The Giant Awakes

Indonesia

Economic News

22 Jul 2010
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Papua, blessed with bountiful natural resources but lagging behind other regions in terms of economic growth, is attracting new investors. Historically one of Indonesia's poorest and least developed provinces, an increase in spending on infrastructure and rural development is set to open up new areas for investment, particularly in the plantations business.



One of the factors highlighted as a means to counter adverse economic conditions in Indonesia's poorer areas has been the promotion of investment at the local and regional levels. Accordingly, government figures show that the overall expenditure budget allocated to the regions rose from Rp150.5trn ($3.6trn) in 2005 to Rp226.2trn in 2006 and Rp252.5trn in 2007. It is estimated to reach Rp271.8trn in 2008, a 7.6% increase year-on-year. Not only is the government spending more money on regions but it is determined to use these funds more effectively.



Indeed, while 70% of Papua's budget was consumed by the state apparatus in 2006, this amount has been reduced to 27% in 2007 and 2008, out of a total budget of Rp21trn for Papua in 2008.



While the logging, mining and hydrocarbons sectors have traditionally been the most important sectors of Papua's economy (the mining and energy sector makes up 69% of gross regional domestic product expenditure in Papua), Barnabas Suebu, the governor of Papua, is keen to promote diversification by supporting plantations projects and developing power infrastructure.



The development of palm oil plantations to feed the growing biofuel industry is a top priority for Indonesia. President Yudhoyono announced in early 2007 his intention of attracting $22bn in investment into the palm oil industry in Papua.



The central government has an ambitious plan to open up 5m ha of land for the plantations industry, predominantly palm oil and cassava, dedicated to the biofuel industry.



The highest estimate for available land for palm plantations is set at slightly over 9m ha. This is three times more than any other single province in Indonesia. The central government argues that none of this land is covered with rainforest.



A number of groups have already expressed their interest, or signed MoUs for the development of plantations in what Governor Suebu has called 'the sleeping giant'.



Two Indonesian groups, Sinar Mas and Medco Energi, have already signed agreements, while Malaysian-based Felda is said to be finalising negotiations.



Sinar Mas Agro Resources and Technology, in a venture with China National Offshore Oil and Hong Kong Energy, announced in January 2007 their aim to clear 1.2m ha of forests in Boven Digul, Merauke and Mappi regencies for palm-oil plantations. They have already signed a concession to develop 200 000 ha of plantations in each of the three districts. With an overall investment of $5bn, divided equally between Papua and Kalimantan plantations, the produce is geared towards supporting the domestic biofuel industry.



Medco Energi is also seeking land in Papua to develop its biofuel business by developing 100 000 ha of land in Papua, with more likely to follow.



There have also been reports in the local press, as yet unconfirmed, of feasibility studies being undertaken by a number of regional players in Papua's plantations sector. Thus Malaysia's Genting Bhd is said to be planning $3bn for 400 000 ha of plantations. Meanwhile Indonesia-based Muting Mekar Hijau is eyeing 540 000 ha for palm oil and sugar, Rajawali Corporation is looking at investments in Keerom district and Indomal is said to be assessing 300 000 ha for palm oil in Merauke.



Suebu has estimated that the development of 2m ha of plantations in Papua would bring work to 250 000 households.



While the development of the biofuels industry will appeal to countries like Indonesia keen to diversify energy provision away from hydrocarbons, the emerging international market for carbon credits is also proving attractive for Papua.



Governor Suebu won a major victory at the Bali conference on climate change in late 2007. The province is keen to sell carbon credits for avoided deforestation to companies seeking to offset their carbon footprint elsewhere in their operations. Indeed carbon credits are already traded on a number of exchanges in Europe and the US, for example through the Chicago climate exchange. Credits in the EU alone are valued at close to $27 a tonne of carbon dioxide.



As a result, Bank Indonesia, the central bank, forecast 7% growth in the province for 2008, above the national goal of 6% set by the World Bank.



"With sufficient political will, regencies have the capacity to develop their own regions and use their capital productively," Agung Pambudhi told OBG. "It is a matter of good local governance and transparency: poorer districts are as capable of attracting investment as are rich ones."

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