way we will secure $50m to $60m per year, assuming a ticket price range between Rp4,000 ($0.44) and Rp10,000 ($1.10) depending on the distance of the journey", Syukur said. "The central government will provide 50% of this fund, with the regional administration of Jakarta taking care of the other 50%."



Syukur expects the confirmation letter to be issued within two weeks, and the financial closure of the deal within 10-12 weeks after the amendment of the contract with the Jakarta regional administration, which is necessary to incorporate the latest arrangements. Currently PT JM is in the process of ensuring approval of the regional parliament of Jakarta for this amendment, and expects this to be finalised in four weeks



Syukur also said that construction, which had been stopped due to the insecurity of financing, could be resumed in the meantime using a bridging loan. According to the previous contract targets, 50% of the first monorail line should be operational at the end of 2007, and the full two-line network by the end of 2008. However, due to the guarantee issue, Syukur anticipates a delay of approximately six months.
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