Ready for business: Positive economic prospects make for attractive opportunities

 

A popular and official local provincial motto reads “success and prosperity only come with effort”, and it is clear that these days, East Java is taking this wisdom seriously. The push to amplify economic growth is seeing major efforts under way to attract more investment and develop the region’s economy.

GEOGRAPHY & HISTORY: Covering an area of 47,154 sq km (2.5% of Indonesia’s total), and containing some 287 islands, as well as the eastern end of Java itself, the province of East Java borders the Java Sea, the Indian Ocean and the Bali Strait. The largest offshore islands are Madura and Bawean, while the province’s territory also includes the Masalembu, Kangean and Sapudi island groups. East Java encompasses a variety of geographical and geological formations as well. Central East Java is a fertile region, while north East Java is relatively barren, with limestone mountains in the north.

Man has long inhabited East Java, as demonstrated by the discovery of the 500,000 year-old fossils of Java Man (homo erectus) in East Java in 1890. The province also has a long civilisational record as well, encompassing the legendary ancient kingdoms of Kahuripan, Kediri, Singosari, Mataram and Blambangan. The Hindu Majapahit Dynasty, founded in the 13th century and based in and around East Java, also controlled most of the Indonesian archipelago, the Malay Peninsula and portions of the Philippines, establishing lucrative trade relations with China and other South-east Asian regional powers. Islam began to spread into the area in the 14th century, quickly becoming the dominant religion.

GOVERNMENT & PEOPLE: Today, the province of East Java is governed by the East Java provincial government, which rules from the capital and second-largest city in Indonesia, Surabaya, which is also a major industrial centre and port. The province is then administratively subdivided into nine cities, or kota, each with a mayor, and 29 regencies, or kabupaten. Popular elections take place every five years.

In 2010, East Java had a population of 37.5m, according to a Statistics Indonesia (BPS) survey, second only to West Java (at 43m) and equal to almost 16% of the total population of Indonesia. However, population growth is comparatively low, at 0.54% per year in 2005-10. About 15% of East Javanese were on incomes below the poverty line in 2010, a slightly higher percentage than the national average. As with the rest of the country, the people of East Java speak Bahasa Indonesia. Other regional languages, such as Javanese, Madurese and Osing are also spoken, as well as Chinese dialects. The majority of East Javanese practise Islam, but a small minority are Christian, Hindu or Buddhist.

STRONG ECONOMY: East Java contributes roughly 15% to the national GDP, making the province Indonesia’s second-largest economic contributor. Most of this activity is generated in the capital, Surabaya. In December 2011 Standard and Poor’s (S&P) rated the city BB/Stable/–, based on its strengths: a low debt level and no defaults, robust average operating balances of 27% from 2007-11 and adequate liquidity.

At the same time, the city has a number of weaknesses, specifically its limited financial flexibility, an evolving intergovernmental system, unmet infrastructure requirements and, despite being the country’s second-largest city, its low-income economy, as measured by international standards.

S&P also rated the city’s financial management. In its financial management assessment (FMA) the city scored “intermediate plus”, reflecting S&P’s opinion that Surabaya has sound governmental policies and practices in managing expenditure and government-related entities. In the report, the authors called Surabaya’s financial management policies and practices “one of the best among South-east Asian local governments that Standard & Poor’s assessed”.

PERFORMING: During the period between 2009 and 2012, East Java’s GDP outperformed Indonesia’s as a whole. In 2009 East Java’s GDP was 5% compared to Indonesia’s 4.55%. This trend continued in 2010, with East Java’s GDP at 6.68% and Indonesia’s at 6.1%; in 2011 with 7.22% and 6.5%; and in the first quarter of 2012 with 7.19% and 6.3%, respectively, according to Bank Jatim, a leading regional bank.

According to the bank, in 2011 the bulk of contributions to East Java’s GDP came from trade and hospitality services (30%), followed by the processing industry (27.1%) and agriculture (15.4%). Other contributors included services (8.6%), transportation and communications (5.6%), finance and leasing (4.9%), construction (4.7%), mining (2.2%) and electricity, gas and water supply (1.4%). Inflation in East Java spiked in 2008 and 2010 (10.72% and 6.96%, respectively), but came down to 4.09% in 2011, dropping further to 3.53% as of August 2012.

“We have strong economic fundamentals in East Java,” Hadi Sukrianto, the president director of Bank Jatim, told OBG. “That provides us the opportunity to grow many sectors, such as banking, in terms of both size and quality. With 15% of national GDP coming from East Java, the second-largest amount in Indonesia, the banking industry can continue to scale up within the province.”

INVESTMENT: Among major foreign investors in East Java are international names such as Nestlé, Samsung Astra, Cheil Jedang, Philips, Unilever, Hanil Jaya Metal Works, Ajino Moto, BRC Lysaght, Ispat Indo, KTI and RSSI. According to the Badan Penanaman Modal Jawa Timur (BPM Jatim), Japan, South Korea, China, Singapore, the Netherlands and the UK brought the most sizeable amount of foreign direct investment (FDI) into East Java in 2012.

For 2012, East Java trumped all the other provinces by realising total investment of some Rp133trn ($13.3bn) – also a significant increase on 2009 levels of Rp46.9trn ($4.7bn), 2010 levels of Rp82.6trn ($8.26bn) and 2011 amounts of some Rp110.47trn ($11.05bn). Based on investment licence figures, FDI has been growing considerably as a segment as well, expanding from Rp18trn ($1.8bn) to Rp44trn ($4.4bn) in 2011, an incremental rise of some 24%.

SPEEDING UP: In June 2011, East Java’s governor, H Soekarwo, announced he was aiming to see the province’s economic output surpass of that of Jakarta. Success in this undertaking, he argued, would raise the province’s profile both nationally and globally and boost incomes, exports and investment. As Soekarwo told the local media, “I have targeted a goal that by 2013 East Java’s gross regional product will be higher than Jakarta’s – so much so that the president may have his office in Jakarta, but the heart of the economy will remain in East Java.”

The administration is thus undertaking significant construction projects, including new airports, railways and container ports, both in conjunction with the national economic master plan (see analysis) and on its own initiative. The governor also ensured investors of the “security and ease” of investing in East Java today, pointing to his administration’s easing of the investment licensing process fashioned after that in Singapore. Soekarwo also said that the licensing process for foreign investors will be reduced to 17 days, compared to up to 78 days currently.

TRANSPORT NETWORKS: Indonesia’s second-largest port – and East Java’s largest – is Surabaya’s Tanjung Perak Port. This has a water area of 1574 ha, plus 575 ha of land. The province’s other main seaports include Banyuwangi’s Tanjung Wangi Port, Gresik’s Gresik Port and Probolinggo’s Tanjung Tembaga Port. There are also several private ports. East Java’s main airport is Juanda International Airport, located 20 km from Surabaya, with an area of 160 ha. In addition to Juanda, the province’s airfields include Bawean Island Airport, Gresik; Jombang Airport, Ponggok; Abdul Rachman Saleh, Malang; Blimbingsari Airport, Banyuwangi; Iswahyudi Airfield, Maospoti; and Trunojoyo Pagerungan Airport, Sumenep.

East Java has a good network of toll and free public roads and highways that connect its largest cities. Major arterials are the Anyer-Jakarta-Surabaya-Banyuwangi route and the Jakarta-Bandung-Yogyakarta-Surabaya route. A trans-Java highway is currently being developed, with land acquisition for the prioritised segments of the highway 70% complete. The 5.4-km Suramadu Bridge, the longest in Indonesia, crosses the Madura Strait and connects Surabaya and Madura Island.

ENERGY CENTRE: Several global oil and gas firms operate in East Java in partnership with Pertamina, the state-owned oil and gas company. Mobil Cepu operates in the Cepu Block, while Petrochina International works with Pertamina Hulu Energy (PHE), a Pertamina upstream directorate subsidiary, in Tuban. According to Pertamina’s 2011 annual report, production at Tuban Block in 2011 was to 7593 barrels per day (bpd) and 8.73m standard cubic feet per day (mmscfd) of gas. The West Madura Offshore (WMO) Block, located 113 km off the coast of Bangkalan, Madura saw production of 9319 bpd and 110 mmscfd of gas in 2011. WMO’s operations were taken over by PHE WMO from Korea-based Kodeco Energy in May 2011, and the block is now producing about 12,000 bpd and 160 mmscfd of gas. With three new production platforms planned, PHE WMO expects WMO’s output to average 16,000 bpd by year-end 2012.

MORE POWER: Pertamina’s Banyu Urip oil field in Cepu Block project has a May 2014 development deadline for five engineering, procurement and construction projects. This enormous endeavour will see the construction of 49 oil wells, a 95-km pipe to deliver the oil to depots, a floating storage facility and an offloading facility with a 1.7m-barrel capacity. However, several obstacles have arisen at the oil field, among them problems gaining permits and a shortage of skilled labour. The government has limited the hiring of foreigners, but local workers sometimes lack adequate skills to deliver major projects. Cepu Block is expected to start producing 90,000 bpd of crude oil beginning in May 2014, increasing to 150,000 bpd in August 2014 and 185,000 bpd in November 2014. According to upstream oil and gas regulators, the Cepu Block partners will need to invest some $1.3bn to achieve full output capacity.

Pertamina estimates that the current oil and gas production in its fields can be increased, particularly in the Banyu Urip field, which with 450m barrels of oil reserves is the largest fully unexploited reserve in Indonesia. ExxonMobil and Pertamina each have 45% stakes in the $1.3bn project. The remaining 10% is divided among four local government companies under a consortium, Badan Kerja Sama Blok Cepu.

Upstream oil and gas regulators expect the Banyu Urip oil field to play a significant role in boosting the nation’s oil production, helping achieve the government’s goal of producing 1m bpd of crude oil in 2014-15. On the gas side, one challenge is that despite having untapped gas resources, supply is lacking in East Java. The current gas supply of 130 mmscfd cannot meet demand of 400 mmscfd. Boosting this is thus a key goal for energy planners.

INDUSTRY: East Java is a major manufacturing base for the country, with the sector contributing more than 27% to East Java’s GDP In 2011. The province is home to over 14,000 large and medium-sized manufacturing units and more than 600,000 small companies and handicraft home industries.

Domestic and foreign companies manufacture a diverse array of products in East Java. Among the major goods and manufacturers that are currently located in the province are pharmaceuticals ( Merck), cement (Semen Gresik), milk (Nestlé Indonesia), paper (Tjiwi Kimia), personal care (Unilever), fertiliser (Petrokimia Gresik), textiles (Hapete), furniture and wooden building materials (Kutai Timber Indonesia), steel (Radjin Steel), housewares (Maspion Group), footwear (Java Rino), food processing (Sekar Group), shipbuilding (PAL), ceramics (Asia Victory) and cigarettes (Gudang Garam).

In the future, it is possible that Taiwanese electronics manufacturing firm Foxconn will be added to this list. According to comments made by the industry minister, M S Hidayat, reported in the local press in July 2012, Foxconn – also known as Hon Hai Precision Industry X – will begin investing in a factory in East or Central Java in 2013. If the deal goes forward, Foxconn will invest up to $10bn over five to 10 years, creating up to 1m new jobs. The domestic manufacture of electronic components for companies such as Apple, Dell, Hewlett-Packard, Intel, Microsoft, Cisco and Acer could also reduce Indonesia’s reliance on imported electronics.

Neither the government nor Foxconn had revealed where the factory will be located as OBG went to press, but chairman of the Indonesian Association of Industrial Zones, Sanny Iskandar, said potential sites in East Java included Gresik, Lamongan and Mojokerto. “For electronic component industries, East Java is more suitable [than Central Java] because it has harbour access,” Iskandar told local media in July.

BUILD UP: Meanwhile, construction is booming in East Java, driving up the demand for cement. The increase is largely a product of increased housing construction and government-funded infrastructure projects. These are also expanding elsewhere in the country, which is further good news for building materials manufacturers based in the province.

Indonesia consumed 48m tonnes of cement in 2011, with domestic demand expected to continue to drive cement production for the foreseeable future. Indeed, according to cement industry groups, Indonesia is expected to have the highest cement consumption growth of all countries in South-east Asia in the near future. This is a result of the country’s strong economic prospects, as well as current low cement consumption per capita, which sits at approximately 200 kg per annum.

CONCRETE PLANS: To meet this demand, Holcim Indonesia has announced plans to add two new cement plants in East Java. Holcim expects to increase its production capacity to 12m tonnes per annum (tpa) by 2015, up from its current level of 8.3m tpa. One Holcim plant will be built in Tuban, in addition to another that is already under construction. The total building cost of the first plant is likely to run to $450m, and both plants will have a capacity of 1.7m tpa when they begin operation in 2013. The new Tuban plant will give Holcim a pivotal position in the East Java market and deliver savings on logistical costs, allowing it to move away from its current system of shipping cement from its West or Central Java plants to supply its operations in East Java.

Holcim will have competition in East Java, as one of its main rivals, Semen Gresik, is also constructing a new plant in Tuban – Tuban IV. This is part of a total $756m investment in new plants in Sumatra and Java that Semen Gresik intends to make as part of its drive to become the largest cement producer in the region in 2013. The Rp3.18trn ($318m) Tuban IV plant will have a 3m-tonne capacity.

PHARMA: The local pharmaceuticals products industry is also booming. Merck Sharp and Dohme (MSD) are investing $21m in a new 4900-sq-metre packaging factory in Pandaan, Pasuruan. The factory, located 50 km south-east of Surabaya, will produce medical packaging and will complement MSD’s existing 3350-sq-meter East Java factory. Exports will make up about 75% of the goods produced at the Pandaan factory, with 25% sold domestically.

The East Java provincial government has also built a number of industrial estates to cater to foreign investors. Located in Surabaya, Gresik, Tuban, Lamongan, Sidoarjo and Mojokerto, these estates permit investors to circumvent what can otherwise be a challenging process, offering a choice of renting land and standard warehouses or factories.

AGRICULTURE & LAND USE: With a warm, humid climate that ranges from 24°C to 34°C, a dry season that runs from May to September and a wet season from October to April, East Java is a natural agricultural centre. Indeed, almost two-thirds of all the province’s land is used for agricultural purpose.

The provincial government encourages the investment of multiple groups into agricultural processing services, and the central government is now focused on investment that creates downstream products from these raw materials. “Value added on downstream products as opposed to upstream will give more advantages to the farmers,” Subiyono, the president director of state-owned sugar producer Perkebunan Nusantara X, told OBG.

Staples such as rice, milk, tapioca, corn and sugar, fish, shrimp, tobacco and rubber are produced and processed in East Java, which also has abundant natural resources, including oil, chalk, marble, salt and kaolinite. East Java’s rice production is the highest in the country, with a yield of 5900 kg per ha in 2009, according to statistical agency BPS, which also showed East Java contributing 11.6m tonnes of husk rice production, or 17.5% of the national total, in 2010. According to the BPM Jatim, East Java currently has the likely potential to produce as much as 10.5m tonnes of rice, 57.3m tonnes of corn and 2.7m tonnes of cassava per year.

DROUGHT PLANS: However, crop expansion plans may need to be refigured due to the drought conditions the province suffered in 2012. This led the local government to make plans for 100 rainwater catchment geo-membranes (dam-type facilities that capture and store rainwater) each with a capacity of 5000 cu metres and at a total cost of Rp20bn ($2m). As of August 2012, about 14,000 ha of rice fields were hit by drought, and the government made plans to divert water from unaffected areas.

Another challenge to East Java’s agricultural sector is the development of the land itself. Increasingly, East Java’s agricultural and residential lands are being converted for industrial and mining purposes. Ony Mahardika of the East Java branch of the Indonesian Forum for the Environment (Walhi), told local media outlets in November 2012 that 20,514 ha of East Java’s agricultural fields have been lost to the rapid growth of industries and infrastructure in recent years. Mahardika pointed out that East Java has been producing 40% of the nation’s total food output, but industrial projects – such as one in Gresik regency that is slated to further decrease the province’s agricultural area by about 2000 ha – put a strain the province’s food production capabilities. “In order to continually develop the agricultural and associated agro-industries there needs to be adequate water irrigation, cooperation between farmers and universities, regulations to increase exports and overall development of capacity,” Lalak Indiyono, president director of Boma Bisma Indra, told OBG.

EDUCATION: East Java is home to some of Indonesia’s best public and private universities, with over 300 private universities and 13 state universities on its rolls. The province’s Airlangga University is ranked fourth in the country, and the Institute Technology Surabaya (ITS) is considered one of the country’s best technology schools. Surabaya’s Airlangga University, ITS, State University of Surabaya and the Institute for Islamic Studies (IAIN) Sunan Ampel are among the top public universities. The province’s international schools include the Surabaya International School, Surabaya Japanese School, Sophomore International School, SMA Khadijah Surabaya and Petra Christian University. In addition, the Wesley International School, a Christian school, is located in Malang.

Another important form of education in East Java, especially for low-income students, is Pesantren, or education built around Islamic teachings. Pesantren students live in boarding schools and study the Koran as well as receiving formal education. Pesantren education and accommodation are offered for a nominal fee or for free. Improvements in the national education system are likely to benefit the province, with the number of compulsory years in education rising from nine to 12 under government plans, and each region due to gain a community college. Additionally, foreign universities will now be allowed to establish campuses in Indonesia under the 2012 education reforms (see Education chapter).

TOURISM: With its proximity to one of the most popular holiday destinations in the world, Bali, East Java has tremendous potential, both as a springboard for islands further east and for the rest of Java, in addition to its own variety of attractions. Juanda International Airport recorded 95,328 arrivals during the period between January 2012 and June 2012.

While small in comparison to 1.36m at Bali’s airport Ngurah Rai, Juanda’s numbers for that period represented an increase of 9.2% over the same period in 2011. At the same time, the hotel room occupancy rate grew from 47.8% in May 2011 to 50% in May 2012. The average length of stay for both foreign and domestic visitors was two days.

ATTRACTIONS: East Java is not without tourist sites to exploit. Climbing the active volcano, Mount Bromo, or conquering the highest mountain in Java, Mount Semeru, are just a couple of possibilities for adventuresome holidaymakers. Madura Island’s distinct culture and bull races also offer a major draw. On the province’s easternmost side, which is closest to Bali, Banyuwangi regency is set to develop itself as an ecotourism destination emphasising culture and conservation. Banyuwangi is already also used as a transit point between Bali and Java. Taking advantage of this traffic, the regency hopes to direct tourists to sites such as Mount Ijen and the Meru Betiri National Park, as well as introduce them to the Using tribe, which has a culture and dance performances quite similar to the Balinese. The promotion of Banyuwangi is being enhanced further by a 300-km international cycling race, known as the Tour D’Ijen, as well as a jazz festival and carnival. These resources, along with the area’s natural beauty, should help to boost visitor numbers in the long terms.

Additionally, global hotel chain Aston International is planning a number of new hotels in the province, which will join other well-known brands, such as JW Marriott, Sheraton and Shangri-La. First up for Aston’s development plans is a three-star hotel, 110 km west of Surabaya in Bojonegoro regency on the banks of the Bengawan Solo River. Aston’s vice-president of sales and marketing, Norbert Vas, said in a press release that it was important for Aston to have a presence in East Java because the company aims to provide a comprehensive network of international-quality hotels throughout Indonesia. “Growing into East Java is an important part of this strategy, and Bojonegoro will soon be followed by projects in Jember, Madiun, Malang and Surabaya,” Vas said.

OUTLOOK: With much infrastructure and economic muscle already in place, the potential for growth in East Java is great, as are the investment opportunities. The province is well positioned to take advantage of national economic master plan projects, as well as to capitalise on local organic development trends. With regulatory and infrastructure pieces falling into place, growth may be about to accelerate in many ways. East Java, then, has much success and prosperity to reward the efforts of its investors.

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The Report: Indonesia 2013

East Java chapter from The Report: Indonesia 2013

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