A win-win partnership with Germany

Germany and Indonesia celebrate 60 years of friendship and strengthen ties between their complementary markets.

Since diplomatic relations were first formed in 1952, Indonesia and Germany have maintained strong ties through both good and turbulent times. Germany illustrated its long-term commitment to Indonesia by standing alongside it throughout the Asian Financial Crisis. While many companies left the area in a mass exodus driven by speculation and fear, German firms, with only a few exceptions, remained true to the Indonesian market. 

This solidarity proved prudent. As the Eurozone falters under the weight of domino banking crises, Indonesia’s financial system has remained robust, rewarding the responsible long-term investor who has learnt the harsh lesson that fast money gained is usually not earned. The story underpinning this 60th anniversary is therefore one of two nations, both regional leaders in an important moment of transition. 

Indonesia’s prudent financial stewardship since the 1997-98 crisis is now being rewarded. Called the ‘best performing emerging market’ in 2011, Indonesia has regained its ‘investment grade’ status from Fitch and Moody, some 14 years after it was removed. 

Indonesia’s economic success (the archipelagic nation recorded a GDP growth rate of 6.5% in 2011) and stability come from the fact that it defied the conventional recipe for ‘development’ and focused predominately on the huge potential within its own population. As a result, domestic consumption comprises the bulk of GDP with exports only accounting for 26% – despite being endowed with incredible forestry, mineral, agricultural and arguably any other type of natural resource currently in demand on the international market. 

“Our growth is powered by our home market with 70% of GDP coming from domestic consumption,” explained Sofjan Wanandi, Chairman of the Indonesian Employers Association (APINDO). Additionally, the republic has an export-to-GDP ratio of 25% – second only to India within the region – and a debt-to-GDP ratio of approximately 26%. Compare the second figure to 85.7% in the UK or 165% in Greece and one can better comprehend Indonesia’s relative immunity to international financial forces.

However, Indonesia has witnessed the ‘effects’ of the global economic downturn to some extent this year. Foreign investors – who own a majority of free-floating shares on the Indonesian Stock Exchange – sold a net 4.9 trillion rupiah between January and June, pushing the Jakarta Composite Index into an overall decline this year despite reaching an all-time high of 4224 on May 3. 

Edgar Ekaputra of Bank Danareksa puts this down to speculation and a lack of investor knowledge with regards to Indonesia. “We are still penalised by foreign countries, because we are the least understood country. But look at foreign exchange reserves – we have 150 billion – this is the highest in 30 years. Consider inflation – it stands at approximately 5.5% – this is the lowest in 30 years. You don’t have to sell BMWs to succeed here, just sell soap. When you sell anything to 240 million people, the multiplier effect is immense,” he said.

With 50% of the population below the age of 29, and 9.3% aged above 55, 65% of the population base is ‘productive’. This, coupled with an unemployment rate as low as 6.5% in 2012, ensures that income outpaces consumption. Add in the low-cost lending environment encouraged by Bank Indonesia (the country’s central bank) and you have the emergence of an impressive consumer class.
With rising consumer spending, investment has followed, challenging the ‘liberalisation-first’ approach advocated by most economic development pundits. “Indonesia has all the resources that the world needs and is now placing greater emphasis on value addition which will trigger huge investments, if done the right way. The inflow of investment is constantly growing, foreign investment was at $20 billion last year,” explained Jan Ronnfeld, Managing Director of the German-Indonesian Chamber of Commerce (EKONID). 

Such wealth is, however, concentrated in the islands of Java and Sumatra. Undergoing democratisation and decentralisation simultaneously upon the downfall of the Suharto regime in 1998, the country has significant work to do to improve the level of coordination that occurs between government bodies, as well as between the government and the private sector. 

“We are dealing with a scenario in which government entities are unavoidably clashing whilst attempting to deliver public services within a blossoming democratic framework,” justified Professor Kuntoro Mangkusubroto, who heads the presidential task force UKP4 assigned to improving Indonesia’s investment climate. 

However, the introduction of President Susilo Bambang Yudhoyono’s ‘Master Plan for the Acceleration and Expansion of Indonesia’ (MP3EI) and the subsequent establishment of ‘six economic corridors’ – assigning specific roles to each of the six geographical clusters – has arguably had a noticeable impact. Investments outside of Java reached 33.6 trillion rupiah (EUR 2.9 billion) in the first quarter of 2012, which represented 47% of total investment realisation during that period.

Historically an economy based on cheap labour and the export revenue generated from raw materials, Indonesia’s two greatest challenges are to accelerate the expansion of its manufacturing sector whilst simultaneously investing in the development of innovative and creative human capital. The government is ensuring more value addition occurs at home by placing bans on the export of many unprocessed commodities. While an export ban of any kind will always be frowned upon by the dominant ‘free trade’ discourse, Ilham Habibie, Chairman of the German Alumni Association, reminds us that initiatives such as these are about creating more long-term, quality jobs.

With this goal in mind Indonesia is now aiming to attract investment and trade with partners that will help bolster its industrial base – and spur innovation among SMEs. Germany is an obvious partner to help accelerate this process of value-added industrialisation and enterprise. “We are developing our SMEs as well as our industrial sector. With Germany we share a strategic partnership on how to deal with joint productions,” says Eddy Pratomo, the Indonesian Ambassador to Germany. 

 

The Director General for National Export Development within the Indonesian Ministry of Trade, Gusmardi Bustami explained that in order to be involved in the whole production process Indonesia needs more advanced technologies. “With the products we buy from Germany, we can manufacture more products here and sell more value-added goods,” he says. 

However, while German technology still maintains a strong reputation, Germany is now facing increasing competition from countries such as Japan, Korea and China who provide substitutes at lower prices. The Director General for International Industrial Cooperation within the Ministry of Industry, Agus Tjahajana Wirakusumah, elaborated on this phenomenon. “Ten to 15 years ago when you built a manufacturing plant all the machinery was German. However, nowadays the Indonesian entrepreneur is mixing and matching technologies to give cost-saving solutions.” 

The height of German-Indonesian political and economic relations came at the end of the 1990s when the German-educated Bacharuddin Jusuf Habibie became president. Despite holding office for only one year, president Habibie helped usher in a new era of representative government following three decades of authoritarian rule under President Suharto. Under Habibie’s leadership, educational exchange, economic cooperation and political relations with Germany were all prioritized, but over time the relationship began to dwindle.

In the past couple of years however, these strong ties are returning as each nation identifies the other as a strategic partner, as illustrated by Chancellor Merkel’s visit to Indonesia in July. Celebrating the 60th anniversary of diplomatic relations, Germany and Indonesia have committed to strengthening their cooperation in five key areas: trade, education, health, research & technology and defence. Merkel and Yudhoyono also pledged collaboration in the energy sector; namely, to raise Indonesia’s share of renewable energies to 25% by 2015. 

An increase in bi-lateral trade between Indonesia and Germany is particularly attractive as each market complements the other perfectly, with Indonesia supplying Germany with agricultural products, textiles, electronic devices, footwear and ores, while importing machinery, chemical products, communication technologies, motor vehicles and pharmaceutical products. “I think that what is unique about doing business with Europe, as opposed to Asian countries, is that we are complementary. What we have, they don’t have. And what they have, we have not. We need one another so to speak,” explained the Chairman of the Indonesian Chamber of Commerce (KADIN), Suryo Sulisto. 

This mutually beneficial relationship has prompted an increase in trade, with the total volume of exchange between the two nations growing by approximately 12% – to EUR 6.7 billion – in 2011. While German exports to Indonesia increased by 12% to EUR 3.4 billion, German imports from Indonesia reached EUR 3.3 billion, a year-on-year growth of 9.7%. These figures should only increase in the coming year, as the Indonesian government has prioritised the establishment of a Comprehensive Economic Partnership Agreement (CEPA) that will help German products gain an additional advantage against their Asian competitors. Jakob Sorensen, Chairman of the European Chamber of Commerce in Indonesia, said that he is excited to see how CEPA is able to bring more European investment into Indonesia as it will lead to capacity building, the transfer of know-how and job creation.  

With ASEAN integration planned for 2015, Germany’s strengthened ties with Indonesia will be vital to ensure fruitful cooperation between the EU and ASEAN. “Germany and Indonesia are not two lonely stars, but are connected with large and dynamic regions. The implications of what we do together – economically, politically and culturally – can and should have an impact on cooperation between Europe and ASEAN as well,” said Dr Norbert Baas, the German Ambassador to the Republic of Indonesia and Timor-Leste. 

Of like mind is Chancellor Merkel, who said during her July visit: “I am deeply convinced that Europe has to hurry up in setting up a free trade agreement with this region if it wants to be able to compete.”

Thus, as Germany starts to recognise the growing power of Asia, it would be well-served to look beyond the lure of China, and towards Indonesia. “When you think of Indonesia, think beyond natural resources, and think beyond exporting goods and services to Indonesia. Indonesia should be seen as part of an enlarged ASEAN strategy,” recommends Ilham Habibie. 

As the world strives to find a sustainable path for development – financially, environmentally and socially – strategic partnerships such as that being formed between Indonesia and Germany will be vital to ensuring that lessons learnt and knowledge gained can be shared, so as to maximise the benefits and minimise the risks of global interconnection. This moment of celebration of 60 years of bi-lateral relations therefore serves as a reminder to us all that moments of crisis are, and have always been, opportunities for transformation.

Staying abreast of Morocco’s energy demands

In the midst of a global economic crisis and political turbulence in the North African Region, Morocco has proven to be an alternative for economic growth and political stability. Growth rate has averaged 4.5% in the last three years, international trade increased by 20% in 2011, direct foreign investment has doubled, and political stability has been maintained whilst social progress inevitably continues.

Honorable Minister, what is your point of view on this economic growth and investment opportunities in recent years?
I think there are many reasons. One of the most important is attributed to the fact that from the mid 90s and especially in 2000, major reforms were carried out. One of such is the liberalisation of the financial markets and in the 2000s, we embarked on sectoral policies that have strongly favoured a vision and a real strategy for the economic sectors. And I think the combination of a number of fundamental reforms such as the financial market and the privatisation of public companies have provided the framework. Also, sectoral strategies undertaken by Morocco have helped to give a clear public view and served as inspiration to the business class. This started in the early 2000s by the tourism sector and then spread over to various other programmes in the industrial, agriculture, water and energy sectors. They have thus helped to federate and mobilise the efforts of the government as a development strategist for the industrial sector, and the business communities. It has enhanced a faster pace of growth. I think these are the main reasons.

We should probably add the favourable international business climate. Within the course of this decade, the country has recorded two major drivers of growth. Public investments have nearly quadrupled in volume and emphases have been laid on improving road networks, airport facilities and port facilities. Thus, the engine of public investment and consumption have been boosted mainly through a liberalisation policy and free trade agreement, opening and eliminating tariffs for the European Union to gain easy access to a number of products. All these factors have accelerated growth and boosted consumption. Economic growth has nearly doubled compared to the 90s when it was dependent on agriculture and so could be easily affected by abundant rain with positive growth or severe drought with negative growth. Since the 2000s, we have alleviated this seasonal factor. The share of agriculture in the GDP has declined and the resilience of the economy consolidated. 

What do you think will be the strategy adopted in the coming years to maintain this growth of 4.5 or 5% in the Moroccan economy?
The government has underscored a number of points in its declaration. First of all and in terms of sectoral policies, note that they will be continued normally. Obviously, sectoral policies on water and energy often projected for ten or 20 years (2020 or 2030) will be continued according to their principles, but their periodic review may be possible to ensure compliance with change in technology. Sectoral policies will be pursued according to the principles. The additional inputs of the government are to profoundly improve governance, ensure the coordination of sectoral policies, carry out structural reforms in order to obtain an enhanced administration and public sector performance and consequently have a better efficiency and transparency of justice. In addition to the pursuit of sectoral policies, these are measures that should earn points for Morocco and help it achieve its goals. These objectives in a certain context will of course be made possible in view of a normal international context which is not common to all countries. We had for instance a relatively poor agricultural year which will surely decrease our growth rate but stay positive. It is estimated at between 3.5% and 4% and not 5%. As you can see, this rate will also depend on external factors. You know Morocco is now very open to foreign countries and so the economic well being of our partners and their capacity to import and export will also have an impact on our country.

Power consumption has undergone an annual average increase of 7%. In the coming years, the demand for electricity will double by 2020 and quadruple by 2030. In this context, Morocco wants to capitalise on its assets so that by 2020, 42% of its production should come from renewable sources in the proportion of 14% solar, 14% wind and 14% hydraulic.

Honourable Minister, what strategies do you intend to put in place to achieve these objectives set in renewable energy for 2020?
It is good you brought out these objectives which are indeed our focus. Within the framework of this programme, we are providing the needed capacity to enhance production either in renewable energy or conventional energy (thermal) sources. Obviously, it is very easy to say that we will double or triple production capacities than to do it. It requires substantial investments. For example, the wind energy programme which should be completed within 12 years before supplying energy that will enable a production of 2,000MW requires an estimated investment amount of over 30 billion dirham, whereas for solar energy with the same production capacity, investment amount is estimated at 70 billion dirham. Works in these two sectors of huge investments and clear visions have begun.

Morocco is keen on demonstrating its capacity to implement and run projects successfully in order to maintain the level of trust donors and investors have placed in us. In reference to the wind energy sector for example, we started ten years ago with a small field with minimal capacity. Today its production capacity is 280MW. This year, we are to plant another field with a production capacity of 350MW. We currently have under construction one field with production capacities at 720 MW to get a total of 1000MW. We have just awarded a field of 150MW to Tazza and we have launched a bid for a field of 850MW. And as you can see that we have almost reached the objective of 2000MW. 

This programme is going smoothly, first due to international technological inputs, second because of Morocco’s favourable geographical location characterised by abundant winds, and also because the project’s developer – namely the National Electricity Board – has demonstrated proven expertise to implement projects and kept good links with the sector’s operators. It is for this reason we have the constant backing of international donors, which helps build our image, competence and expertise in the sector. This is exactly what is going in the solar energy sector. Today the solar airplane of Mr Picard from Madrid will land in Rabat and tomorrow we will organise a reception to celebrate his arrival. This event will mark the launching phase of solar energy projects in Morocco. Very soon the winner of the bid for the first tranche of the 150MW will be presented. Later, we will launch other bids in which solar energy programme will be prioritised. It is the sector that has benefited significant support and gained for example support from two of our international donors and testified Morocco’s ability to execute these very important projects. These are huge investments. 

Still on solar energy programme, the specialised agency MASEN was set up with the responsibility of developing the sector. It is already demonstrating its competence and ability to implement this very important project. One reason for faster economic growth could be due to the fact that since ten years now, we have deployed project management processes and skills with managers of the public and private sectors who I think, have the trust of their partners based on past records in project management. When investors come to Morocco, they will be provided with high-level contacts. Despite the current little difficult international context, the examples we have set are allowing us to keep moving forward. The above achievements are good examples. We also have the thermal energy sector in which we have opened the biggest coal-consumption plant this year in Safi. We have just launched the bid for the construction of the port of Safi which will be the place the coal destined for running this plant will be unloaded. As you can see, investments aimed at technically equipping Morocco are underway but we are mainly focused on renewable energy to achieve this goal at a lower cost.

Honourable Minister, as we already announced, the Ministry expects to achieve by 2020 electricity production capacity of 4,000 MW through solar and wind energies, which represents an amount investment of nearly $12 billion.

Sir, from that point onward, what is your vision of the energy sector for 2030?
For the decade 2020 to 2030, there are alternative plans. You know, like other sectors, the energy sector also has its own specificities. First of all, we must anticipate because to be able to successful implement a programme, preparations have to be made. In the same way, you must be able to adjust to any technological advances that may change the trend of things. Let me explain this in simple terms: ten years ago, it was unconceivable to imagine the level of development in wind energy as it is today with its relatively competitive cost. I am therefore convinced that for the ten years, the solar energy sector experience the fate. Who could have thought ten years ago that 25% of Germany’s energy production would come from solar energy today? 

From observation, you will agree with me that long-term projection may undergo changes or be abandoned for a different one due to technological changes. And so for the period 2020–2030, we have options and not definitive choices. Of course the pursuit of development in renewable energy means a lot to Morocco and may be extended beyond 2020. But for this decade and the next, there is one very important option that has not been mentioned. It is the efficient and rational use of energy. I think it is a priority for us to learn how to save energy. We are a developing country and we need to use energy wisely. This point is very delicate and difficult to deal with. It is easier to build a central but very difficult to change the behaviour of people. We hope to reach out to every home, factory, and community in Morocco to ensure that the energy efficiency measures are applied. The reaching out to millions of individual decision makers to determine their consumption is an even much more complex challenge. And so we have made it our ambition that by 2030, we should be able to save over 15% of our normal energy consumption. We’re already tackling this difficult aspect.

Honourable Minister, the value of energy imports increased by 31% in 2011 and in the same year, export value increased by 245%. However, the net energy bill totalled 13 billion DH with an increase of 14%.

Sir, what do you hope would be the impact of the renewable energy project on net energy spending in 2020?
The impact will be a significant. We expect to have the production level at 24% coming from 42% of the infrastructure installed. But as you know, the negative aspect of renewable energies is that they are not always available (be it wind or solar). They produce less kilowatts and energy because there is a difference between energy and power. Energy is the relationship between power and the weather. Renewable energies now account for 4% of our consumption whereas we intend to produce 20%. We would consume less fossil fuel. 

Germany is today the world’s third largest economy after the United States and China and the first in the European Union with a GDP of over $3,800 billion. Moreover, and most importantly, Germany is currently the leader and voice of Europe.

Sir, what do you think should be the relationship between the two nations, Morocco and Germany?
Germany is today a great nation both economically and politically. We have very strong tides with Germany in the energy sector. Thanks to the German Cooperation Agency GIZ, we have maintained very strong cooperation with German companies. Nowadays, you always find an expert from GIZ working in our offices on one of our worksites. We have many of such cooperation worksites mainly in the sectors of water, environment and energy. They also partake in studies and management of specific projects on the environment. 

We have also established very strong ties with the German Development Bank that provides funding for most of the projects we are working on and also accompanies us in the fields of solar energy, construction of dams and windmills. Practically, the most important cooperation agreements with Germany are in sectors under my jurisdiction, essentially the environment, water and energy sectors. This is an important relationship and Germany is among the three most important partners of Morocco. 

We have embarked on very important discussions with our partners including our main European partner, Germany, on issues concerning the development of renewable energy and particularly exchange energy programme. As you know, our ambition is to create a large Euro-Mediterranean energy market, particularly in the context of the Mediterranean Union and also with several organisations working on this project at several levels. It is also about private and public initiatives. It is important to have an interconnected Mediterranean market in which we can exchange, sell and buy energy and in which each market can be supportive of the other in case of problems. And so it is technically possible for Morocco to exchange energy with Tunisia, Spain, Germany, and France. Morocco is a pioneer to that effect because it is already connected to Spain and Algeria by means of high voltage connections. 

We are also connected to the Maghreb-Europe pipeline, already playing the role of the Euro-Mediterranean connection, which runs from Algeria to Spain and from Portugal via Morocco. For me, Germany, Spain, France, Italy and the Maghreb form one loop. We concluded a number of negotiations with Germany few weeks ago on energy development projects. We signed several cooperation agreements for loan to finance the project and we are currently discussing a memorandum of understanding and a framework agreement between the Ministries of Energy of Morocco and Germany to further develop the cooperation between our two countries through public institutions, education, finance and the industry.

The Moroccan-German agreement in terms of renewable energy is very fluid. In fact, on January 27, 2011, the two nations signed a renewable energy cooperation agreement and moreover, the cooperation boss in the German Embassy, Ingrid Barth, has repeatedly stressed the importance of bilateral collaboration in this domain.

Sir, what are the keys to continuing and strengthening this collaboration with the German government and scientists?
These agreements are on the verge of being finalised and I think we need to truly succeed in creating this renewable energy market and concretise all the ideas on the table of discussion today. For instance, Morocco is a party to the Desertec Initiative in which Germany is greatly involved nowadays. Germany and Morocco are parties to several initiatives. If we want to trade energy, I think we must talk about energy in terms of wider space, and if we want to exchange energy, you have to cross Spain and France. As you know, you cannot travel to Germany without crossing these countries. We must therefore think in a broader sense and so Morocco and Germany are driving forces in that light, which means these two countries have the willingness to exchange, particularly in the domain of energy and to export green Moroccan energy to Germany and if possible import energy from the latter or other countries. 

There are bilateral cooperation, financing and even technical agreements; we have a renewable energy research institute which is closely linked to Germany and whose manager was educated in that country. He is very familiar with the cooperation between Morocco and Germany, specifically in the field of research and development but we also need to play a role as a driving force in both countries to improve the cooperation. For example, about three weeks ago, in collaboration with the German Cooperation, we co-organised a major conference in Marrakech that brought together about 400 participants, which means all the players in the renewable energy sector in the region were present. Morocco and Germany are somewhat playing the role of catalysts in this cooperation.

Sir, you were appointed Minister of Energy, Mines, Water and Environment in January, which means you are heading a department which deals mainly with the economic development and social progress of the country.

Honourable Minister, do you envisage any challenge at the end of your political project? What future result would make you proud of your accomplishment?
Let’s summarise it in terms of a project or plan which is quite complex and which I think have two aspects. First, I would very much appreciate were decision makers and the public to accept the fact that energy, water and the environment are real challenges for the 21st century particularly for Morocco because they are impediments to sustainable development, which means they are indispensable but not infinitive. So our top priorities are to sensitise on the rational use of this natural capital and maintain the environment in which we live because they are essential for our development and that of future generations. 

We are to therefore act in this context and according to this responsibility and make it a priority on our agenda because this is a key ministry with even greater importance in other countries. In the last century, Morocco’s major priorities were road construction and education, which are not for the 21st century as I mentioned earlier. So we need to first explain the importance of these priorities to people within the ministry and in other government ministries, and to elected officials or the public, and then ensure that citizens adopt positive attitudes thereon in their daily lives. 

The second challenge is to ensure that those sectors are technically equipped because we know that a power plant calls for huge investment, sound financial and technical engineering skills. But those problems will be dealt with in management policies because these plants will surely benefit the residents despite some expected protests. At the end of my term, we should have been able to take sound decisions with long-term technical and economic plans and ensure that policy makers and local citizens abide by them. Today whenever we want to build a sanitary landfill indispensable for waste control, there are always objections and so we need to find ways of getting into dialogue with them in order to take a decision. It means we need to instate new dialogue strategies in those sectors in Morocco because in the past, decisions by authorities were always adhered to. But now the Government has a vision that will be submitted for the approval of local policy makers and citizens before implementation. This means there should be a change in administrative practices and policies. I am not going to give you any figure because it is a vision. It must first enable us to have a federated society by explaining the importance of these areas in this century which are hindrances for the sustainable development of Morocco. We must secondly devise a new political and democratic practice for these sectors.

I will ask the last but most complicated question. What final message do you have for readers of Financial Times on Morocco and the sector under your responsibility?
We have special admiration for the German system and especially for German companies known for the good quality of their products and sound management skills. We wish to collaborate with these companies and we think that Morocco has what it takes to make this collaboration a success. We have embarked on projects we think may be suitable for our partners. To make a joke, let’s say the Morocco-Germany relationship is a football match at the end of which Germany is almost always the winner; we will ensure that Morocco wins sometimes.