Japan takes stake in Indonesia’s future

Financial Times:

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 Indonesia’s fast-growing domestic electricity market is, however, altering the formula, helping to secure Indonesia’s emergence as an economic power in its own right.

Explaining the change from buying materials to investment, Keizo Ogata, chief executive of Japanese group Paiton Energy, said: “Raw materials can make higher-profit margins but are risky.One indication of Indonesia’s new might is that five 

Japanese companies are among the seven bidders to construct the country’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 country’s 2009 total capacity by two-thirds.

“Japanese companies are still looking to invest in natural resources, like oil and gas, but . . . everybody has an interest and there’s a lot of competition.”

It is Japanese trading companies and utilities, traditionally the biggest buyers of Indonesia’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.

“With the Indonesian economy growing we have big hopes for electricity demand, and we’re looking to invest aggressively as we expand our global independent power production business,” 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.