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Indonesia’s new drive for foreign investment may fail without better infrastructure and less red tape
JAKARTA – “Please come and invest in Indonesia. Because where we see challenges, I see opportunity. And if you have any problem, call me.”
President Joko Widodo’s plea from the podium to World Economic Forum delegates meeting in Jakarta this week was typical of the personal style that the homespun politician crafted first as mayor of his hometown Solo and later governor of Jakarta.
His message was intended to show that he is in for the long haul when it comes to overcoming obstacles to investment. Indeed, one of his first actions after taking office as President of Indonesia last October was to descend on Indonesia’s Investment Coordinating Board (BKPM) for an impromptu visit.
He returned in January to launch a “one-stop” facility aimed at simplifying Indonesia’s notoriously tortuous investment procedures. Bagus Hariadi, the BKPM’s director of infrastructure planning, says the agency must now work closely with a range of government ministries to reduce the time and steps needed for would-be investors to get the go-ahead.
“Now we can identify which procedures from which ministries can reduce the timeline or be simplified or merged with other licences,” Hariadi said in an interview.
But despite Widodo’s boosterism and a clear growth in foreign investment in recent years – BKPM figures show it swelling from US$16.2 billion in realized investments in 2010 to US$30.7 billion in 2014 – Indonesia is likely underperforming as an investment destination.
According to the US State Department’s 2014 Investment Climate Statement on Indonesia report, the vast archipelago is an attractive investment destination for its large population and growing middle class. But “factors such as a decentralized decision-making process, legal uncertainty, economic nationalism and powerful domestic vested interests create a complex and difficult investment climate”.
Indonesia ranks 114th out of 189 countries in the World Bank’s “Ease of Doing Business” index. Between 2007 and 2012, US$23 billion in investment was “scared off” by red tape and hazy, overlapping regulations, says the BKPM, which revoked permits granted to more than 6,500 investors over that time.
Many investors had already decided not to go ahead with their projects, citing a complex and decentralized permit system that gives local governments significant say in who sets up shop on their patch and in turn facilitates what might euphemistically be called “rent-seeking” opportunities for regional officials.
So far, the BKPM’s one-stop system aims only at smoothing out how investors interact with different national-level ministries and does not factor in regional politics. Hariadi acknowledged that as a major hurdle. “Indonesia also has the disadvantage of different regulations for investment between provinces and municipalities,” he said.
Assessing Widodo’s attempt to speed up procedures at the BKPM, the World Bank said that changes so far did not go far enough and had to involve regional administrations.
“Complex reform implementation … is still needed to achieve more integrated and efficient business licensing, requiring simplification and mapping of the licensing process, information and communications technology improvements, and organizational change and coordination at BKPM and other ministries,” the bank said in a report published in March.
But investors are put off not only by complicated laws but also by Indonesia’s shoddy infrastructure. Widodo wants Chinese investment into this area – roads, ports, power plants – in the hope of building a more attractive investment destination for manufacturers and service providers.
Even after Widodo returned from a recent visit to China and Japan, where he received pledges for US$68 billion in investments from China and US$6 billion from Japan, BKPM officials were stressing that at best only about 15 per cent of such pledges typically amount to realized investments.
One of Widodo’s most talked-about reforms so far has been freeing up funding for an ambitious infrastructure plan by eliminating expensive fuel subsidies. If realized in full, the plan will see Indonesia lay 2,000km of new roads, develop 24 sea ports, build new 15 airports, establish new 14 industrial estates and build power plants with a cumulative capacity of 35GW – all within the five years of his presidential term.
The new roads, ports and power plants will be needed if Indonesia is to pull in enough investment to reach its target of 7 per cent annual growth, up from the current projections of around 5.5 per cent for this year.
The BKPM’s Hariadi readily acknowledges the infrastructure challenge, saying both Indonesian and foreign businesses almost invariably raise it when discussing proposals.Show