For a year now, Indonesia’s Lippo Group has been mass-advertising a US$20 billion mega-project known as Meikarta on the eastern fringes of Jakarta, describing the ambitious undertaking as “epic in scale and vision as a truly integrated city of the future.”
Boasting 92 apartment and office towers, 18 of which are under construction, and 1.5 million square meters of prime commercial space, the 500-hectare development lies next to the new Kertajati international airport, the Trans-Jakarta Tollway and the planned Jakarta-Bandung high-speed railway.
In addition to shopping malls, an international standard hospital and 100 ha of parkland, plans for the self-contained super-city include 10 five-star hotels, 150 elementary and high schools, three universities and an industrial research center.
For all its grand designs, however, Meikarta is fast becoming a millstone around the neck of Lippo Karawaci, the conglomerate’s main property arm. Construction is at a virtual standstill, sales are slow and Lippo stands accused of reneging on advertising costs.
Owned by the politically-wired Riady family, Lippo is Indonesia’s second biggest diversified real estate developer with interests in banking, hospitals, schools, malls, department stores and cable television.
Business sources familiar with the Meikarta venture say Lippo seriously miscalculated by going ahead with the project before it had obtained the necessary permits and licenses from the West Java government, apparently believing it could get it done while work was already in progress.
But once that broke into the open, the Riadys — evangelical Christians of Chinese heritage — found themselves under attack on social media, including from the same conservative Muslim lobby that brought down former ethnic-Chinese Jakarta governor Basuki Purnama.
Lippo Karawaci denies rumors it is in financial trouble, with listed subsidiary Lippo Cikarang saying it expects to book 10.5 trillion rupiah (US$750 million) in marketing sales from Meikarta this year, compared to 7.8 trillion rupiah in the months following its August 2017 launch.
All that has been on the back of a splashy US$107 million advertising campaign and other marketing efforts that have reportedly attracted recent pledges of US$550 million from 19 global partners in health and medicine, financial technology, education and logistics.
But Moody’s Investors Service, a ratings agency, last month cut Lippo Karawaci’s rating from B1 to B2 on U$75 million in senior unsecured notes due in 2020, warning that proceeds from the private placement covered only half of the company’s debt maturing in 2018-19.
Jacinda Poh, Moody’s Singapore-based vice president, said the change in rating reflected the view among property analysts that Lippo Karawaci’s operating cash flow was insufficient for financing interest payments and other company businesses over the next 18 months.
Fitch, another ratings agency, had previously downgraded Lippo Karawaci’s long-term issuer default rating to B+ based on expectations of significantly reduced access to cash flow from property sales as a result of a planned divestment that could ultimately see its stake in Meikarta fall from 54% to 27%.
Standard & Poor’s analysts say if Lippo fails to sell some of its assets in the next six months, its credit rating could sink from B-negative to triple C. Nothing has been sold yet, but as deputy chairman James Riady once told a former staffer: “There is nothing in the group that is not for sale at the right price.”
First conceived 20 years ago, Meikarta’s success rests on housing thousands of middle-income industrial estate staff and would also conceivably work in synergy with the Chinese-funded, US$5.8 billion Jakarta-Bandung railway and other major West Java infrastructure projects.
The railway consortium, which unlike Meikarta still hasn’t acquired all the land needed to get the venture off the ground, is not part of China’s massive Belt and Road Initiative (BRI). If it was, Meikarta would stand to benefit from more Chinese investment.
As it is, three Chinese partners – the China State Construction and Engineering Corp (CSCEC), Country Garden Holdings and Shenzhen Yantian Port — have reportedly pulled out of the project, taking 7.5 trillion rupiah (US$750 million) with them, because of Beijing’s tightened monetary policy.
Introduced in August last year, the new restrictions on outward Chinese investment targeted the military, real estate, hotels, film and entertainment, while encouraging more involvement in industries that promote BRI and improve China’s technology and research.
According to a senior government official, Lippo founder Mochtar Riady, 88, listed 9th on Forbes’ Indonesia rich list with US$3 billion in assets, recently asked Maritime Coordinating Minister Luhut Panjaitan to talk to the Chinese about including the railway in BRI.
But that is unlikely to happen. The BRI’s focus is on creating corridors in the frontier provinces of North Sumatra, North Kalimantan and North Sulawesi, where infrastructure and other related projects can be better integrated with the rest of the Southeast Asian mainland.
Those range from a proposed US$28.4 billion hydropower plant in Bulungan, North Kalimantan, to a US$2 billion international port and industrial estate in Kuala Tanjung, North Sumatra, and two North Sulawesi projects – a US$1.5 billion tourist estate and a US$2.4 billion industrial estate.
Outside those corridors are a planned US$2.5 billion tech park on Bali’s Kura Kura Island, five mine-mouth power plants worth US$12 billion in coal-rich areas of southern Sumatra and Central and East Kalimantan, and three port developments.
Java is not among them, though Meikarta and seven existing industrial estates are already geographically incorporated in the Indonesian government’s plan to establish a Bekasi-Karawang-Purwakarta special economic corridor to attract more high-tech industrial investment.
The corridor is home to most Japanese car, motorcycle and home appliance plants with a work force of 1.5 million. Indonesia currently produces 1.2 million cars and six million motorcycles a year, most of which are sold on the domestic market.
When it is completed next year, the 230,000 cars destined for export will be shipped through the new Patimban container port, 70 kilometers northeast of Karawang, which will take some of the pressure off Jakarta’s main Tanjung Priok port.
Meikarta may eventually have to be scaled back, but analysts agree that Lippo’s problems appear to be more about liquidity than solvency. As one banker familiar with the company’s operations put it: “They’ll get through it. It’s just a really big apple to take a bite out of.”
Fitch apparently agrees as it continues to retain Lippo’s national long-term rating at A+, saying that even after the planned Meikarta divestment the company’s diversified commercial property portfolio will provide a robust recurring cash flow.
Former employees say the Lippo Group has a central treasury which functions as an internal bank. “Money is allocated for a start-up, which must then pay it back from revenues in a short time,” says one ex-employee. “If they don’t, then they don’t get any more. When things get tight, everyone pays.”
One example has been the Jakarta Globe, an English-language daily turned out by foreign professionals which could have offered serious competition to the Jakarta Post if Lippo had paid more attention to circulation and advertising. It has now retreated out of print and is circulated only on-line.
Another more modest real estate project, South Jakarta’s Lippo Village, likewise failed to measure up to its initial grand vision. While the towers were built, a promised five-star Marriott Hotel did not materialize, anchor tenants have pulled out and apartment owners complain they still don’t have titles to their units.
Meikarta is by far the conglomerate’s most ambitious project in its 67-year history, a serious bet on the Jakarta metropolitan area spreading eastwards and eventually enveloping the hill city of Bandung.
“It does make a lot of sense,” says the banker who requested anonymity. “There are other projects around the world, like London’s Canary Wharf, that had to go through the ups and downs of cycles to get to where they are today. If anyone can do it, they (Lippo) can.”