By Anthony Deutsch in Jakarta and Jonathan Soble in Tokyo
For decades, Indonesia enjoyed a simple economic relationship with Japan. The poor, resource-rich country exchanged oil, gas and other commodities for cash, while fuelling the advanced manufacturing sector of its wealthy Asian neighbour.
A rush by Japanese investors into Indonesiaâ€™s fast-growing domestic electricity market is, however, altering the formula, helping to secure Indonesiaâ€™s emergence as an economic power in its own right.
One indication of Indonesiaâ€™s new might is that five Japanese companies are among the seven bidders to construct the countryâ€™s largest power station, a 2,000 megawatt coal-fired plant in Central Java costing up to $4bn. It is part of a government programme to add 20,000MW of capacity by 2014, which would increase the countryâ€™s 2009 total capacity by two-thirds.
Explaining the change from buying materials to investment, Keizo Ogata, chief executive of Japanese group Paiton Energy, said: â€śRaw materials can make higher-profit margins but are risky.
â€śJapanese companies are still looking to invest in natural resources, like oil and gas, but . . . everybody has an interest and thereâ€™s a lot of competition.â€ť
It is Japanese trading companies and utilities, traditionally the biggest buyers of Indonesiaâ€™s commodity exports, that have now become the most aggressive foreign investors in its domestic power sector.
Demand for electricity in Indonesia is expected to rise by at least 8 per cent a year at current growth rates. Even faster growth is possible, analysts say, if the economy continues to gain momentum and electricity is supplied to the roughly 40 per cent of the 240m population without power.
After suffering total economic collapse more than a decade ago, Indonesia came through the recent financial crisis unscathed. Strong domestic consumption, backed by the burgeoning middle class spending more on consumer goods, helped it achieve economic growth of 4.5 per cent in 2009. This year analysts expect growth to hit 6 per cent.
â€śWith the Indonesian economy growing we have big hopes for electricity demand, and weâ€™re looking to invest aggressively as we expand our global independent power production business,â€ť said Masumi Kakinoki, chief operating officer of the power and infrastructure division of Marubeni, a Japanese trading house.
Japanese companies are not only competing against each other, but also with China and South Korea, which are large importers of Indonesian coal, liquefied natural gas and palm oil. China has already invested $1bn in the sector and hopes to win more projects.
Japan, however, is still out in front. Between 1990 and 2009, Japanese companies poured more than $5bn into Indonesiaâ€™s power sector. They have been helped by strong and long-standing bilateral government relations, including a 2006 deal through which Tokyo agreed to finance electricity projects.
In 2007, Marubeni took a 32.5 per cent stake in a 660MW coal-fired electricity plant in Cirebon, West Java, due to begin operations next year. In March, the plant received $600m in financing from a group of mostly Japanese state and commercial banks.
Japanâ€™s trading companies are generating steady profit by investing in infrastructure and selling electricity to Indonesiaâ€™s state power supplier, PLN, according to Paitonâ€™s Mr Ogata. It is not a quick cash investment, but the risks are relatively low, he said.
Paiton laid the ground for its Indonesian infrastructure business a decade ago, after the devastating 1997-1998 Asian financial crisis. This year it is building an 850MW geothermal expansion plant for $1.2bn in East Java. If it wins the latest bid, it says it will need to double its workforce to more than 600. In line with the Japanese governmentâ€™s enthusiasm for the investment push, most of the countryâ€™s big Indonesian investments are channelled through the Japan Bank for International Cooperation, a state-owned entity that has $8.5bn worth of loans in Indonesia.
â€śThe relationship between Indonesia and Japan is very good and Japan is supporting the Indonesian government,â€ť Mr Ogata said. â€śThat is the basic investment climate. A private company is therefore comfortable to make investments.â€ť