INFRASTRUCTURE INVESTMENT IN EMERGING MARKETS AND DEVELOPING ECONOMIES A BRIEF LOOK AT INDONESIA. Raj Kannan, Managing Director

INFRASTRUCTURE INVESTMENT IN EMERGING MARKETS AND DEVELOPING ECONOMIES A BRIEF LOOK AT INDONESIA Raj Kannan, Managing Director 2 July 2015 St. Catherine s College, Oxford

CONTENTS 1. Overview of Indonesia Economic, Demographic & Investment Pages 2-5 2. Impediments to Continued Growth Infrastructure Deficits Pages 7-12 3. Role of Institutional Investors in Infrastructure Investment Page 14 4. Role of DFIs Increasing but faces familiar traction issues Page 16 5. Key Takeaways Page 18 Page 1 of 28

Economic Overview Solid and consistent growth and projected to become the 5th largest economy in the world by 2030 Projected Annual GDP Growth Rate 2015-2018 China & HK Vietnam Kazakhstan Qatar India Indonesia Nigeria Ghana Thailand Chile 7.2% 6.5% 6.5% 6.5% 6.2% 5.5% 5.4% 5.2% 4.7% 4.6% 0.0% 2.0% 4.0% 6.0% 8.0% Projected Real Annual GDP Growth Source: Ernst & Young: Rapid Growth Markets (2014) Estimated Growth of the Indonesian Consuming Class In Million People Below Consuming class Consuming class 240 195 45 265 180 85 280 110 170 2010 2020 2030 Source: McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesia s Potential (2012) Projected GDP 2018 (USD Billion) 10 Fastest Growing Markets China & HK India Indonesia Nigeria Thailand Chile Kazakhstan Qatar Vietnam Ghana $2,721 $1,311 $495 $451 $388 $330 $284 $277 $57 Source: Ernst & Young: Rapid Growth Markets (2014) $16,305 $0 $5,000 $10,000 $15,000 $20,000 Projected GDP (USD Billion) China US India Brazil Indonesia Japan Germany Mexico France UK Projected GDP 2030 (USD Trillion) 10 Largest Economies 12.2 9.3 8.4 8.2 6.6 6.4 5.6 38.2 30.3 73.5 0 20 40 60 80 Projected GDP (USD Trillion) Source: Standard Chartered: The Super-Cycle Report (2010) Despite recent growth setbacks, Indonesia s GDP is estimated to grow by 5.5% per year between 2015-2018. By 2030, the country is expected to become the 5th largest economy in the world. From 2010 2030 additional 125 million people will enter the consuming class (middle class and above). Page 2 of 28

GDP Contributors - 17,000 islands but 82% of GDP is from 2 Islands - Java and Sumatra, with Kalimantan growing rapidly 24% of GDP 9% of GDP 22% of Population 6% of Population 4% of GDP 7% of Population 3% of Population 2% of GDP Industrial zone Power plants Corn Cocoa 58% of GDP 57% of Population 3% of GDP 5% of Population Palm oil Fishery Shipyard Although having only 17% of total national landmass, Java encompasses 57% of the national population and produces approximately 58% of national GDP. A majority of industrial zones are present in Java but is expanding to the Eastern Indonesia regions. Vast resource potentials and industrial opportunities are being opened up including geothermal power, fisheries, shipyards, cocoa, palm oil, and more. Source: Indonesian Statistical Agency (BPS); Indonesian Investment Coordination Board (BKPM), 2013 database; Tusk Advisory Analysis Page 3 of 28

Demographic Bonus Enviable numbers in the productive age group with majority living in cities and most are internet savvy Estimated Growth of the Indonesia s Population by Age Group In Million People Proportion of Urban and Rural Population in Indonesia 2012 2030 300.00 250.00 200.00 240 12 265 24 280 28 53% 53% 71% 150.00 100.00 163 ~68% 183 ~69% 196 70% Urban Population Rural Population Source: McKinsey Global Institute: The Archipelago Economy: Unleashing Indonesia s Potential (2012) 50.00-65 58 56 2010 2020 2030 Children (0-14) Adult (15-64) Elderly (65 above) Source: Coordinating Ministry of Economic Affairs, MP3EI Book (2011) 196 million people will be in the productive working age group of 15 to 64 by 2030, encompassing 70% of the population. This advantage gives Indonesia the largest working population in the region. Internet users (in million) 150 100 50 0 32 million people are expected to move from rural to urban areas from 2010-2030. 74.6 83.6 93.4 102.8 2013 29.8% 2014 33% 2015 36.5% Percentage of total population 2016 39.8% The need for massive investments in urban housing and employment sectors to accommodate the boom is increasing. Page 4 of 28

Investment Boost - Rising Foreign Direct Investments, mainly from neighbouring countries Foreign Direct Investments (in million US$) FDI by Country of Origin (2014) (in billion US$) 35,000.0 30,000.0 CAGR 11.9% 28,617.5 28,529.70 Singapore, $5.80, 20% 25,000.0 24,564.7 Others, $9.90, 35% EU, $3.80, 13% 20,000.0 15,000.0 16,214.8 19,474.5 Hong Australia, Kong, $0.60, 2% $0.70, 2% South China, $0.80, 3% Korea, USA, $1.10, 4% $1.30, 5% Japan, $2.70, 10% Malaysia, $1.80, 6% 10,000.0 5,000.0-2010 2011 2012 2013 2014 FDI in Indonesia has grown rapidly over the last 5 years and is expected to rise further. The current FDI is dominated by fellow Asian countries particularly Singapore, Japan, and Malaysia accounting for over 36%. Source: Statistics on Foreign Direct Investments Realization Based on Capital Investment Activity Report Q4, 2014. BKPM Note: investment numbers exclude oil & gas and financial investments Page 5 of 28

CONTENTS 1. Overview of Indonesia Economic, Demographic & Investment Pages 2-5 2. Impediments to Continued Growth Infrastructure Deficits Pages 7-12 3. Role of Institutional Investors in Infrastructure Investment Page 14 4. Role of DFIs Increasing but faces similar traction issues Page 16 5. Key Takeaways Page 18 Page 6 of 28

Key Impediments to Continued Growth High Logistics Costs Indonesia s logistics costs at 27% of GDP, is very high compared to the average ASEAN and ASIA PACIFIC logistics costs, which is at 10% Land transportation is the major contributor to logistics costs 30.0% 25.0% 20.0% Indonesia s logistics costs are much higher than in other ASEAN and neighboring countries 20.0% 25.0% 27.0% Land (70.7%) Water (22.0%) Air (2.70%) Rail (0.5%) Services (4.1%) 16.3% 15.0% 13.0% 10.0% 8.0% 9.9% 10.6% 5.0% 0.0% Land Transportation contributes to more than 70% of Indonesia s logistics costs Source: World Bank Report State Of Logistics Indonesia 2013, Bahagia et al (2013) Page 7 of 28

Caused by major infrastructure deficits in the transportation sectors Travel Time (hrs/100km) Modal Share (%) Road Ratio (%) Malaysia 1.1 Hong Kong 25 11 63 0 Tokyo 22% China 1.2 Taipei 14 46 20 19 London 21% Thailand Vietnam Indonesia 1.35 2 2.6 Jakarta 2.3 62.2 12.9 22.6 Rail Private Transport Non-Rail Public Transport Others Singapore Jakarta 6.26% 12% Poor quality of roads and high levels of congestion have made the travel time in Indonesia the highest in the region, causing logistics costs to be the highest in the region. Lack of government investments in public transport over the years has resulted in excessive use of private transport for commuting, thus causing major congestion in most cities. Despite the general perception that Jakarta has sufficient roads, the reality is the opposite. General land acquisition problems combined with severe underinvestment in roads have caused this bottleneck. Ratio of Double Track (%) Dwelling Time (days) Air Transport Indicators Japan China India Malaysia Thailand Indonesia 41.1% 38.8% 28.4% 18.0% 13.4% 7.7% Tanjung Priok Thailand Malaysia (Port UK, Los Angeles Australia, NZ France Hong Kong Singapore 2 1.1 3 3 5 4 4 8 Quality of Air Transport Infrastructure Available airline seat km/week Airport Density (number per ha) 5 4 3 2 1 0 Passengerkilometers (million person- Malaysi a Cargo (tons-km) Thailan d Lack of Double tracking reduces efficiency of the rail system in the country both for freight and passenger rail services. Source: Tusk Advisory Analysis A major issue in the seaport sector is the high dwelling time that currently takes up to 8 days in Tanjung Priok, far longer than Thailand (5 days), and Singapore (1.2 days). Since the deregulation in 2004, growth in air travel has gone up double digit per year, but new airport development or expansion of existing airports has not caught up. SHIA for example is designed for 22 mil passengers but currently handles 55 million passengers per year (9 th highest in the world). Page 8 of 28

Combined with under investments in the Power & Water Sectors - reaching a crisis situation Electrification Ratio (%) 100 80 99.3 94 100 97 89.7 73.7 65 97.3 85 60 40 32 20 0 Thailand Indonesia Malaysia Philippines Vietnam Electrification Ratio (%) Urban (%) Rural (%) Low electrification ratio, especially in rural areas is a major bottleneck for economic growth. Water Storage Capacity Percapita (m3/capita) World Standard Conclusion Thailand 1104 1975 Water Resource Infrastructure Total Renew. Water Resources (per capita) 5 4 Large Dam Density 3 2 Freshwater Withdrawal Ratio 1 0 Indonesia 54 Large Dam Capacity Dam Storage Capacity 0 500 1000 1500 2000 2500 Inadequate water supply for personal use deteriorates living standard in Indonesia. It will increase citizens health service expense and income loss which eventually leads to economic losses for the country. Source: Tusk Advisory Analysis & World Bank Report No. of Large Dams (>15m) Malaysia Thailand China Vietnam Indonesia Poor management of the irrigation canals especially in the regional level has made rice production slow, thus creating issues with food security. 70% of Indonesia s bulk water is currently used for irrigation, thus improved management bulk water resources is needed. Page 9 of 28

Main causes for the infrastructure deficits includes delivery bottlenecks, under investments and lack of government led funding schemes The key issues and bottlenecks faced by a selection of priority projects: Official expenditure data in infrastructure is around 5% of GDP The actual percentage of APBN and APBD is actually lower, since this data includes costs of office buildings for related ministries. Main issues: Spatial Planning 22% Budgetrelated 14% Others 11% Permit 20% IPPKH 14% (in USD Billion) 60.00 5.24% 4.96% 5.06% 50.00 40.00 3.77% Infrastructure Investment 4.26% 4.00% 4.13% 5.01% 5.11% 4.72% 5.00% 4.00% Land Acquisition 33% AMDAL 6% 30.00 20.00 10.00 3.00% 2.00% 1.00% Other cross cutting issues faced by many infrastructure projects: Ambiguous legal and regulatory frameworks Lack of long-term financing Inadequately prepared projects Poor asset management Lack of consequence management Weak human capital and poor institutional capacity Lack of industry capacity Absence of community support for infrastructure projects - Private Sector State-Owned Enterprises Regional State Budget (APBD) National State Budget (APBN) Total Infrastructure Investment Share of GDP, % Total Infrastructure Investment 0.00% Source: Tusk Advisory Analysis Source: Tusk Advisory Analysis based on State Budget data from the Ministry of Finance Page 10 of 28

But change is on the way The government has established new agencies and new funding schemes for PPPs and priority projects 1 The Ministry of Finance is in the midst of operationalising a new PPP Unit. o The new PPP Unit will be directly under the fiscal agency, unlike the previous unit which was under the Planning Agency, Bappenas o The new PPP Unit will be directly involved in risk sharing frameworks and the design and implementation of innovative financing schemes like APS, PBAS+ etc. 2 The Government has established KPPIP to coordinate delivery of priority projects: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP 1 ) KPPIP 3 The Ministry of Finance is introducing Availability Payment Schemes & PBAS Availability Payment Scheme is being considered for 1. Economic Infrastructure that has no revenue upsides, such as roads in rural areas, public transport, access roads or railways to remote communities, etc. 2. Social infrastructure that naturally has low return profile such as hospital, public housing, schools and education facilities, or community facilities. Coordinating Ministry of Economic Affairs Ministry of Finance Roles in delivering priority projects: Ministry of National Development Planning (Bappenas) National Land Agency (BPN) o Stakeholder coordination and approval chasing mandate o Develop Pre-Feasibility Study (OBC) guidelines to be used by Bappenas for project screening. o Pre-Feasibility Study (OBC) guideline would consist the requirements for good quality economic and financial analysis for funding scheme determination. 1 In Indonesian: Komite Percepatan Penyediaan Infrastruktur Prioritas while for Economic Infrastructure that have revenue upsides, there are proposals to consider Performance Based Annuity Schemes Plus (PBAS+) PBAS+ is designed to incentivize the privates sector concessionaire of high economic impact projects to innovate revenue creation strategies that will generate additional revenues to the government. Page 11 of 28

CONTENTS 1. Overview of Indonesia Economic, Demographic & Investment Pages 2-5 2. Impediments to Continued Growth Infrastructure Deficits Pages 7-12 3. Role of Institutional Investors in Infrastructure Investment Page 14 4. Role of DFIs Increasing but faces similar traction issues Page 16 5. Key Takeaways Page 18 Page 12 of 28

To date the local institutional investors have had limited role in infrastructure investments but reforms are underway 1. PT Sarana Multi Infrastruktur (PT SMI) (State Budget 2015 allocated USD 1.6 billion. Provided loan amounts of USD 390,000 in 2013.) A government owned infrastructure financing company. 2. PT Indonesia Infrastructure Finance (Gov t commitment: USD 450 million. Disbursed USD 140 million in 2014.) A private non-bank financial institution with government seed equity. 3. Hajj Fund (USD 4.6 billion) Keep safe the Pilgrims deposits for their hajj journey. Most investments are allocated in Sharia deposits and Government Sukuk. No record of investments in infrastructure. In 2013, the total assets of insurance industry is USD 50 billion. Mainly investing in equities and bonds. Infrastructure as an asset class is still untested for these Insurance companies, for now 04 Special Purpose Funds (SPF) 03 Pension Funds (PF) Insurance Funds (IF) Indonesia has 267 institutions managing pension funds of USD 33 billion, mainly investing in deposits, mutual funds and bonds. No record of investments in infrastructure. 01 Sovereign Wealth Funds (SWF) 02 There are 4 types of pension funds (% of total assets in Indonesia): 1. Civil Service Provident 1 (26%) 2. BPJS (Old-age savings) 2 (31%) 3. Employee-Sponsored Pension Fund (35%) 4. Financial Institution Pension Fund (8%) 1 The funds will be incorporated into BPJS in 2029. 2 Not inclusive of Pension Fund, which will come into full effect on 1 July 2015. OJK is currently drafting regulations to enable pensions funds to invest in infra Indonesia currently has no sovereign wealth fund. The Government Investment Unit of Indonesia (PIP) was recently dissolved and is to merge with PT SMI. The introduction of long dated financing schemes like APS & PBAS+ will provide attractive options for the Indonesian institutional investors to enter infrastructure financing. Page 13 of 28

CONTENTS 1. Overview of Indonesia Economic, Demographic & Investment Pages 2-5 2. Impediments to Continued Growth Infrastructure Deficits Pages 7-12 3. Role of Institutional Investors in Infrastructure Investment Page 14 4. Role of DFIs Increasing but faces similar traction issues Page 16 5. Key Takeaways Page 18 Page 14 of 28

Development Finance Institutions have increased funding commitments to Indonesia for 2015-2019, but fund disbursement issues remain Loan Commitments by DFIs for Indonesia 2015-2019 8 10 5 10 Source: World Bank, official reports & Other news reports USD 95 Billion* 12 50* * Note: China s commitment is $10 bil for power sector and $40 bil via a fund focused on Indonesia and other Asian countries. USD 1.5 Billion (~ 2.7 times more than 2014) World Bank China* ADB JICA IDB Others ISSUES IN FUNDING DISBURSEMENTS 1. Sponsored projects face implementation bottlenecks 2. Government is undecided on the funding scheme determination Funds committed to infrastructure projects are not being disbursed according to schedule as the projects are hampered with bottleneck issues, arising from delays in permit issuance, land acquisition, etc. Complex bureaucracy and administration procedures prolong the process. Government often takes too long to evaluate its funding scheme options based on feasibility studies, thus the committed funds remain undrawn and unused, sometimes requiring extension of draw-down terms. For example, Soekarno-Hatta high-speed railway, Jakarta MRT With MOF exploring the use of long dated payments schemes like APS & PBAS, there is hope that the DFI s funds could be better absorbed. Page 15 of 28

CONTENTS 1. Overview of Indonesia Economic, Demographic & Investment Pages 2-5 2. Impediments to Continued Growth Infrastructure Deficits Pages 7-12 3. Role of Institutional Investors in Infrastructure Investment Page 14 4. Role of DFIs Increasing but faces similar traction issues Page 16 5. Key Takeaways Page 18 Page 16 of 28

Key Takeaways Indonesia is a rapidly growing economy with vast potential but investments in Infrastructure and human capital is a must to guarantee continued growth Ø The new government is focused on reducing logistics costs, ensuring energy security, food security and social equity to guide the growth; Ø There is still vast potential for growth outside of Java; and the government is supporting many programs and investments aimed at developing these regions; Ø Increased focus on making investment process easier and unlocking bottlenecks is encouraging; Ø Increased funding committment from DFIs and new rules to enable local institutional investors to participate in infra investments are steps in the right direction. DFIs and Instituitional Investors have a key role to play to guide the government in its mindset change to introduce long dated payment schemes Ø The government led funding schemes like APS, PBAS are prime opportunities for DFIs to help the government cross the funding barrier; Ø DFIs also need to provide support to the government to operationalise the new institutions and to help unlock the bottlenecks in funding disbursements; Ø Increased opportunities for international institutional investors with infrastructure investment experience to assist and co-invest with Indonesian institutional investors like pension funds that are likely to be allowed to invest in infrastructure in the near future. Page 17 of 28

THANK YOU www.tuskadvisory.com SINGAPORE Tusk Advisory Pte Ltd Level 25, One Raffles Quay North Tower Singapore 048583 SINGAPORE Tel: +65 6622 5718 Fax: +65 6622 5999 Email: corporate@tusk.sg INDONESIA PT. Tusk Advisory Penthouse / Level 21, Sona Topas Tower Jalan Jend. Sudirman KAV 26 Jakarta 12920 INDONESIA Tel: +6221 250 6668 Fax: +6221 250 6228 Email: corporate@tusk.sg Page 18 of 28

Page 19 of 28

New Government Priorities Focus on Fixing Infrastructure while Increasing Social Equity National Security Encompasses food, energy, and water resilience of the country. Focuses on reducing reliance on imports and increase domestic capacity for energy, food, and water. National Connectivity Encompasses the need to increase access between regions, reduce regional disparity, reduce cost of logistics and foster trade between regions and other countries. Social Equity Encompasses the need to provide social security to the people. Increase labor quality through better education, increase livelihood through better healthcare, and increase overall welfare. Food Security: Increasing food production to be self sufficient and less reliant to import. Targets to achieve production of 10 million tonnes surplus of rice by 2018. Energy Security: Ensure 96.6% electrification ratio and develop 35,000 MW of new generating capacity Water Resilience: Increase access to clean water from 60% to 100% by 2019. Increase the average water reserve capacity per capita from 54m3/capita/year to 115m3/capita/year 27% 19% Reduce Logistic Cost: Reduce overall logistic cost from 27% of GDP to 19% of GDP by 2019 to increase national competitiveness. Access Between Urban and Rural Areas: Increase connectivity between areas to leverage the economies of lessdeveloped regions while also paving way for urbanization Education: Provide 12 years compulsory education for all citizens. Increase amount of productive vocational labor. Healthcare: Provide accessible national health care system for all citizens via Health Card system and BPJS. Productivity & Welfare: Implement reforms to boost agricultural productivity, provide affordable housing, and create a social security system. Page 20 of 28

This Time with Direct Government Funding Commitments The Government Plan for 2015-2019 Logistics To reduce logistics costs from 27% of GDP to 19% of GDP by 2019. Develop 2,650 km new roads and complete 1,000 km new toll roads(includes those awarded but not started) Rehabilitation of 46,770 km of existing road Develop 2,159 km inter-urban railways and 1,099 km urban railways in Java, Sumatera, Sulawesi and Kalimantan Develop Bus Rapid Transit systems in 29 cities Mass rapid transit in 6 metropolitan cities and 17 large cities Develop 15 new airports Develop air cargo facilities in 6 locations Develop 24 new or revitalized seaports Procure pioneer cargo vessels, livestock vessels, transport vessels Technology To provide easy connectivity across Indonesia, technology infrastructure is required. Energy Improve connectivity by building infrastructure which leads to development of e-health, e- procurement, e-education, and e-logistics To achieve energy security, the GoI aims to reach electrification ratio of 96.6% by 2019. Develop power plants, incl. 30 hydropower plants, with the total capacity of 35,000 MW Optimize domestic refineries and build new oil refineries of 2X300,000 barrels Others Expansion to 1 million Ha irrigation system and development of 49 new dams to increase irrigation from dams rate from 11% to 20% Achieve sanitation and drinking water availability to 100% by developing water supply to 21.4 million house connections in metropolitan area and 11.1 million in rural area Improve public house by developing of 5,257 twinblocks flats to accommodate 515,717 households on lease Forecasted infrastructure funding sources for 2015-2019 Road Railway Urban Transportation Land Transport & Ferries Air transport Sea transport Power Energy (Oil & Gas) Information & Computer Technology Water Resources Water Supply & Sanitation Public housing 0 100 200 300 400 500 600 700 800 900 1000 Source: Tusk Advisory Analysis Funds (IDR Trillion) Government & SOE Private To realize the plan, the Government is planning to commit up to 70% of the required funding, directly and via its State Owned Enterprises with the balance expected from private sector. Page 21 of 28

And prioritizing maritime sector s growth and Power Generation & Transmission Maritime Corridor/Sea Toll The Maritime Corridor (or otherwise known as the Sea Toll) involves the establishment of 24 strategic ports to serve as a multi-linked sea transportation network which is both time and cost efficient. Maritime development involves revitalization of the shipyard industry and procurement of more patrol ships. Source: Bappenas Document, Nov 2014 Required Investment IDR 592 T (~USD 59.2 B) for sea transport including sea toll* Planned Funding Diversification Private ~IDR 164 T (~USD 16.4 B) SOE ~IDR 238 T (~USD 23.8 B) State Budget ~IDR 260 T (~USD 26.0 B) *) major investments including for (1) development of 24 strategic ports ~34.8%; (2) development of 1,481 non-commercial ports ~28.3%; (3) vessel procurement for the next 5 years ~14.5% Power Plants Development Achieving Economic Growth 6-7% By 2019 the government needs to develop at least 35,000 MW of new generating capacity on top of previously unachieved targets 96.6% Electrification Ratio 85.7 GW Generating Capacity PLN IPP Source: Bappenas Document, Jan 2015 Exchange Rate : USD 1 = IDR 10,000 16.4 GW new generating cap. 50,000 kmc new transmission 82,000 MVA of relay circuits 150,000 kmc new distribution 18.7 GW new generating cap. 360 kmc new transmission Total Investment IDR 980 Trillion (~USD 98 Billion) is required to fund power plants, transmission networks, as well as distribution networks State Budget IDR 100 T (~USD 10 B) PT. PLN IDR 445 T (~USD 44.5 B) IPP IDR 435 T (~USD 43.5 B) PLN and State Budget can only fund a total IDR 200 Trillion (USD ~20 Billion) and require equity injection, direct lending, and tariff adjustment to fill the 345 Trillion (USD ~34.5 Billion) gap in funding Page 22 of 28

For the next 5 years, the required investments in infrastructure is around $430 billion, however the funding gap is massive Accumulated Government Funding Allocation 2015-2019 in IDR Trillion Infrastructure Funding Gap 2015-2019 in IDR Trillion IDR 11,366 IDR 7,641 IDR4,104 IDR5,519 Base Line IDR1,415 IDR 3,725 IDR 2,310 Available** government funding Funding gap Funding needed for infrastructure*** Baseline Total Revenue* Routine Expenditure Surplus 1* IDR1,415 Non-routine Infrastructure Non-infrastructure Expenditure* Expenditure * Numbers updated based on available publicized data (Bappenas Deputy of Development Funding presentation, January 2015) *** Including Disaster Management Sector (BASARNAS, BPLS, etc.) and development of specific regional area (Surabaya, Gresik, Batam) ***Source: Background Study RPJMN 2015-2019, Bappenas, developed by Tusk Advisory. Assumed exchange rate $1 = IDR 13,000 The above funding gap is not possible to be filled with direct investments by the private sector alone. As demonstrated in the last decade, most of the planned projects are not bankable thus would require some form of government fiscal support including via long dated payment schemes Page 23 of 28

The recent increased budget for infrastructure is very encouraging, however converting these additional funds to actual projects requires better delivery mechanisms and better governance framework For 2015, the government has increased the infrastructure budget by over 50% from last year 300 250 200 150 100 50 0 86 *State Budget Realization **State Budget Revision (APBN-P) ***Proposed State Budget Revision (RAPBN-P), current State Budget Allocation is IDR 189.1 T Source: MoF Press Release State Budget Allocation for Infrastructure IDR Trillion 114.2 145.5 155.9 177.9 >50% 281.1 2010* 2011* 2012* 2013* 2014** 2015*** In addition, Government has committed under the RPJMN 2015-2019 to increase infrastructure funding by 2.5 times higher than what was spent in 2010-2014 However, looking at the amount of SAL/SiLPA each year, providing additional budget for infrastructure alone is not sufficient to overcome infrastructure delivery problems 120.000 100.000 SiLPA and SAL amount from 2008 to 2013 IDR Billion 80.000 79.950 60.000 40.000 20.000 0-20.000 2008 94.616 23.964 66.524 2009 44,706 98.910 SILPA (Sisa Lebih Pembiayaan Anggaran/Financing Surplus) Source: GoI Financial Reports 46.549 105.324 21,020 70,263 25,722 66,594 2010 2011 2012 2013 SAL (Saldo Anggaran Lebih/ Excess Balance) Up to April 2015, only 2% of the allocated budget for Ministry of Public Works has been spent Key reasons includes slow start to awarding of projects and the issues related to land and permits Government is thus exploring holistic and comprehensive reforms to fast track infra delivery Page 24 of 28

To encourage infrastructure delivery, the government has implemented fiscal, market, regulatory and institutional reforms COMPLETED FISCAL AND MARKET Fiscal Viability Gap Funding (VGF) The GoI would contribute a maximum 49% per project cost in VGF. Land Revolving Fund A facility to support land acquisition for toll road projects; managed by the Ministry of Public Works. Market Bond Issuance for Infrastructure Projects Issuance of municipal bonds. ONGOING Fiscal Availability Payment (PBAS) The GoI is committed to periodically pay investors for providing infra assets and satisfying standards of operation. Market Issuance of infrastructure companies bonds Indonesia Stock Exchange is examining ways to ease and accelerate bond issuance for infrastructure companies. REGULATORY Law No. 2/2012 on Land Acquisition for Public Infrastructure Regulated timeline for the process Appointment of better Land Appraisal Team to calculate fair compensation Improved compensation determination method to avoid community rejection Revision on Pres. Reg. No. 67/2005 on Public Private Partnership (PPP) Broader scope of infrastructure allowed for PPP Provides legal basis for availability payment for return of investment mechanism Revision on Pres. Reg. No. 54/2010 on Public Procurement Accommodation of retainer fee Utilization of procurement agent to procure within public procurement system, allowing accelerated process INSTITUTIONAL PT Sarana Multi Infrastruktur Provides alternative source of fund and promotes PPP projects. PT Penjaminan Infrastruktur Indonesia (Indonesia Infrastructure Guarantee Fund) Provider of guarantee to increase project attractiveness for investors. PT Indonesia Infrastructure Finance Focuses on the revitalization of private investment for Indonesia infrastructure. To accelerate permit processes, Indonesia Investment Coordinating Board (BKPM) has launched one single window permit processes on Jan 26 th 2015 Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) focuses on the preparation and delivery of priority projects, from funding scheme determination to monitoring and debottlenecking PPP Unit at Ministry of Finance to facilitate the development of Final Business Case Page 25 of 28

To encourage investments including infrastructure, the government has centralized and shortened approval process for permits and licenses The Indonesian Investment Coordination Board (BKPM) launched the One Stop Service Center (PTSP in Indonesian) on January 26th 2015 in an effort to streamline investment permits for all sectors. This program gives BKPM the authority over 134 key permits usually issued by the 22 different ministries/agencies. The PTSP would put the permit issuance process into a single roof in BKPM thus ensuring faster process and clear guidelines. The process is expected to be optimal by April 2015. Before PTSP After PTSP PERMIT ISSUANCE OTHER AGENCIES Legal Permits Other Licenses Coordination with Region INVESTORS 260 days Land Use Permits Industrial License In the past investors have had to seek permits and licenses from individual government agencies. They would refer to BKPM for business permits while refer MoF for taxes. Investors would need to go to ministry of law for legal permits while going to sector ministries for sector/operational permits. Before the PTSP it takes on average 260 days to issue a full business permit. The worst, licenses for power plants - is estimated to take up 930 days or almost 3 years. INVESTORS 260 days OSSC (PTSP) Average time 90 days OTHER AGENCIES The new One Stop Service Center would encompass 22 different ministries and agencies into a single service center for investment managed by the National Single Window for Investments. This integrated coordination would accelerate permits from an average of 260 days to only 90 days. It even promises to expedite power plant permits to just 240 days. The OSSC provides consultation, front office and administration services to investors. The office provides issuance for investment, business expansion, tax levies, import and export permits, and human capital permits. Source: National Single Window for Investment, Indonesia Investment Coordinating Board (BKPM), 2015 Page 26 of 28

Additional holistic reforms are being considered that will increase institutional investor interests via long dated funding schemes INFRASTRUCTURE DELIVERY WHEEL INFRASTRUCTURE DELIVERY WHEEL Source: Tusk Advisory Analysis 7 6 8 UNLEASH PUBLIC SECTOR CAPACITY & CREATE PUBLIC- PRIVATE PMOs IMPROVED ASSET MANAGEMENT & INTRODUCE CONSEQUENCE MANAGEMENT INTRODUCE INDUSTRY EXPANSION PROGRAMS & COMMUNITY CONSULTATION SCHEMES IMPROVED GOVERNANCE OF DELIVERY VIA SIDA & INSTILL VALUE FOR MONEY 1 POLITICAL COURAGE & COMPREHENSIVE REGULATORY REFORMS 2 VIA INFRASTRUCTURE LONG-TERM LAW FUNDING COMMITMENT & FULLY PREPARED PROJECTS DEBOTTLENECKING ACCELERATED SPATIAL PLANNING INCLUSION & IMPROVED AMDAL AND IPPKH APPROVAL EMPOWERED REGULATORS & GUARANTEE LAND ACQUISITION 4 VIA IIGF 5 3 Page 27 of 28

Such as PBAS+ for sub-financial economic infrastructure projects to incentivise both the government and the concessionaire Pure BOT High Revenue Risk PBAS APS No Revenue Risk PBAS Fixed annuity payment ensuring a fixed agreed IRR (say 14%) All revenue above 14% IRR due to extra traffic is shared between Government & private (60:40) Shifting Paradigm FROM - Toll road as a mode to get from point A to B INNOVATION TO - Toll road as a destination by itself, thus generating higher traffic Revenue Revenue sharing Fixed annuity Revenue from extra traffic will give the private sector incentives to innovate. By doing so, it will stimulate economic activity. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Construction Cost Operation and Maintenance Year Examples of innovations: Development of industrial and commercial area along the road Upgraded rest area for events In-situ events, bazaars, market Source: PBAS+ is an alternative funding scheme for sub-financial economic infrastructure projects developed by Tusk Advisory PBAS + enables the development of strategic projects with high economic impact today and pay for it over 20 to 30 years from future tax revenue of the government combined with the revenue collected from the project itself. Page 28 of 28