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Norton Rose survey highlights significant opportunities for inward investment into Indonesia

In a far reaching survey by Norton Rose Group, the international legal practice, 109 respondents from Asia Pacific, Middle East, Europe and North America and drawn largely from the infrastructure and energy sectors, resoundingly agreed (96%) that there needs to be an increase of foreign investment into Indonesia. The respondents agreed that the greatest areas of opportunity include mining and minerals, power, LNG, upstream oil and gas, telecoms and palm oil.

The respondents were unanimous in their view that Indonesia requires international funds to invest in the vast number of potential energy and infrastructure projects. In the next two years 86% of all respondents thought that investment in Indonesia would increase and 21% thought that the increase would be significant.

Jeff Smith (pictured), Partner, Singapore and Head of South East Asia, Norton Rose Group, says: "We are certainly seeing increased interest in Indonesia, and not just from Asian neighbours, but from much further afield. Investors from Europe and India in particular seem much more interested than before."

Nearly 92% of respondents rated the mining and minerals sector as offering good or very good investment potential. Of all the sectors in the Norton Rose Inward Investment into Indonesia 2011 survey, respondents rated the mining and minerals sector the highest. The enthusiasm for this sector significantly exceeds the second most highly rated sector, being telecoms (73%), followed by palm oil, ports and roads.

The clear message from respondents is that the commodities sector offers more potential than infrastructure. Foreign investors have long enjoyed favourable returns by meeting the huge demand for commodities from growing economies in the region, such as India and China.

Ashley Wright, Partner, Singapore, Norton Rose (Asia) LLP, says: "The massive attraction of the mining and minerals sector is Indonesia’s huge reserves and its proximity to an Asian market hungry for commodities."

Unsurprisingly, 94% of respondents think that the private sector has an important role to play in the development of energy and infrastructure projects in Indonesia.

The Indonesian Government acknowledges this: the National Development Planning Agency (BAPPENAS) forecasts that investment of approximately USD93 billion from the private sector will be required to meet Indonesia’s infrastructure needs in the 2010-2014 period.

Laurie Pearson, Of Counsel, Singapore, Norton Rose (Asia) LLP, says: "The key is to bring together the public and private sectors. Both have a crucial role to play. The public sector must continue its work to create a stable and attractive investment climate for private investors."

The Indonesia Infrastructure Fund (IIF) and the Indonesia Infrastructure Guarantee Fund (IIGF)

The Indonesian Government established the IIGF and the IIF in 2009 to provide an alternative source of funding and support for infrastructure projects. More than three quarters of respondents (79%) thought that the IIF and IIGF have an important role to play in the future development of projects in Indonesia.

Susandarini, Managing Partner at Susandarini & Partners, Jakarta, says: "The introduction of the IIF and the IIGF by the Indonesian Government to sweeten public-private partnership (PPP) schemes shows the serious effort and commitment provided by the Indonesian Government to accelerate the development of infrastructure projects in Indonesia."

Laurie Pearson, Of Counsel, Singapore, Norton Rose (Asia) LLP, says: "The critical question remains the same – what Government support will be offered for non-PPP projects? Some form of Government support is still key for financing many power and other domestic projects."

Most respondents identified multiple risk factors as being significant to a successful investment in Indonesia. Legal / regulatory risk was considered particularly serious, with 95% of respondents viewing it as significant or very significant.  Investors want a legal environment that is enforced and provides enough certainty to underpin long term finance.

Respondents were also concerned with the availability of foreign finance, engaging with a suitably qualified Indonesian partner, jurisdictional uncertainty between regional and federal Government, land acquisition, offtaker credit risk, political stability, restrictions on foreign ownership and the availability of Government guarantees (in that order).  

Ross Ramsay, Senior Foreign Legal Counsel at Susandarini & Partners*, Jakarta, says: "While all of the nominated factors were seen as significant, legal/regulatory risk and availability of foreign finance were seen as particularly significant.  These two factors are of course closely related, with prospective foreign investors wishing to see clear regulatory frameworks in place in Indonesia to support their investment funds."

Overall, the results show great enthusiasm for investment in Indonesia tempered with reservations concerning the political and legal environment – particularly legal/regulatory risk.

That many of the most significant deals in South East Asia are taking place in Indonesia is testament to the willingness of the foreign investment community to place their confidence in Indonesia’s investment potential and to find ways of securing their interests despite the perceived difficulties of working in this exciting emerging market.

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