Britain seeks far-flung business opportunities – Nikkei Asian Review

http://asia.nikkei.com/Politics-Economy/International-Relations/Britain-seeks-far-flung-business-opportunities

JAKARTA — In his first major foreign visit since retaining power in the May 2015 elections, British Prime Minister David Cameron brought over 30 heads of business to Indonesia, the world’s fourth biggest market by population, to seek investment deals and push the case for a mammoth trade zone taking in the 28-country European Union and the 10-member Association of Southeast Asian Nations.

“For too long, Britain has seen the weather-vane pointing to these far-flung lands, but continued to rely on our European neighbours for trade and investment,” Cameron said in an article published in the U.K.’s Daily Mail ahead of the four-day trip to Southeast Asia.

Meeting Indonesian President Joko Widodo on Monday to discuss mutual trade and investment prospects, Cameron told media that “we [the U.K. and Indonesia] are natural business partners and there is much more we can do.”

In return for considering British investments, Indonesia wants greater access to the U.K. and to the wider European market for its exports, which are mostly commodities such as palm oil, rubber, coal, coffee, copper, oil and natural gas. “The lower tariff [is] needed on Indonesian [primary] products like wood, clothing, coffee and fisheries,” Widodo said after meeting Cameron, adding that British applications for investment in Indonesian infrastructure would be considered.

The two leaders bantered and posed for cameras on a verandah at Indonesia’s presidential palace, despite a likely disagreement over the the case of Lindsay Sandiford, a British grandmother who is on death row in Indonesia over drug smuggling charges, which Cameron raised with the Indonesian president.

President Widodo has sanctioned the execution of 12 foreigners so far this year for drug trafficking, while mostly ignoring pleas for clemency from foreign governments. However, it is likely the two governments preferred to maintain the economic focus of the visit

Not easy in Indonesia

At the turn of the year, President Widodo cut a massive fuel subsidy to free up cash for much-needed spending on Indonesia’s roads, rail links, ports and power supply, which are widely described as substandard — an impediment for would-be foreign investors and a contributing factor to slowing growth in the Indonesian economy.

“We are fully aware that it’s not that easy for us to provide adequate infrastructure due to a number of existing problems, such as high logistics costs,” National Development Planning Minister Andrinof Chaniago said on Tuesday morning during a meeting with the British business delegation accompanying Cameron.

Indonesia does not have enough cash to fund the projected $450 billion in infrastructure investment that is needed to bring the massive 13,000 island archipelago up to speed with neighbors such as Malaysia and Thailand and boost prospects for growth.

Indonesia’s economic expansion has slowed from a 6% annual average over the past decade, to under 5% per annum, due to reduced demand from China and elsewhere for Indonesia’s commodity exports.

Like the U.K., Indonesia has joined the newly-formed and Chinese-led Asian Infrastructure Investment Bank, and is courting Chinese and Japanese backing and finance for its much-touted infrastructure modernization plans.

Ahead of his meetings in Jakarta, which he last visited in 2012, Cameron pledged to “make available up to 1 billion pounds ($1.5 billion) to finance infrastructure projects in Indonesia.” Among the deals sought is a sewage treatment system for Jakarta. Though it is one of the world’s 10 biggest cities, the Indonesian capital is hampered by overworked infrastructure and substandard utilities.

Simon Moore, international director at the Confederation of British Industries, which describes itself as “Britain’s premier business lobbying organization,” welcomed the trip, saying “these deals are a welcome boost to British jobs and growth across the country, and show the government is working hard to fly the flag for U.K. plc.”

Cameron was accompanied on the deal-making hunt by chief executives from well-known British companies including construction equipment maker JCB, insurers Lloyd’s and Aviva, as well as Rolls Royce, which, along with other U.K.-based companies such as Unilever, Standard Chartered, Rio Tinto and GlaxoSmithKline, has already invested in Indonesia.

John Nelson, Chairman of Lloyd’s, who joined Cameron on the trip, said that Indonesia and ASEAN have a lower than average insurance take-up, suggesting a major business opportunity for the insurance sector.

“The ASEAN region is a priority for Lloyd’s because despite its swift economic growth over the last decade, insurance penetration has not kept pace. In 2013, ASEAN’s insurance penetration rate was half the global average,” Nelson told the Nikkei Asian Review.

Indonesia is notably disaster-prone, and during recent weeks several airports have been closed due to volcanic activity. Monday’s magnitude 7.0 earthquake in Papua in the east of Indonesia was the latest in a country that sits on the Pacific “Ring of Fire” and sees regular earthquakes. The most devastating came a decade ago off the coast of Sumatra, causing the tsunami that killed 230,000 people in Indonesia, Thailand, India and Sri Lanka.

“Lloyd’s could play a much more significant role in the Indonesian market by increasing the reinsurance capacity and underwriting expertise for specialist risks, particularly for the catastrophe risks Indonesia faces, with the aim of complementing and strengthening the domestic market,” Nelson added.

But while Indonesia’s massive population of around 250 million, and its growing middle class — now estimated at 45 million people — represents a potentially lucrative market opportunity, significant hurdles to doing business there remain.

The British government’s trade and investment department advises businesses looking at Indonesia that “quick wins” are unlikely, citing factors such as a complex bureaucracy, an uncertain and unpredictable legal and regulatory environment, lack of transparency, high logistics costs, poor infrastructure, as well as a business culture where companies will rarely respond to emails.

While Indonesia has huge economic potential, said Michael Buehler, a political scientist specializing in Indonesia and based at the University of London’s School of African and Oriental Studies, there are risks.

“Indonesia remains a high cost economy,” Buehler told the NAR. “Red tape and poor infrastructure will set up U.K. investors for disappointment.”

While President Widodo has tried to make Indonesia’s notoriously labyrinthine investment procedures less complicated, some of his supporters espouse a brand of economic nationalism and back long-standing restrictions on investment. Ranked 114 out of 189 countries in the World Bank’s ease of doing business tables, Indonesia sits far below neighbors such as Singapore (1), Malaysia (18) and Thailand (26). The U.K. occupies eighth place.

Perhaps with those difficulties in mind, Prime Minister Cameron is using the trip to bang the British business drum across the wider region, rather than focus on Indonesia, for all its vastness and possibilities.

Looking to the region

The EU, with a combined population of 508 million, has a free trade agreement with Singapore, ASEAN’s most prosperous member, but Cameron is pushing for the completion of wider deals with the ASEAN region — population 620 million. It is described by the U.K.’s Trade and Investment department as “a new big beast in the East” due to the potential of its consumer market, the world’s third largest in total.

ASEAN already has FTAs with Australia, China and Japan — leaving Europe playing catch-up. “An EU-ASEAN trade deal would really turbo-charge growth across the single market,” Cameron said ahead of a Monday night meeting with ASEAN Secretary General Le Luong Minh at the group’s Jakarta headquarters.

“Alongside an EU-U.S. trade agreement, such deals would be like a shot in the arm for Europe’s economy,” Cameron added, mentioning a proposed agreement between Brussels and Washington alongside the mooted EU-ASEAN deal, which was first proposed in 2007. However a press statement issued by the ASEAN secretariat after the meeting between Le and Cameron made no mention of the proposed FTA.

ASEAN, which is scheduled to form a EU-lite economic community by the close of the year, has a combined gross domestic product of $2 trillion, almost half of which is contributed by Indonesia. The EU’s total GDP of nearly $18.5 trillion would make it the world’s biggest economy if measured as a single entity, slightly ahead of the U.S. and twice that of China.

According to the website of the European Commission, the EU’s main administrative arm, “ASEAN as a whole represents the EU’s third largest trading partner outside Europe (after the U.S. and China) with more than 235 billion euros of trade in goods and services in 2013.”

However there are huge differences in the respective average incomes in the two blocs, which according to 2014 World bank figures stands at just under $36,000 per person per annum in the EU but just under $4,000 for ASEAN.

Internally, both the EU and ASEAN are marked by massive economic disparities between richest and poorest members. According to Eurostat, the European Commission’s statistics body, the EU’s wealthiest member is the tax haven of Luxembourg, with a GDP per capita of $92,000 a year, while Denmark, Sweden, Ireland, The Netherlands and Austria all average more than $40,000.

The EU’s poorest member state, Bulgaria, has an average income roughly equivalent to the ASEAN average. ASEAN’s richest is Singapore with $55,182, while the poorest is Myanmar, where the average income is just $887 per person per year, according to ASEAN statistics.

However some predict that ASEAN will see economic growth of 5% a year for the next decade, meaning that the southeast Asian region represents a potentially lucrative opportunity for European businesses. The European Commission says pan-EU growth will be only 1.5% for 2015, limiting prospects for commerce across a region riven by struggling economies in Greece, Ireland, Italy, Portugal and Spain.

Next stop Singapore

On Tuesday Cameron followed Indonesian President Widodo to Singapore, where he lauded the city state’s perceived record of efficiency and clean government. There Cameron also outlined his own administration’s plans to make it more difficult for criminals and Russian oligarchs to use London, a major financial and banking hub, as a base for money laundering. “London is not a place to stash your dodgy cash,” Cameron said, speaking in Singapore on Tuesday afternoon.

Cameron will also travel to Vietnam — the first ever such visit by a U.K. prime minister — and to former colony Malaysia, where he is being criticized by opposition politicians for visiting at a time when his counterpart there, Prime Minister Najib Razak, is under pressure over allegations that almost $700 million in government money was diverted to bank accounts in his name ahead of elections in 2013.

In Malaysia, Cameron will discuss combating Islamist terrorism and curbing the flow of would-be fighters seeking to join the so-called Islamic State in Iraq and Syria.

Cameron had similar discussions in Indonesia with local religious leaders, and pledged increased counter-terror cooperation with Jakarta. Indonesia has the biggest Muslim population of any country and around 500 Indonesians are estimated to have joined IS, which has affiliated militants based in Sulawesi in eastern Indonesia and other supporters in Aceh, a strongly Islamic province in the north of Sumatra.

However, more British citizens have joined IS than have Indonesians. “The number in the U.K. is slightly higher, from a much smaller Muslim population, so we’re keen to see how Indonesia is succeeding in keeping extremism at bay,” said Moazzam Malik, the British ambassador in Jakarta.

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