Irhoan Tanudiredja, Senior Partner, PricewaterhouseCoopers, on the challenges the country faces moving forward

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Irhoan Tanudiredja, Senior Partner, PricewaterhouseCoopers

In less than three years Indonesia will encounter the ASEAN Free Trade Area (AFTA), which will eliminate intraregional tariffs and non-tariff barriers among the South-east Asian countries, with a view to integrate the economies in the region into a single production base and regional market. AFTA is aimed to increase ASEAN’s competitive edge, to attract investment and boost trade between country members. It is also hoped to leverage on the huge potential and complementariness that exist in the region to strengthen and deepen intra-ASEAN industrial linkages, including creating strong small and medium-sized enterprises (SMEs).

With the larger scale production and a 620m population as of 2015, ASEAN provides broader market access to manufacturers. Indonesia is currently the darling of investors due to its rapid economic growth relative to other countries in the region, and particularly to the crisis-affected countries in the West.

However, analysts say that challenges remain for Indonesia to be ready for the AFTA. The government, business and all the stakeholders are required to prepare strategies to enable the country for the milestone, otherwise it would be a mere market target and throw its potential to the wind.

There are a number of challenges that may hinder Indonesia in fulfilling its business and investment potential, which are succinctly summed up by PricewaterhouseCoopers Indonesia in its economic barometer (eBar) survey 2010. The survey revealed that senior executives in Indonesia found infrastructure quality the single most important improvement needed to boost the current business environment. Sufficient infrastructure will eliminate high-cost economy, create efficiency and eventually boost competitiveness.

The eBar also pointed to the fact that Indonesia was seen as a less attractive place to invest by investors compared to other ASEAN countries, due to the higher cost and the longer period needed to start up a business, and less efficient registration process. The time needed to start up a business in Indonesia is higher compared to other ASEAN countries, because of the long bureaucratic process, the number of approvals that are needed from different ministries, a lack of transparency, the inconsistency in the regulatory framework and registration process, and the availability of a user-friendly registration process (i.e. submission by email).

In addition, many respondents feel that compliance process in Indonesia is less efficient than that of other ASEAN countries. The government’s efforts were deemed insufficient to improve incentives for foreign investment in Indonesia by more than half of the respondents, senior executives particularly from the energy, utilities and mining sectors.

Another challenge faced by Indonesia is increasing comparative advantages in the integration of priority sectors. The country has the advantage in sectors such as palm oil, natural gas and electronics, while for automotives, agriculture, IT, they are limited to the level of excellence. It is important for Indonesia to provide advantageous sectors with fiscal incentive and capital access to improve their competitive edge against other countries in AFTA. It takes significant paradigm shift, namely trading activities that rely on state protection, to improve business competitiveness. In that case, strong management, efficiency, capital strength and product excellence are very much needed to succeed.

The AFTA will become an opportunity for SMEs in Indonesia to find the market beyond the domestic one to sell their products. The SMEs should use this opportunity to increase the quality of their products, otherwise they will lose their competitive edge. A way for Indonesia to overcome this challenge can also be to undertake a strategy of adding value to export products that have special Indonesian characteristics.

AFTA expansion can affect the Indonesian economy both negatively and positively. However, the good would far outweigh the bad if the government, business and all other stakeholders unite to face the AFTA together and are aware that ASEAN Economic Community is indeed a golden opportunity instead of a threat.

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The Report: Indonesia 2013

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