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A worker
uses pliers at the construction site of the Rasuna Epicentrum
superblock in
Jakarta in this September 29, 2010 file photo. Indonesia is
getting major
credit upgrades at a time when Western economies are\
getting downgrades.
Moody's Investors Service on Wednesday returned the
country to investment-grade
level for the first time since the Asian
financial crisis. (Credit:
Reuters/Beawiharta/Files)
|
(Reuters) -
The Dutch were the last to build a railway in Indonesia and that was before
World War Two. Their soldiers marched people off their land at gunpoint. The
question of compensation did not arise.
Now, it's
the Chinese that are coming to build a new railway in Indonesia. China Railway
Group has been awarded a $4.8 billion contract to build and maintain the new
line in southern Sumatra, which before Dutch colonial rule in the Indonesian
archipelago was the centre of a Southeast Asian maritime empire that had
thriving trade links with China, the Middle Kingdom.
The railway
will run from the Tanjung Enim coal mine, the richest deposit in Indonesia, to
a new port in the Sunda Strait, where what's left of the Krakatau volcano still
puffs smoke after blowing its top in 1883.
From there,
the coal will be shipped to the northern hemisphere to power China's industrial
engine, part of a strategy of building infrastructure for resources that
Beijing has employed successfully elsewhere in the world.
The quest
is not as simple, or as brutal, as it was under colonial rule. Getting land,
licenses and locals onboard requires a hearts-and-minds campaign and
illustrates why, despite a return to investment grade, betting money on
Southeast Asia's biggest economy isn't for the fainthearted.
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Indonesia
infrastructure video: link.reuters.com/ner95s
Graphic on
Indonesia infrastructure projects: link.reuters.com/xuc26s
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
INVESTMENT
GRADE AGAIN
Ratings
agencies have been raising Indonesia's credit rating at a time when they have
been downgrading Western economies. On Wednesday, Moody's Investors Service
returned Indonesia to investment grade for the first time since the Asian
financial crisis in 1997-98.
Indonesia
needed an International Monetary Fund bailout to recover from that crisis, but
it avoided tumbling along with the world's largest economies and neighboring
countries into a global recession in 2008-2009.
Now, helped
by a global commodities boom, Indonesia is one of the fastest-growing countries
in the G20, and could join Brazil, Russia, India and China -- the BRIC
economies -- as the next emerging markets powerhouse. An estimated 35 million
of its population of 240 million are now considered middle class.
Fitch
Ratings brought Indonesia back to investment grade last month after 14 years of
junk ratings, citing President Susilo Bambang Yudhoyono's efforts to kick-start
infrastructure.
A
long-awaited land acquisition law was passed on December 16, allowing Indonesia
to accelerate road, port and airport projects, and could be a major turning
point in the country's efforts to ignite an economic boom.
Investors,
hungry to dig into the archipelago's vast deposits of oil, gas, and minerals,
expect the land-acquisition law to spur government infrastructure projects. But
it will be no help for private projects such as the Sumatra railway.
President
Yudhoyono has pledged to double spending on roads, seaports and airports to
$150 billion to help deliver average growth of 6.6 percent over the remainder
of his term ending in 2014. Poor infrastructure is the biggest impediment to
foreign direct investment and Yudhoyono hopes foreigners will pony up much of
the money to improve it.
But
Indonesia, which has had a feisty democracy since the fall of long-time
autocrat Suharto in 1998, remains a stubbornly difficult country in which to do
business, and Yudhoyono may find it easier to raise that kind of money than to
spend it.
GREASING
THE WHEELS
In a
country where property deeds can be as scarce as snow, getting land and local
permits is likely to remain the biggest impediment to investment.
A Reuters
examination of the railway project in Sumatra shows that investing in projects
in the provinces has become much harder than during the Suharto dictatorship,
when Indonesia was last rated investment grade. Since then, Indonesia has
decentralized much of its power. Now a myriad of local interests must be
accommodated, inevitably causing delays.
That has
been the case with the Sumatran railway, whose completion looks set to be
pushed back at least three years to 2017, an executive at Indonesia's Rajawali
Group, which is the majority owner of the rail project, told Reuters.
Investors
in the project have had to pay off gangs, build swimming pools for the
government, step around delicate religious sensibilities and try to overcome
years of mistrust from locals, such as Sigurung in the village of Tanjung Raja
Giham.
Sigurung is
a 70-year-old village elder. Like most Indonesians, he uses one name. Sigurung
remembers how Dutch soldiers intimidated his grandparents, driving them off
their land, halfway between the mine and port to build the old railway to the
coal mine back in 1914. They shot some residents before forcibly relocating the
rest.
Sigurung is
fine with the latest rail project -- as long as he gets paid for the land and
his sons get jobs. Otherwise, there will be trouble, he vows.
"There
will be no railway if you don't get permission from us. The Chinese can work in
this area as long as they're nice to us. But if you don't give us work we will
become thugs," he said with a disarming smile.
Indonesia
lags its Southeast Asian neighbors in building highways, ports and power
plants. The World Bank ranks it 75th on its Logistics Performance Index, well
behind peers Thailand, the Philippines and Malaysia.
HISTORICAL
DISTRUST
The 307-km
(186 miles) Transpacific Railway runs from the coal mine to a new port near the
provincial capital of Bandar Lampung on the Sunda Strait. The line would enable
coal firm PT Bukit Asam to triple the output of its vast open-pit mine, under
which lies enough coal to fuel China's current imports for about 15 years.
The
project, which took six years just to get off the ground, will likely be
delayed because of an issue with its coal license. This may worry stock
investors who paid a big premium for shares in Bukit Asam, betting the railway
will turn a medium-sized producer into a global heavyweight alongside
Indonesia's Bumi Resources.
Chinese
investors face their own host of issues in increasing exposure to the railway.
With its banks financing the project, and China Railway building it, Chinese
industry is expecting a huge bump in coal imports: as much as half the
increased coal output is slated to go to China.
The Chinese
have helped fund and build infrastructure projects in resource-rich countries
from Myanmar to Zambia. But Indonesia has nursed a deep distrust of communism
since a bloody, failed coup in 1965 by a pro-Beijing communist party, and
populist resentment over local ethnic Chinese wealth.
"It's
very difficult for foreign investors, particularly from China, to get assets in
Indonesia," said Rudiantara, the chief of the development firm running the
railway project, Bukit Asam TransPacific.
But with
demand for investment growing, that may have begun to change. Indonesia is
seeking $100 billion of private funding to overhaul its creaking transport
network. Chinese Premier Wen Jiabao, on a visit to Jakarta last April, pledged
$19 billion of investment credit for Indonesia, including $9 billion of soft
and commercial loans for infrastructure development.
China Development
Bank will lead the financing of the railway project, with money also coming
from the world's biggest and fourth biggest lenders, ICBC and Bank of China.
PAVING THE
WAY
Despite the
delays, Rudiantara said the coal railway could become a blueprint for future
Chinese investment and private infrastructure projects in Indonesia, the
world's largest exporter of thermal coal.
Scribbling
calculations and drawings on a giant whiteboard in the boardroom of his Jakarta
office, he showed how the railway's route will shave hours off coal delivery
times and drive a surge in the mine's output.
But he also
acknowledged the challenges. "We call them the three Ls -- licenses, land
and loans," Rudiantara said, adding he already had most of the licenses
out of dozens needed from local and central government officials.
Indonesian
bureaucracy has a reputation among foreign investors for being obstructive and
corrupt. Even having local partners has not stopped many from pulling out of
Indonesian projects to stem their losses.
"The
issue is getting the right local partner," Rudiantara said. "China
feels 'hey I have money, I have everything, you come to me, I'm not coming to
you' ... The relationship really matters when you're dealing with the
Chinese."
Getting the
money was the easy part for Rudiantara, who is teaching his daughter Mandarin
and who has a dragon embossed on his business card. At a business lunch with
Chinese bank representatives he once got 10 basis points off the cost of a loan
by agreeing to go to Beijing and sing karaoke songs in Mandarin, a former
colleague said.
LAND ROVING
Getting the
land is the last and highest hurdle, Rudiantara said. Few people have land
rights documents in an archipelago of 17,000 islands with hundreds of tribes
and ethnic groups, and conflicting claims can turn violent.
In one
case, the landowner had been travelling for years and couldn't be reached, and
for religious reasons his wife wouldn't speak to men without the approval of
her husband. It took Rudiantara several months to resolve the issue through
negotiation with her male relatives. In another, the chief of a Sumatran
district sold off a chunk of land that wasn't his to a rival firm, leading to a
drawn-out court battle that Bukit Asam lost.
Once a developer
finds a landowner, negotiations over the acquisition price usually begin with
only a vague sense of market value.
Rudiantara
plans to swoop on the whole route at the same time with his team, to avoid the
negotiations driving land price speculation further down the track. Prices of
land along the route range from 100,000 rupiah per square meter to one million
rupiah ($10 to $100), residents said.
"If
there is not fair compensation there will be a riot and nobody will want to
give up the land," said Sigurung's nephew Bumiputera, his comments
incongruous with his sleepy village of ramshackle houses and rutted lanes 200
km (120 miles) from Bandar Lampung.
Rajawali
Group has consulted universities on how best to approach local people from an
ethno-cultural perspective. Its progress will be closely watched, given that
many projects, such as another coal railway by Gulf-based investors MEC
Holdings on Borneo island, have been held up for years over land acquisition.
Success could spur a project to build another proposed railway on Sumatra to
the north, which would take coal to India.
"This
is a make-or-break infrastructure project for Indonesia," Rudiantara said.
SMOKING
COAL
At Bukit
Asam's mine operations in Tanjung Enim, huge yellow dump-trucks trundle along
giant open pits stretching to the horizon, where wild elephants and tigers roam
in the island's remaining jungles. Coal is stockpiled in mounds, smoking in
places because of the tropical heat, before being sorted for grade and sent on
conveyor belts to the rail line.
From this
smoldering, grim place, Bukit Asam's former chief executive Sukrisno conducted
a charm campaign with gift hampers of rice, sugar and cash for local residents.
Government
officials are more costly. Sukrisno says the company refuses to give cash, but
instead builds facilities, such as a 29 billion rupiah ($300,000) hospital and
tennis courts used for the recent Southeast Asian Games in the provincial
capital of Palembang.
"In
the past three years we spent 35 billion rupiah ($3.8 million) to build a
sports center in Muara Enim (town). Now they are asking for a swimming pool. I
say ok, we'll provide it. They are also asking us to build an education
centre," he said.
Since local
governments spend almost nothing on local infrastructure, officials stand to
benefit by taking advantage of "corporate social responsibility"
(CSR) spending by companies such as Bukit Asam.
"We
ask government officials how we can help via CSR in order to smoothen the
process," said Sukrisno. "If CSR only builds facilities, like roads,
the local people would not directly feel it, but if we give them packages then
they're very happy."
Bukit
Asam's mine workers, most of them hired locally, are also part of the campaign.
A short drive from the moonscape of the open pits is a different world, where
hundreds of whitewashed colonial houses with palm tree gardens provide
accommodation for senior staff. Workers have access to a swimming pool, a
basketball court, a soccer pitch and a golf course. The housing development has
the feel of a university campus during summer break.
To build
the railway, Bukit Asam and Rudiantara will have to stretch that kind of love
along another 300 km of track.
KNIVES AT THE
READY
The rust
colored train cars on the existing Dutch-built railway, their bellies full of
coal, shunt slowly away from the mine into a region of forest, lazy rivers and
agriculture. The proposed new railway will take a shorter and quicker route to
carry over twice as much coal, with capacity of 25 million tonnes a year.
The land is
fertile. Cocoa and coffee grow in the thick, red, volcanic soil of the
highlands, while lush rice paddies carpet the lowlands. Cash crop plantations
producing rubber, clove and palm oil crowd the landscape towards the southern
tip of the province.
With such
abundance, it's easy to see why not everyone is so keen to give up their land.
"It's
better to forego a watch than a machete," as one local saying goes.
Sigurung's nephew Bumiputera carries a dagger with him every day.
"We
want the company who builds the railway to be open in their approach and give
us fair and honest explanations -- not sweet promises and then a stab in the
back ... this will create danger," Bumiputera said.
Across the
archipelago in the past year, disputes over development of resources have
turned deadly. In northern Sumatra, a mob burned down the exploration camp of
an Australian gold miner. In central Sulawesi province, local residents pushing
for better public facilities attacked oil firms with Molotov cocktails, killing
two and shutting a field's oil output for two weeks.
And in
eastern Indonesia's Papua province, copper miner Freeport Indonesia's
operations were paralyzed by a three-month strike that led to blockades,
shootings and sabotage, as tribesmen armed with bows and arrows joined irate
miners.
"I
think there's real concern from local communities -- I don't think they're
against development, but they want the development to be done in an equitable
way," said Scott Poynton, chief executive of non-governmental organization
The Forest Trust. Poynton suggested creating jobs and services, such as
hospitals in remote communities, would help.
"There's
a risk that these spats will grow," he said, after completing an
eight-year project to remove guns from Java's teak forests.
It's
difficult to even get to Sigurung's village without danger. Gangs of
handkerchief-veiled bandits collect "road taxes" at obstacles on the
narrow country roads.
A QUESTION
OF TRUST
Before
Rudiantara can speak to a villager about buying his land, he first has to get
permission from the provincial governor, then the district chief, before
tracking down the house of the village head and asking him to talk to a member
of his clan.
Graft,
being endemic in Indonesia, is a problem not only for the buyer, but also for
the seller: corruption makes it difficult for residents to trust their leaders.
Residents
along the rail route repeatedly told Reuters they suspect government officials
and hereditary village chiefs will try to hoodwink them over land acquisition
deals.
"We
don't want any village head to become the point person on land talk. That
shouldn't be done," said Bumiputera. "All of us should know the
process and the pricing of any deal. They say they want to eradicate
corruption, but here there's a lot of petty corruption."
In a sign
of the likely disputes to come, Husni Thamrin, a fourth-generation head of
several villages on the rail route, said that kind of individual deal-making
could create a lot of local resentment, and that firms should go through the
chiefs.
Either way,
keeping the locals happy, from village communities to senior government
mandarins, will be critical to the success of Indonesia's drive to overhaul its
infrastructure.
"Don't
think that just because we're poor and you're wealthy, that we're uneducated
and you're well-educated, you can play with us," the village elder
Sigurung said.
(Additional
reporting by Mas Alina Arifin, Fathiya Dahrul and Dwi Prasetyo Budi Santosa;
Editing by Bill Tarrant)
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