Thu, 26 Aug 2010


By Anthony Deutsch and Taufan Hidayat in Jakarta
Adani Group, the Indian conglomerate, has signed a preliminary agreement in Indonesia to build a railway line and coal terminal in remote southern Sumatra.

The Indonesian Investment Co-ordination Board said on Wednesday that Adani would invest $1.6bn to lay down a railway line between a major coal pit and the island’s southern port of Tanjung Api Api.

Indonesia, the world’s largest exporter of thermal coal, is struggling to maintain the infrastructure required for meeting the booming energy demand in Asia’s economic powerhouses. Much of its natural resources, including precious metals, palm oil and lumber, are found in remote regions thousands of miles from the capital, Jakarta, and where roads and electricity are scarce.

The cash-strapped government needs foreign capital to build tens of thousands of miles of paved roads and tracks, reinforce the creaking electricity grid and construct new harbours.

The island of Sumatra has huge coal stores that are considered underexploited. In March, China Railway Group said it had won a 24-year contract to build the railway in a deal worth $4.8bn.

But the head of South Sumatra’s government investment agency told the Financial Times that Adani, not China Railway, had been selected for the project because the Chinese had failed to follow through on initial interest.

Adani signed a preliminary contract on Wednesday, the investment board said. It was not clear why the value of the deal had changed.

China Railway could not be reached for comment.

“We’ve been looking for an investor to finance and develop this project for quite a long time, several investors had come in and expressed interest in the project, but we finally got a more serious one,” said Permana, the head of the investment agency.

Nearly half of Indonesia’s coal reserves are on Sumatra, which is the westernmost island of the emerging democracy of 240m people. But the bulk of mining production is situated in Kalimantan, the Indonesian half of Borneo island. “Currently, only 11-12m tonnes per year are being extracted [on Sumatra] due to poor transportation. With the railway and coal terminal project, we can extract 50m tonnes per year,” said Permana.

Indonesia exports more than 250m tonnes of coal per year, the bulk of it to China, India, South Korea, Japan and Taiwan.

Analysts project that figure will double in the coming decade as emerging Asian economies continue to rely heavily on fossil fuel to feed their coal-fired power plants. The new port and railway are scheduled to begin operating by 2015 or 2016.