Indonesia clearing hurdles to attract foreign investment

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The investment board in Indonesia is ramping up initiatives to attract funds into the country as it launches a massive infrastructure programme designed to accelerate modernisation and promote growth.

In June, the Indonesia Investment Coordinating Board (BKPM) announced plans to cooperate with the Bank of China in promoting Indonesia’s investment potential at a roadshow in Zhejiang and Fujian Provinces in July. While such moves underline BKPM’s aim of reaching out to potential investors in strategic countries such as China, the slow pace of investment as well as regulatory challenges for foreign investors remain key concerns.

Infrastructure spend

The BKPM said in April that China had, for the first time, broken into the top 10 biggest foreign investors during the first quarter, investing $75.1m in 200 projects in Indonesia. However, this was dwarfed by Singapore at $1.2bn and the US at $292m.

Boosting investment will be crucial to funding the government’s planned $150bn infrastructure programme, including new ports, power stations and roads, over the next five years. “The upgrading of our ports and other maritime infrastructure depends on whether we can attract large pools of investment, due to the government’s limited budget and insufficient resources to make the necessary infrastructure improvements,” BKPM’s chairman, Franky Sibarani, told OBG.

Sibarani told media in June that total direct investments would need to increase by more than 15% per year on average over the next five years to achieve the government’s annual economic growth target of 7% by 2019.

The early signs are good: foreign direct investment rose 14% year-on-year to Rp82.1trn ($5.4bn) in the first quarter of this year, according to BKPM data released in April. This represented a significant recovery after weak foreign inflows in 2014 due to uncertainty caused by legislative and presidential elections.

One-stop shop for investment

To attract more foreign investment, in January the administration of Joko Widodo launched a one-stop service for investment at BKPM that aims to streamline and simplify licensing procedures for foreign investors.

 “The one-stop service will play a key role in [improving the investment climate]. We provide a simple and integrated licensing programme to facilitate the process for investors,” Sibarani told OBG.

The government has also introduced a new package of tax incentives and relaxed regulatory conditions. For example, investment in the power generation sector previously required as many as 49 permits and took more than two years to process. Now only 25 permits are needed and the process is completed in nine months. In the energy exploration sector, the number of licences needed has been reduced from 52 to 42. However, field operators still need to secure a staggering 341 licences from relevant ministries and another 101 licences from local governments.

Alongside the regulatory challenges, the government also has to overcome jitters about policy enacted by the previous administration, including a ban on unprocessed mineral exports, which critics say has closed off some avenues to foreign investors.

No-entry signs on some sectors

In May 2014, Indonesia revised its negative investment list, which specifies business activities closed to non-Indonesians, with sectors ring-fenced for domestic investors including energy, agriculture, retail and storage, among others. Meanwhile, Article 50 of a Trade Law enacted the same year allows the state to arbitrarily impose limits to protect government interests, and Articles 67-72 allow restrictions as a measure to preserve domestic demand.

In a June report, investment bank Morgan Stanley said private investment in Indonesia was likely to disappoint. “Companies were discouraged with overlapping regulations and increased uncertainty potentially impacting their investment plans in the foreseeable future,” it said.

The current government is trying to mend bridges with foreign investors and has admitted mistakes were made. For example, Jakarta is looking to delay a ban on exports of copper and other mineral concentrates due to come into effect in 2017, though bauxite and nickel are still expected to be retained for domestic processing. Jakarta pressed on with last year’s ban on mineral exports, even though there is not enough domestic smelting capacity to process the country’s output.

The new government’s efforts are already having an impact. Following meetings in May, business leaders from China and Japan have separately told Widodo that they remain committed to their engagements in Indonesia and intend to follow through on their investment plans.


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