Five years ago, property agent Daisul Akhyar took 20 minutes to drive to work in Pekanbaru, capital of Indonesia’s Riau province. Now, he can spend two hours in traffic after a surge in wealth transformed the city.
“If you live in Riau now, it’s like living in Jakarta, there are new residential and retail developments all over the city,” Akhyar, a director of local developer PT Asrindo Perdana Mandiri, said in Pekanbaru on Sumatera island. “Selling property in this place is like selling candy to children.”
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Houses under construction stand in Pekanbaru. “Selling property in this city is like selling candy to children,” said Daisul Akhyar, a director of PT Asrindo Perdana Mandiri. “If you live in Riau now, it’s like living in Jakarta -- there are new cluster houses and retail developments all over the city.” Photographer: Dimas Ardian/Bloomberg
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People fish along Siak River as Jembatan Siak IV (Siak Bridge IV) is under construction in Pekanbaru. Pekanbaru had compound annual growth of 9.8 percent over the past 10 years and will average of 7.3 percent a year to 2030. Photographer: Dimas Ardian/Bloomberg
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A worker harvests palm oil fruit at a plantation owned by PT Guna Dodos in Pelalawan, Riau province. “There’s a lot of new middle-income class popping up in Riau because of palm oil,” said Viator Butar-Butar. Photographer: Dimas Ardian/Bloomberg

Traffic runs on a highway in Pekanbaru. President Susilo Bambang Yudhoyono plans to build 30 new industrial zones across the 17,000-island archipelago and to spend $125 billion on infrastructure by 2025, including $12 billion on 20,000 kilometers of roads, enough to go halfway round the world. Photographer: Dimas Ardian/Bloomberg
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Customers shop in a shopping mall in Pekanbaru. For the growing number of residents in provinces like Riau, new wealth means new spending. Photographer: Dimas Ardian/Bloomberg
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Vehicles wait for ferry transport to cross the sea to Sumatra island at Merak port, West Java. The attempt to spread prosperity from Java, home to 62 percent of the population, began during Dutch colonial times with the start of a transmigration program designed to move people to sparsely inhabited islands such as Sumatra, Borneo and New Guinea. Photographer: Kris Aria/AFP/GettyImages
The world’s fourth most-populous nation is seeing its economy reshaped as cities on islands including Sumatera and Borneo grow faster than Java, home to the nation’s capital, Jakarta. A transmigration program championed by former President Suharto in the 1980s, combined with China’s demand for palm oil, coal and iron from Indonesia’s rural provinces, helped outlying cities expand as much as 4 percentage points faster than the national average over the past decade.
As China’s expansion boosts incomes of miners and farmers in some of the sleepiest and most far-flung corners of Asia, companies from Unilever Plc (ULVR) to Toyota Motor Corp (7203). are flocking to Indonesia’s second-tier cities to tap their rising demand. At the same time, increasing urbanization raises pressure on President Susilo Bambang Yudhoyono to improve infrastructure and strains environmental resources.
“In future, the nation’s economy will be supported by cities outside Java,” Perry Warjiyo, the central bank’s executive director for monetary policy and economic research, said in an interview. “This is in line with the government’s program to spread out economic growth to all the provinces.”
Outpacing Jakarta
Smaller cities of 150,000 to 2 million inhabitants will outpace the big conurbations like Jakarta, increasing their share of gross domestic product to 37 percent in 2030, from 31 percent currently, McKinsey & Co. said in a September report. At present, the region around Jakarta covers less than 1 percent of the country and accounts for more than 10 percent of the economy.
Growing incomes in the outlying cities will benefit consumer goods and services companies such as PT Unilever Indonesia (UNVR), PT Indofood CBP Sukses Makmur (ICBP) and PT Telekomunikasi Indonesia (TLKM), said Fadlul Imansyah, head of investment at PT CIMB- Principal Asset Management in Jakarta, with 2.3 trillion rupiah ($240 million) of assets.
Spend, Spend
“The fast growth in regions outside of Jakarta has become a priority for these companies,” said Soni Wibowo, a director at Jakarta-based PT Bahana TCW Investment Management, which manages about 22 trillion rupiah in assets. Profits of companies like ACE Hardware Indonesia (ACES) have been aided by that demand and “going forward there’s still growth to expect,” he said.
The boom in second-tier cities has helped swell the middle class. Seven million Indonesians joined their ranks each year for the past seven years, according to a 2011 World Bank report. Private spending grew 5.4 percent in the fourth quarter of 2012 from a year earlier, and consumer confidence in March was 116.8, the eighth straight month the indicator exceeded 115. Pekanbaru, Pontianak, Karawang, Makassar and Balikpapan regions will lead growth, McKinsey says.
“Consumer confidence in Indonesia is very, very high,” said Destry Damayanti, chief economist at PT Bank Mandiri in Jakarta. “That’s why they spend and spend.”

Fried Chicken
The spread of consumer demand is drawing investment from companies including Nestle SA, Toyota (7203) and Unilever, as well as many from Java. Four-bedroom units at developer Ciputra Group’s Citragarden residential complex in Pekanbaru start from 900 million rupiah, compared with 685 million rupiah for the cheapest similar abode at the company’s CitraIndah project, 30 kilometers from the center of Jakarta.
On the fourth floor of Ciputra’s mall on Jalan Riau, palm- oil planter Safruddin is eating fried chicken and soup from a fast-food restaurant while his Volvo is being repaired in a local garage. On lower floors, outlets for Body Shop International Plc (BOS), Giordano International Ltd. (709) and other global brands indicate the spread of wealth to the province in the past few years. On the ground floor, a Honda Motor Co. (7267) dealership offers the latest Freed, Jazz and Brio models for as much as 1.8 million rupiah a month in installments, more than the average wage in the province.
“In Riau now it’s easy to get a job, that’s why there are so many new shopping malls,” said Safruddin, 52, who like many Indonesians only uses one name. Of his 10 children, two sons help manage his plantations in nearby Bangkinang. A third plans to open a supermarket and an English-language school. “At least I won’t need to buy him a car. He can buy it himself.”
Oil, Timber
Money from palm oil has joined Riau’s boom riches from oil and timber industries that drew companies such as PT Chevron Pacific Indonesia (CVX), PT Indah Kiat Pulp and Paper, and PT Surya Dumai Industri (SUDI). Riau has been one of the main oil-producing regions since reserves were first discovered there in the 1930s.
Pekanbaru had 9.8 percent average annual growth over the past 10 years and will sustain a 7.3 percent pace through 2030, McKinsey says. The report predicts similar growth for oil-rich Balikpapan in East Kalimantan, and Makassar in South Sulawesi. National GDP grew at an average annual pace of 5.7 percent in the decade through 2012.
With many of Indonesia’s provinces outside Java reliant on oil, minerals or agriculture for revenue, those gains will depend on swings in prices of the commodities. In Riau’s case, a slump in palm-oil prices slowed the pace of development.
The slump reduced demand for new shops and apartments to about 1,500 units for Pekanbaru in 2012, from around 10,000 in previous years, said Akhyar, who is also vice secretary for the Indonesia Real Estate Association in the city. He said sales this year may be about 5,000 units as demand recovers.

More Roads
As new shops and apartments spring up, the government is trying to keep up, spending more on roads and ports. President Yudhoyono plans to build 30 new industrial zones across the 17,000-island archipelago and to spend $125 billion on infrastructure by 2025, including $12 billion on 20,000 kilometers of roads, enough to go halfway round the world.
“The resilience of private consumption has been supported by improvements in consumers’ purchasing power and consumer confidence,” Bank Indonesia said in a statement today, after holding its benchmark interest rate at a record-low 5.75 percent for a 14th consecutive meeting.
The attempt to spread prosperity from Java, home to 62 percent of the population, began during Dutch colonial times with the start of a transmigration program designed to move people to sparsely inhabited islands such as Sumatera, Borneo and Papua. The settlers were given land to help develop plantations and raise income levels.