Mustain Sjadzali, President Director, Citra Panji Manunggal, on investment opportunities in the energy sector for foreign firms

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What remains to be developed to achieve pipeline interconnectivity in Indonesia?

MUSTAIN SJADZALI: The industry has always dreamt of a regional, interconnected pipeline grid connecting Indonesia to ASEAN, originally with Indonesia as gas producer and Malaysia as manager of the grid.

Land acquisition issues remain a major hindrance when awarding to pipeline contractors. State-owned enterprises (SOEs) as owners still do not place adequate resources and a sense of urgency and anticipation at the outset of the project, often causing major disruptions and delays down the line. Close, “on the ground” facilitation between the government and landowners helps in reducing antagonism between the parties. Perhaps, being less cumbersome and more nimble and flexible, assigning this responsibility to the contractor may be the way to go to achieve expediency.

Alternative and renewable energy, including biomass power projects, will come into operation and help Indonesia and ASEAN reduce the current heavy reliance on gas-fired plants.

The Indonesian oil and gas industry has a good knowledge set, so it is about time that SOEs made their presence felt in the region. Now there is talk of the ASEAN Economic Community, where we will be truly mobile. I am optimistic about this.

Overall, we are optimistic when it comes to pipeline projects, which will play their part in bringing more flexibility towards achieving the optimum energy mix for the country.

How have SOEs taken part in the development of the downstream sector?

SJADZALI: SOEs have floated a “Synergy of SOEs” theme to maximise their involvement in infrastructure development projects. Although this sounds positive, it may create distortions within the system, as it does not encourage private sector participation and development.

Public-private partnerships (PPPs) have faced a multitude of issues for the past few years, which have prevented medium-sized companies from participating and developing the downstream segment. 

There may still be lingering questions of fundamental paradigms, such as should major SOEs, such as Perusahaan Listrik Negara (PLN), assume the role of a corporation or an agent of development in relation to the state subsidy for electricity. Lower interest rates, better regulatory issues and more clarity needs to be pushed to incentivise the private sector’s contribution to the energy sector.

Given the global downturn of the energy market, which segment provides the most favourable dynamics for foreign firms to expand to?

SJADZALI: The country still needs a lot of pipelines to connect sources to the market. However, renewable and alternative power generation may be the solution for some remote areas or for areas where an alternative energy source is available nearby, such as biomass, water or geothermal. We have a new pricing regulation in place regarding renewable energy, but the question for PLN is whether they are willing to carry out these regulations in full.

How can a foreign firm best penetrate Indonesia’s downstream business?

SJADZALI: Given the country’s regulatory complexities, and its similarity to most ASEAN markets, every foreign firm needs to collaborate with a local partner. Access to land is the work of the local firm. Foreign firms will also have to interact heavily with SOEs. 

On an engineering, procurement and construction contract, the foreign firm would most likely be on the procurement side because of its worldwide network.

Foreign firms also bring cheaper financing; some local banks only lend in local currency, with interest rates of around 12%. Multinational companies can come in with cheaper interest rates, and also bring more efficient procurement costs and processes, and proprietary engineering processes. 

In terms of developing independent power projects and private pipelines, getting the required permits from local authorities is challenging. If we are working with regional entities, we need to properly map out the responsibilities.

The government has also been talking about PPP schemes, so any newcomer needs to consider what the obligations of each party is. The government needs to adhere to the letter and the spirit of the law, assuring contractual security and enforcement. Nice policies come up, but they are not always shared by everybody along the line. Companies should be prepared to take the heat or turn away from it. Analysis should always be done of risks, which will hopefully be recovered by returns. 

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