Mon, 11 Apr 2011


By Robert M Cutler
MONTREAL - Indonesian and Indian officials have signed 18 Memoranda of Understanding (MoUs) seeking to drive up industrial cooperation between the two countries, which are seeking to more than double bilateral trade by 2015.

Bilateral trade in 2005 was merely US$5 billion, a figure that has more than doubled to $11 billion in 2010. The target is to more than double it again to $25 billion over the next five years. Indonesia is already India's third-largest trading partner in Southeast Asia.

Several of the new deals concern big-ticket items, including a

$4 billion move to build airports in Bali and Yogyakarta, Java, agreed by GVK Power, an Indian company that is developing an airport for Mumbai and manages one in Bangalore. GVK is active not only in the transportation but also in the energy sectors, so it is possible that knock-on effects will be felt in the latter. GVK signed agreements with Badan Koordinasi Penanaman Modal, a board set up by Indonesia to facilitate investments, and PT Pembangunan Bali Mandiri, which promotes airport development, the Hyderabad-based company said in a statement on Monday.

To facilitate meeting their increased trade goal, the two countries have begun negotiating an Indian-Indonesian Comprehensive Economic Cooperation Act to supplement and build upon the terms of the existing India-ASEAN Free Trade Agreement.

Indonesia, the world's fourth-most populous country but with over three-quarters of its population living on only three of its 6,000 inhabited islands, has become a key global exporter of oil, gas, and coal. In addition to a strategically favorable geographical situation in East Asia, the implementation of governance and financial reforms over the past decade has opened its resource wealth to trade and investment.

Thus India's International Coal Ventures will invest $3 billion to build a steel plant in Indonesia and buy coal from it. The plant's initial capacity is reported to be 3 million tonnes with a final capacity possibly more than double that figure. Other Indian companies including Reliance Power have already bought large Indonesian coal mines to feed their power generating stations in India. According to Bloomberg News, Reliance Power may build an industrial-purpose railway in southern Sumatra, where over half the country's coal reserves are found.

Indonesia finds itself in a bit of an energy bind. Whereas 20 years ago, the oil and gas sector represented nearly half of the country's export earnings and an equal proportion of government revenues, it now contributes less than one-fifth of export earnings and less than one-third of government revenues.

The country's crude oil supply, which was nearly 1.4 million barrels per day 15 years ago, has fallen to an average of under 850,000 over the past five years. Despite reform of the investment law, many bureaucratic inefficiencies stymie upstream oil and gas exploration and production.

According to the International Energy Agency, current estimated oil reserves are 8.5 billion barrels, of which slightly less than half is proven and the rest potential. Estimated natural gas reserves are 4.7 trillion cubic meters, of which two-thirds are proven and the rest potential. This makes Indonesia the tenth-largest holder of proven gas reserves in the world and the largest in the Asia-Pacific region.

Current gas production is slightly over 80 billion cubic meters per year. That quantity will increase as the liquefied natural gas (LNG) project in Tangguh comes progressively on line. It is developed by a consortium comprising BP, CNOOC, Mitsubishi with a number of smaller partners and lifted its first cargo in mid-2009. The LNG is set for transport to China, South Korea, Japan, and possibly Mexico.

Tangguh is mainly replacing the depleted Arun deposit, so it does not solve the problem that oil and gas production is declining overall at the same time as domestic energy demand is rising quickly. The policy responses so far adopted include moving prices towards international parity, developing capacity for electricity generation more quickly, and further ameliorating the climate for energy investment.

Meanwhile, coal last year represented one-seventh of the countries export revenues outside the oil and gas sector, twice its proportion only three years ago. The new coal export agreements with India suggest how additional improvements to the investment climate can find themselves at cross-purposes with the need to develop domestic power generation capacity.

The state blueprint for energy development until 2025 therefore calls for renewable energy, particularly geothermal and biofuels, to rise from one-twentieth to one-sixth of primary energy supply. Indeed, Indonesia has become a world major player in biofuels, especially as palm oil has increased in price over the last five years.

Again, the amelioration and rationalization of the administrative apparatus will be key to meeting this objective. The problem in implementing a sustainable domestic market for renewables is to create cost-effective incentives for this transformation to take place, while managing potentially disruptive effects such as deforestation and insuring rational land management. Assured funding and better management of infrastructure construction projects overall is a key to stabilizing the growth of general domestic demand and so providing a good basis for economic growth.

The agreements reached between Indonesia and India will be concentrated in the mining, infrastructure, and manufacturing sectors, according to India's Economic Times. How they are implemented is a key to the sustainability of Indonesia's long-term prosperity. The investment agreements should prove a boon to Indonesia's economy, which is expected to grow at least as fast this year as last, when it expanded about an estimated 6%, as consumption becomes less of a driver but with investment (both foreign and domestic) taking up the slack as exports may also fall.

Any drop in global commodity or food prices could hit Indonesia; yet because it exports so much to Asia rather than to the West, the country's customers have relatively stronger resilience. The stock market is periodically shaken by external shocks such as the euro zone crisis but has been a stellar outperformer over the past two years.