Study on Private-Initiative Infrastructure Projects. in Developing Countries in FY2010. Project in the Republic of Indonesia SUMMARY.

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1 Study on Private-Initiative Infrastructure Projects in Developing Countries in FY2010 Study on Jalarta International Gateway Port Development Project in the Republic of Indonesia SUMMARY March 2011 第 1 章 第 2 章 The Ministry of Economy, Trade and Industry Prepared by: Ernst & Young ShinNihon LLC Japan External Trade Organization (JETRO) ITOCHU Corporation Oriental Consultants Co., Ltd.

2 1. Background of the Project The Greater Metropolitan Area extending from West Java province to Banten province become significantly important center on various industries and have 36% of GDP in total of Indonesia (in 2008, except oil and gas ). The port of Tanjung Priok at this area is functioned as only international commercial port and handled 3.8million TEU in 2009 for the containers. The handling capacity is evaluated at 4million TEU and is expected to have a difficulty on handling near future. In this connection, JICA undertook the studies in the international cooperation for port developments as mentioned below, and reported importance of development for the port infrastructure and access roads in order to improve the trade environment and ensure effectiveness of logistics. << The study for development of the Greater Jakarta Metropolitan ports 2003 >> << The study on trade related system and procedures in the Republic of Indonesia 2005 >> To develop introduction of the private investment, the government provided the policy of PPP (Public Private Partnership) in Presidential Regulation No.42 in In respect of Port development, Shipping Law was enacted in April, 2008 and has induced the private investments in addition to separation of port management/port operation sectors, aiming to introduce competition and effectiveness on port management. JICA was also proceeding the study. << The study on the new public private partnership strategy for the port development and management in the Republic of Indonesia 2009 >> Following the previous supports, the preparation of Master Plan for ports developments in the metropolitan area for 2025 is ongoing by JICA. << Master plan study on port development and logistics in greater Jakarta metropolitan area May, 2010 May, 2011 >> Under processing on the above studies, it is a fact that the cargo volume has been increasing rapidly, that requires urgent projects which cope with immediate increase of the cargoes. The projects have been ongoing under Japanese Yen loans. << The Urgent Rehabilitation Project of Tanjung Priok Port >> ( Scope : widening and deepening the ship lane. Yen Loan : 12 billion Construction : 2011 ) << Tanjung Priok Access Road Construction Project >> ( Scope : Constructing an access road to Tanjung Priok Port Yen Load : 52.9 billion Construction : 2011 ) In addition to above development, the urgent construction of new container terminal in Tanjung Priok Port is now under discussion. In compliance with the request from Indonesian government, JICA is now proceeding Pre-F/S on construction at North Kalibaru after review of their ongoing Master plan study on port development and logistics in greater Jakarta metropolitan area. In the same time, the private investment plan by the state-owned seaport operator, Pelindo II is separately proceeding at their own expense for new container terminal of which the opening is aimed in These 2 plans have different scope and implementation schedule but the discussion on unification is not concluded yet.

3 On the other hand, Japanese private firm group consisting of Itochu Corporation and NYK Line intend to participate the terminal management of new terminal and is desiring application of Japanese PPP scheme. Japanese firms opine on management of new terminal that it is essential to work with Pelindo II who is experienced in Tanjung Priok port. However, Pelindo II is going to be one of the terminal operators under new shipping law and may have a difficulty on securing the concession right of new terminal as the established port authority is responsible for competitive selection of the operator under new regulation. To enable Japanese firms to ensure their participation, the development plans should be verified under discussion with the private counterparts and government officials and identified on practicability. This study is processing on construction of new container terminal for Port development plan phase 1 at North Kalibaru for evaluation and shall provide the proposal with action plans from the viewpoints of the private firms in order to ensure implementation. 2. Study of Concept The study is processing in the following steps. 1) Identification of the private investment ongoing plan(pelindo II) First of all, the process and development of the ongoing plan is identified for port plan, details of design, construction cost, and environmental and social evaluation etc. 2) Technical review The technical items are studied as mentioned below. a) Container cargo demand forecast The demand forecast is reviewed based on JICA data of The project of master plan study on port development and logistics in greater Jakarta metropolitan area and the projection of the state-own seaport operator, Pelindo II, and verified. b) Study of container terminal layout plan The requirements of terminal size and capacity is identified in view of current terminal operation data, and current vessel size and possible increase of the tonnage in the fleet for future. The specification and area of the terminal is determined. c) Port plan The port plan is determined based on current private investment plan in consideration to designed vessel size and SEA etc. d) Conceptual design The design calculation is undertaken based on the typical sections of the channel, breakwater, revetment, reclamation, access road and other facilities which are determined in the conceptual design. The implementation of new technical method should be considered in view of squeezing the construction lead time as well as comparison with current method. e) Project cost The estimation of project cost is calculated based on implementation processes of the general design and undertaking the appropriated method of construction in view of short implementation period. The

4 introduction of new technologies is discussed in comparison with the previous method. f) Environmental and social impacts The evaluation of environmental and social impacts includes verification of the contents of EIA conducted by Pelindo II and identification of the stake holders. The action plan for the project should be prepared. 3) Justification of the project The justification of the project is evaluated with study of the following items. a) Study of investment demarcation between public and private. It is in general under the ordinary port development and management project that the public is responsible for the unprofitable public investment for the infrastructures including the breakwater and dredging on access channel etc,and the private for beneficial operation and management including installment of the terminal facilities/equipments etc. In this study, the several patterns of demarcation are considered and summarized with the implementation schedule and construction cost in view of urgency of Port development plan phase 1 at north Kalibaru. b) Verification of implementation schedule ( in case study ) The implementation schedule is verified by each demarcation and reviewed for expected completion and commencement of operation. The selective demarcation for earlier completion/commencement of operation is determined for evaluation of finance at next stage. c) Evaluation of finance ( in case study for practicability ) The verification of the costs is undertaken with study on practicability of implementation schedule. d) Contributed economical effectiveness ( in view of National investment ) The contribution to economical effectiveness is considered and verified in case of execution and inexecution. 4) Proposal toward implementation of the project The proposals of study team are compiled based on the above verifications. a) Appropriate demarcation of public/private investments in view of commencement on operation and profitability. The timing of commencement and appropriate demarcation is proposed in consideration of implementation schedule and financial evaluation. b) Utilization of Japan ODA finance program The amount and investment objectives are proposed. c) Utilization of Japanese technology on port construction The proposal on utilization of Japanese advanced technology is prepared in order to squeeze the construction period and quality management. d) Action plan The action plan is prepared and includes each tasks for private and public parties concerned including promotion/negotiation with Japanese/Indonesia governments for implementation of the projects.

5 3. Description of the Project 3.1 Progress of DGST plan DGST responsible for the port development plan is preparing the Master Plan of Tanjung Priok port and under assistance of JICA and proceeding Pre-F/S for North Kalibaru phase 1 plan. DGST have approved the port development plan at North Kalibaru phase 1 in November, 2010 proposed by the interim report of JICA study team and is going to revise the Master Plan. The JICA study including Pre-FS for North Kalbaru will be completed until May 23, 2011 and then, the request on assistance of F/S and DD etc will be issued with Japanese government to proceed the plan. Fig 3-1 Port development plan at North Kalibaru phase 1 proposed by JICA study team ( source : the interim report of JICA in November, 2010) 3.2 Progress of the Private investment plan (Pelindo II) Pelindo II is proceeding detailed design and selection of the contractor at their expense aiming to open new container terminal in Pelindo II argued on their possession of the concession right that there no need to have competitive tender in case of the entire private investment unless PPP project. The port development plan of the private investment by Pelido II shown below Fig 3-2 was based on the Master Plan prepared by MOT in 2007 but it differs from the plan proposed by JICA study team and incorporated in the revised Master Plan by DGST. DGST is not taking a positive stance to accept commencement of the construction on their plan. The argument between Pelindo II and DGST is unresolved and will require further development with uncertainness.

6 Fig 3-2 Port development plan at North Kalibaru (The private investment plan) ( source : Pelindo II ) 3.3 Participation of 2 Japanese private firms Itochu Corporation and NYK Lines have initiated the PPP project under Japanese ODA loan and intend to participate on thee operation/management of the container terminal at the port development plan phase 1 at North Kalibaru. The port plan on this PPP project was modified based on the proposal of JICA study team is shown below. Their management plan is based on joint venture with Pelindo II, who is however making argument on long implementation schedule under utilization of Japanese ODA loan as the opening of new terminal requires urgency due to higher growth in the projected throughput. Based on our finance analysis, it is quite difficult for Japanese firms to participate the project with higher risks as the all private investment had FIRR at lower rate less than 10% in calculation. On the assumption of participation of 2 Japanese firms in terminal operation business, the concession right is essential to lie at Pelindo II but it is not fixed due to competitive tender process required in new regulation. Pelindo II is insisting to proceed their plan at private investment to ensure obtainable concession right at earlier stage. This issue is still unresolved and under argument.

7 Fig 3-3 Port development plan at North Kalibaru (proposed by the study team) The points argued are summarized as follows; Table Summary of the points argued in the plans ITEM Pelindo II DGST (JICA Study) METI Study Development Plan Development Cost Year of Commencement Operation Berth Length:800m Depth of Basin:-18.0m Location:East Water of the Port 617 Million USD (Pelindo Study) 2013 Berth Length:1,200m Depth of Basin:-15.5m Location:North Water of the Port 1,000 Million USD (Progress Report; still under estimation) 2015~2016 (Progress Report; still under estimation) Berth Length:1,000m Depth of Basin:-14.5m Location:North Water of the Port 789 Million USD (METI Study) 2015: Partial Operation 2016: Full Operation Finance All Private Investment Basic Infra:Yen Loan Terminal Facilities:Private Basic Infra:Yen Loan Terminal Facilities:Private Concession Right Obtained by private operator with own investment Port Authority will call tender for concessioner Obtained by private operator with own investment Operator PPP Scheme Assumed Pelindo II & local/foreign partners Introduction of PPP scheme is assumed not required Port Authority will call tender for concessioner Concession right will be given through tender competition even for unsolicited project Assumed Pelindo II & Japanese Private Investors Introduction of Japanese PPP scheme is assumed on the condition that Pelindo II and Japanese investors will obtain concession right Japanese 2 firms would like to start discussion of the partnership in new terminal management firm but at first, it is recommendable to induce Pelind II to agree PPP scheme with Japanese ODA loan which enable to reduce the financial risks and to discuss on ensuring possession of concession right.

8 Container Throughput (1,000TEU) 4. Implementation Schedule The implementation schedule of the development plan at North Kalibaru finally proposed by the study team is shown below table (Table 4-1 Implementation schedule). On this study, the handling capacity at the current facilities in Tanjung Priok port is estimated at 5million TEU for the international containers which will be increased as per the international container forecast in Fig 4-1 Throughput forecast for international/domestic containers at Tanjung Priok. Based on these forecast and estimation, it is opined that the commencement of operation for new terminal in the port development plan at North Kalibaru phase 1 is required in 2015 at latest. The implementation schedule is extended for 5 years but it is essential to ensure schedule management accurately so that the terminal can be completed without delay. Table 4-1 Implementation schedule Fig 4-1 Throughput forecast for international/domestic containers at Tanjung Priok 20,000 15,000 Total Throughput Forecast International Container Forecast Domestic Container Forecast 10,000 5,000 0 Year

9 5. Feasibility of the Project 5.1 Preliminary Economic Analysis The purpose of this section of the report is to evaluate the effect of public investment from the viewpoint of the national economy. The national benefit is calculated based on the comparison between the With Project Case and the Without Project Case. With Case Without Case : defined as the completion of the project proposed in this study. : defined in order to handle the excess cargos which are more than the capacity of the existing container terminals. It is assumed that the cargos are handled at the TJ Emas port, which is located in the Java Island, and transferred to the hinterland of TJ Priok port by truck. The feasibility of the project is evaluated with the calculated Economic Internal Rate of Return (EIRR). Table EIRR calculation results CASE Alternative A Alternative B BASE CASE 20.7% 20.6% the costs increase by 10% 19.5% 19.4% the benefits decrease by 10% 19.4% 19.3% In general, it is said that a project with an EIRR of more than 15% is economically feasible considering the opportunity cost of capital in Indonesia. As for this study, the resulting EIRRs of all cases are larger than 15%. This means that the planned project is economically feasible. 5.2 Preliminary Financial Analysis The purpose of this section is to evaluate the feasibility of this project by calculating FIRR (Financial Internal Rate of Return) on the soundness of the balance of payments and investment earnings over time. The study is proceeded on the fore-mentioned plans in chapter 3, Alternative A ( all private investment ) and Alternative B ( public private partnership ) for comparison. The procurement of investments by the terminal operator is assumed to comprise 30% by the owned capital and 70% by a loan from the commercial bank based on the discount rate of 10.5%.

10 Alternative A, Case 6 項目 Table Financial terms and condition for analysis 政府 民間 1 事業費分担 - 2 収入 - 航路浚渫 防波堤建設 地盤改良 埋立 橋梁 道路建設 岸壁建設 陸上ターミナル施設建設 荷役機械調達 荷役手数料 トランシップ料 コンテナ保管料 コンテナ転地料等 3 運営費 - 人件費 燃料費 水道光熱費 ターミナルマネージメント費 4 維持管理費 - 5 減価償却費 - 6 税金 - 利益の 20% 岸壁 ヤード舗装 建物 荷役機械 維持浚渫 アクセス道路防波堤 護岸 埋立地 アクセス道路 岸壁 ヤード舗装 建物 荷役機械 7 物価上昇 年率 5% の物価上昇率を 2020 年まで考慮 ( 建設費 運営費 ) 8 レベニューシェア 9 資金調達 - Alternative B, Case 1 項目 政府 自己資金 30% 市中銀行 70% 市中銀行 ( 年利 15% 返済期間 10 年 据置期間なし ) 民間 1 事業費分担航路浚渫 防波堤建設 地盤改良 埋立 橋梁 道路建設岸壁建設 陸上ターミナル施設建設 荷役機械調達 2 収入岸壁使用料 曳船料等 荷役手数料 トランシップ料 コンテナ保管料 コンテナ転地料等 3 運営費人件費 水道光熱費等人件費 燃料費 水道光熱費 ターミナルマネージメント費 4 維持管理費維持浚渫 アクセス道路岸壁 ヤード舗装 建物 荷役機械 5 減価償却費 - 岸壁 ヤード舗装 建物 荷役機械 6 税金 - 利益の 20% - 7 物価上昇 8 レベニューシェア 9 資金調達 民間ターミナルオペレーターの収入の 10% を Royalty として政府に支払うと仮定 円借款 ( 年利 1.5% 返済期間 25 年 据置期間 7 年 ) 円借款 STEP( 年利 0.2% 返済期間 40 年 据置期間 10 年 ) 年率 5% の物価上昇率を 2020 年まで考慮 ( 建設費 運営費 ) 自己資金 30% 市中銀行 70% 市中銀行 ( 年利 15% 返済期間 10 年 据置期間なし ) The outcome of evaluation is summarized in the below table. FIRR(Financial Internal Rate of Return) of Alternative A was calculated at lower value, 8.6%, which is below the discount rate of 10.5% in the assumed owned capital (30% of total investment amount). In the other hand, Alternative B was quoted at 3.8% for FIRR in the public portion and 18.1% for the private portion. The major revenue of the public comprises the royalty (10% of the revenue of private terminal operator) on the previous assumptions but the lower interest loans including Japanese yen loan shall be required to compensate repayment of the loan. The discussion is continued at the chapter of Cash flow in details. FIRR for the private portion 18.1% which is higher than the discount rate of 10.5%. It is recognized that Alternative B is very feasible in financial viewpoint. As the result of evaluation, the Alternative B plan would be proposed for the favorable demarcation in finance. Investment Cost (1,000 USD) Table Summary of financial analysis Alternative A Case 6 Private Operator Government Alternative B Case 1 Private Operator 906, , ,700 Total 946,000 FIRR (%) 8.6% 3.8% 18.1% (Sensitivity Analysis) (A) 10% overrun for investment cost FIRR (%) 7.7% 3.2% 16.5% (B) 10% lower demand FIRR (%) 7.2% 3.1% 16.3% (A) & (B) FIRR (%) 6.4% 2.5% 14.7%

11 6. Introduction of Japanese Technology etc 6.1 Technical Advantage Container terminal management It is understood that it is significant to consider the quality of service for the users in terminal management and to ensure continuous efforts and improvements on operational productivity and efficiency among the terminal operators in competition in order to obtain the regular users (shipping lines). Japanese global shipping lines have managed and operated their own terminals, through which they have built their knowledge/experiences on operational demand/required productivity/efficiency etc and management skill at the position of not only for the ships operator (terminal user) but also terminal management. Especially, their terminals in Japan have achieved higher productivity among the world under cooperation with the local stevedore labors. Their knowledge and activity in Japan terminal has been valued in terminal management overseas and contributed to the benefit for the foreign shipping lines who are jointly operated and in vessel-shared operation Cargo handling equipments The terminal requires introduction of highly efficient machineries with stable performance and low breakdown ratio in order to ensure smooth and safety operation. The electrical equipment management system for these equipments is especially required to be high quality and stable due to direct factor on emergency stoppage by breakdown and safety issue involved during operation. Low defect ratio can contribute to not only cargo operation management but also maintenance cost under long term operation. Under these requirements, Japanese equipments have the advantage to the others. Considering to environmental effects and energy issue in future, Japanese manufacturers have developed hybrid machineries and electrical RTG etc with technical advantage Construction work It is said that Japanese firms have the advantage of a quality and process management to Chinese, Korean, Indian, Thailand and other contractors. It is considered that Japanese contractors are beneficial for this project which requires short implementation schedule and quick commencement of operation. With regards to construction materials, a quality of steel pipe piles and corrosion-proof technology have been higher than other Asian products. The introduction of Japanese high technology on soil improvement is practical and is definitely contributing to expediting schedule and higher quality Study / Design Japanese consultants have so far worked on various ODA projects in Indonesia and preformed well for preparation of Master Plan, feasibility study, detailed design, selection of contractors, construction management and other wide fields. For this project, it is essential to invite Japanese consultants in view of necessary introduction of Japanese technology on managing construction under tight schedule, soil improvement and others. 6.2 Economical Advantage Price competitiveness of Japanese firms Japanese manufacturers and construction firms have been highly appreciated by Asian government officials in technical, delivery and punctual viewpoints but it allows impression of high costs. The increase of cost has been attributed to the direct and indirect costs on the labor, domestic transportation and land etc. Japanese firms have continued to various efforts on reduction of the costs by proceeding overseas transfer of the production and localization at the development countries Utilization of Japanese ODA PPP project Japanese MOFA fully recognized importance and contribution to the economical progress of the development countries by Japanese private investments and have encouraged their support on the government finance including ODA and activities of Japanese firms in cooperation with the related government officials and assistance firms in collaboration. By utilizing their official and political supports, it is expected that Japanese firms have financial advantage and develop their activities which will contributing to the counterpart countries.

12 With regards to this project of the port development plan at North Kalibaru phase 1, it is recognized that the scheme of Japanese PPP project with moderate loan program supported by Japanese ODA loan should be discussed and accepted instead of the entire private investment plan proposed by Pelindo II Optimizing of Japanese ODA terms, STEP STEP project was introduced in 2002 to optimize Japanese competent technologies and know-how for overseas transfer to the development countries. The regulation and policy have offered the special Japanese loan terms of the lower interest at 0.2% for a loan period of 40 years in case of Indonesia, subject to procurement of Japanese products/materials for more than 30% of the concession price. This financial terms should be effective in the project favorably and supported financially with advantage when implementation. 7. Risks on Execution of the Project 7.1 Necessity for expediting the study/formalities on Japanese ODA scheme The study is proceeded in case of adoption of Japanese ODA loan for the public portion. It is understood that Japanese government have proceed review of the ODA application process in compliance with the request of expediting the process by the counterpart countries and in viewpoints of strategic effectiveness on the support. Japanese government declared the policy in June, 2008 in respect of Expediting Japanese ODA loan process that the approval lead time for procurement of the consultants and construction work should be shortened to within 2 years as target. It is recognized that this policy has been reviewed every year with additional amendments for improvement. It is recommendable that this policy should be optimized for implementation of the subject projects. With regards to this project, it is considered that E/S (Engineering Service) loan may be applicable and needs to accept the engineering service including collection of the site data, detailed design and preparation of the tender documents etc for the design work in advance to the construction work. This loan scheme is subject to completion of the feasibility study with official acceptance of the practicability/justification of the project, and may be applicable in this project case as the practicability/justification was already confirmed by Pre-F/S of JICA study although F/S is not officially finalized. In ordinary Yen loan, it is in principle that the environment assessment report should be disclosed by 120 days prior to conclusion of the concession contract but E/S loan allows to go on the environment assessment in parallel with design work and preparation of the tender documents, and is one of the favorable option for consideration. In order to expedite the construction aiming to early commencement of the terminal operation, it is required that the various method to reduce the implementation time should be considered and discussed in any occasion. 8. Evaluation of Environmental and Social Impact 8.1 Existing Matters of Environment General The target area of this study is around the port of Tanjung Priok, because the subject of this survey focuses on the phase I of the port development plan of Tanjung Priok Port. In the Tanjung Priok port, the employment of around 30,000 people has been produced and in the Kalibaru fishing port, which is at the east side of Tanjun Priok Port, approximately 2,000 fishermen have lived. In sea area of the Tanjung Priok port, the water pollution is observed with the problem. Therefore in this development plan for the new container terminal neighboring inhabitants and environment should be considered. 8.2 Positive Environmental and Social Impact of the Project With implementation of the project such as construction of new container terminal and access roads, removal of the existing breakwater, the environmental improvement around project site can be considered as follows. By removing the breakwater at east side of the port, the water flows inside the port are becoming faster and the sea water are exchanged. The improvement for water quality is expected. (Natural

13 Environment) By access of the larger vessels accompanied with development of container terminals and increases of depth in the routes and at anchorage, CO2 emissions per container 1TEU is expected to be reduced. (Natural Environment) It is expected to hire local residents for the workforce required in the port. So, it is expected to improve the life level of residents and generate employment opportunities for local residents. (Social Environment) With construction of the new terminal and increase of the cargo volume, it is expected to increase industrial and regional development at the hinterland. (Social Environment) 8.3 Negative Environmental and Social Impact of the Project Table 8-1 List of Environmental and social impacts Category 2 Pollution Control 4 Social Environ ment Environmental Item (1) Air Quality (2) Water Quality (3) Wastes (4) Noise and Vibration (1) Resettlement (2) Living and Livelihood Confirmation of Environmental Considerations The examinations on compliance with the environmental standards should be carried out in EIA, because it would be affected by increase of passing vehicles with this project. Water quality simulations for alternative plans should be carried out in EIA exam, because it would be affected by variation of layout of port with this project. The disposal plan of waste materials should be prepared and it should be strictly supervised during the implementation of this project. The examinations on compliance with the environmental standards should be carried out in EIA, because it would be affected by increased of passing vehicles with this project. With construction of access roads, the resettlement of 50 houses may be required. In EIA exam, the route to minimize number of houses to be resettled should be considered from alternative routes. Depend on layout of the terminal and the route of access road, fishermen of Kalibaru fishing port are limited to maritime traffic. 8.4 Alternative Plans As a comparison of layout of landfill and access roads, Pelindo II plan and Master Plan are compared at the view point of the environmental impact. Table 8-2 Alternative plans about environmental impacts PELINDO II Plan Master Plan A route B route C route A route B route C route Layouts

14 Fishery Water Quality Residents Fishery to use aquacultures at reclamation areas should be moved. Fishermen of Kalibaru fishing port are limited to maritime traffic. The piers in fishing port with C route would affect to traffic convenience for fisherman. By removing the breakwater and widening water area, partially improvement for water quality is expected. Polluted materials may transfer to Kalibaru fishing port. Number of houses to be resettled with construction of access road : about 50 houses Number of houses to be resettled with construction of access road : about 50 houses Number of houses to be resettled with construction of access road : about 25 houses No impacts on fishery Due to securing water flow at east side of port, big improvement for water quality would be expected. Number of houses to be resettled with construction of access road : about 50 houses Evaluate 8.5 Actions to be made by the Government for the Project Pelindo is promoting the private investment plan which is based on Master Plan of the Tanjung Priok port in The three provinces (DKI Jakarta, Bekasi and Tangeran) have conducted SEA survey about coastal area use of the Java Sea, and until December 2010 (or January 2011) will submit SEA to Ministry of the Environment (or their organizations) and plan to get approval from MOE. After approval of SEA, Pelindo would submit EIA (under preparation) to MOE and in three months the development permit would be receive from MOE.