Indonesia’s oil and gas sectors will help pull in the investment needed for new infrastructure

New investment law changes the rules of the game
Indonesia is the largest country within the South East Asian economic block, the other point in a powerful triangle completed by China and India. Investment will create equal stature

Indonesia’s Minister of Trade, Mari Pangestu, says that the future portends three major Asian economic blocks – China, India and South-East Asia. The South-East Asian block has a market of close to 600 million people, about half the size of those of China and India, but offers completely different resources. Within it, Indonesia is the largest country. The ASEAN (Association of Southeast Asian Nations) region has stepped up integration targets, accelerating the time frame from 2020 to 2015 for economic union, evidence, according to Minister Pangestu, of the commitment and political will backing the alliance.

In order to assume its rightful place in this block, Indonesia must play catch up with its neighbours, most specifically in its regulatory framework for investors and critical infrastructure such as roads and electricity. Its lag in infrastructure growth, pronounced since the financial crisis at the end of the nineties, is hurting its competitiveness.

In order to level the playing field, the government has announced that the country needs $426 billion of investment over the next three years, $72 billion of which will be public funds. This investment will, according to government calculations, propel annual growth of 6.6 per cent, reduce unemployment from its current 9.7 per cent to 5.5 per cent, and cut the number of Indonesians living below the poverty line from 36 million to 17 million.

Roughly $123 billion of this investment has been earmarked for infrastructure development. With $24 billion coming from the government coffers, there is a financing gap of nearly $100 billion to be filled by the private sector, opening a vast array of opportunities for investors. Various government initiatives have been announced such as plans for 1,600kms of toll roads, and its ‘Fast Track’ programme, designed to meet the country’s increasingly pressing electricity needs with the construction of 40 new coal-fired plants – all by 2009.

Speaking on the occasion of the UK-Indonesia partnership forum earlier this year, Minister Pangestu said that infrastructure development that supports exports and logistic services is crucial for luring the investment necessary to enhance value added production.

“The direction of our policy as well as what we are doing as a government in a coordinated way is designed to increase the value added aspect of our exports,” she explains, saying Indonesia’s vast natural resources are its advantage and will continue to form the base of value added products.

MARI PANGESTU Minister of Trade	MUHAMMAD LUTFI Chairman of the Investment Coordinating Board (BKPM)	CHRIS KANTER Vice President for Investment of the Indonesian Chamber of Commerce and Industry

Chris Kanter of the Indonesian Chamber of Commerce & Industry, the only voice of the private sector in the country with a legal mandate to consult with government on commercial law, says that the current government is not only the most pro-business in recent years but that its commitment to infrastructure development was clear from the onset.

“We held an infrastructure conference in November of 2006, and the response from foreign investors was remarkable. The expectation from the market was big, and the preparations made by the government were much better and faster than before. This government is very transparent and clean, and it has moved forward with the regulatory body for toll roads and risk management schemes. They have formed a unit and it has started working and evaluating,” states Mr Kanter.

This, in a nutshell, sums up the creation of the new investment climate in the country. Indonesia is putting in place the pillars for a safe and transparent environment within a pro-business economy, but it takes time. What is important is the clear message that government initiatives are sending to the world. This should reassure the investors that are needed to bring in that $354 billion. The opportunities and resources are there – the legal certainty is being created. As Muhammad Lutfi, chairman of BKPM, Indonesia’s investment board, has said: Indonesia will soon be the most progressive country in the region for investment.

He adds, “Security in this country has been sustainable. Have you seen anybody pulling out their investments because of nationalisation or security reasons? No. We do not have security issues like Africa, for example. We have the comfort of doing business, but not like in Singapore or Switzerland. Inefficiency in our economy exists, and it is in mending this that our priorities lie. We cannot lure people here to invest and then not deliver on our promises. We want to create a comfortable environment for the investor, and then we will work hard to get them in.”

Proof of this is BKPM’s recent reduction of licensing times for new businesses - from an average of 150 days to 97; Mr Lutfi says he is targeting 50 days in the near future. Efforts such as these have boosted Indonesia’s global competitiveness ranking – in 2006, it was 19 places higher on the World Economic Forum’s list than in 2005, ahead of China, Russia and Brazil. The new investment law that was passed this year, which streamlines bureaucracy in addition to guaranteeing equal treatment for domestic and foreign investors, should boost that ranking yet again.

Secretary General of the Employer Association of Indonesia (APINDO), Mr Djimanto, believes that the changes in labour regulations that APINDO has helped to mould should improve the recent decline in investment in the country’s labour intensive sectors while the association’s chairman Sofjan Wanandi says that Indonesia has followed the example set by its neighbours.

“We are now becoming competitive because we know what India, China and Vietnam had to do,” he says. “The perception of us is worse than the reality. We have to change that,” observes Mr Wanandi.

Minister Pangestu concurs. “We are heading in the right direction, and making progress on structural reform,” she states. Investors must agree – FDI in Indonesia leapt by 123 per cent this year between January and August, reaching a record $11.7 billion.