Dubai Debt Doesn't Deter Indonesian Firms

The meltdown of Dubai's sovereign investment fund and other problems and fears of cancelled investment plans in Indonesia are giving way to new confidence as Indonesian firms push for business in the Gulf States.

Despite recent falls in Asian currencies on Middle East tensions between Iraq and Iran, but not reflecting problems in the Gulf, Indonesia is pushing ahead with launching US$315 million of government Islamic bonds in February.

When the Dubai debt crisis first hit, Harry Su, the head of research for Bahana Securities in Jakarta, wrote under the humorous headline "Till debt do us part" parodying the TV series "Till death do us part" that knee-jerk reactions might hit local Islamic bonds and damage Indonesian Middle East investment hopes. Said Didu, Secretary to the State Minister for State Enterprises, followed that up by telling a Commission of the Indonesian Parliament, "State construction companies should stop or postpone their plans to expand their businesses in Middle East countries."

Several state construction firms including PT Adhi Karya and PT Widjaya Karya had been working in the Middle East, the former on the 160-storey Al-Burj Tower. PT Adhi Karya was also aiming at a US$106 million project in Oman with Adhi Oman. Widjaya Karya also had targeted two power station projects in Saudi Arabia, each with capacity of 2 x 500 megawatts.

But the signing off a massive US$5 billion integrated investment program in Kalimantan was what was needed to blow away those Dubai debt blues. This mega-sized integrated industrial investment was kicked off politically by Indonesian President Susilo Bambang Yudhoyono in a meeting with Crown Prince and Deputy Ruler of the Emirate of Ras Al Khaimah, Sheik Saud Bin Saqr Al Qasimi.

The Ras Al Khaimah Investment Authority will back the first major private railway line in Indonesia, the 130 kilometer track in the East Kutai regency of East Kalimantan. A consortium including the investment authority, MEC Holdings, MEC Coal and MEC Infra, along with Infrastructure Leasing and Financial Services and the Savage-CANAC Corporation are backing a total investment of $5 billion which Gita Wirjawan, Chairman of Indonesia´s Investment Coordination Board (BKPM) has said "sets a positive tone for the development of the local economy in East Kalimantan."

Sheik Saud told reporters that "This type of public-private, Middle Eastern-Indonesian initiative is a fantastic example of what can be accomplished when the fundamentals make sense for all parties involved."

The total investment includes two coal-fired power stations, an aluminum smelter, a fertilizer plant, a railway and a port, with 5,000 new jobs.

Pandu Anugrah of Bahana Securities in Jakarta also confirmed to local media that Indonesian state-owned enterprises and private firms are still pushing to get into new projects in the Gulf and Middle East. State enterprises Adhi Karya, Wijaya Karya and Waskita Karya, along with private firm Citra Mega Karya were reportedly keen to get into construction and oil and gas projects in Algeria, Saudi Arabia, Dubai, Kuwait and Libya.

But a well-publicized dispute between Indonesian state–owned Adhi Karya and Dubai-based Al-Habtoor over a construction project in Doha, Qatar has made Indonesian firms think harder. The Indonesian government has stepped in to help sort this out, calling in Alwi Shihab, the president's special envoy to the Middle East, but Adhi Karya was advised to go for an out-of-court settlement since the Indonesian firm was not in such a strong position.

The lesson for 2009 for Indonesian firms seeking business in the Gulf and Middle East was to seek strong clear contracts for projects instead of holding back on work-in-hand during disputes, but rather go for early legal or out-of-court solutions to avoid more crippling cumulative financial damage.

This lesson on the need to improve and strengthen business approaches appropriate for the Gulf and Middle East is more important for Indonesian firms than worrying about the Dubai debts, as more Indonesian firms go global into the world market.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.