Opportunities huge, so are challenges — Shoeb Kagda
MAY 11 — It is little wonder that Indonesians are the happiest people in the world, according to a recent study by a leading investment bank. Over 50 per cent of the population said they were very happy with their lives and have a positive outlook for the future.
What is there to be happy about?
Real wages are outstripping inflation; jobs are plentiful; lending rates are historically low and demand is robust.
It is often said that the economy is on autopilot, and is growing despite the government and the uncertain political environment. There may be some truth to this as public development expenditure has tailed off in the last few years and capital expenditure is dominated by the private sector.
If the macro-economic fundamentals remain strong, Indonesia will continue to enjoy strong GDP growth. But it faces the risk of being caught in the middle income trap if it does not increase infrastructure spending and raise productivity.
This is where the country is unable to compete on low labour costs alone but, at the same time, does not have the elements of an advanced economy.
ROADBLOCKS TO PROGRESS
Lack of infrastructure has long been a bugbear for businesses and investors wanting to access Indonesia’s hinterland. The country only has an estimated 5,000km of roads; many of its major airports are operating at overcapacity and its seaports are inadequate to cater to growing intra-island trade.
The much heralded Trans-Java toll road remains a work in progress despite the plan being announced more than 15 years ago. The toll road would span 1,120km and connect Merak in the west and Banyuwangi in the east once complete, but problems with land acquisition have stalled the project despite strong investor interest.
The government has been working hard to clear the roadblocks. In December it passed the new land acquisition law which will make it easier for investors to acquire land earmarked for public infrastructure projects.
Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry (Kadin), has said that the country needs an estimated Rp1,786 trillion (RM580 billion) to finance infrastructure projects over the next decade. As the government can only finance 30 per cent of this amount, the private sector will have to play an important role in building infrastructure in the country.
But progress is being made. Last month, President Susilo Bambang Yudhoyono inked a deal with the China Railway Construction Corporation to invest in the Rp100 trillion Sunda Straits Bridge linking the islands of Java and Sumatra. The 30km bridge will link 80 per cent of Indonesia’s 240 million people by road and rail, and will take about 10 years to complete.
If and when completed, the bridge will create new pockets of growth in west Java and south Sumatra and act as a major route for Sumatra’s rich natural resources to reach the densely-populated island of Java.
And to meet the rising demand for air travel, the government has begun work to expand and upgrade the Soekarno-Hatta International Airport which serves Jakarta and acts as the main entry point for business travellers into the country.
Apart from transportation, the country will also have to invest billions in new power plants and Internet infrastructure. Many of these projects are private sector-driven, and investors often have to wade through red tape and bureaucratic inertia to get their projects moving.
Recognising the enormous economic potential of the Internet, the Ministry of Communication and Information launched a programme in 2010 to bridge Indonesia’s Internet divide and hopes to have the whole country connected by next year. But, given the geographical challenge of linking 17,000 islands, that is a tall order — especially since many rural areas are poorly served by modern infrastructure.
THE BUSINESS COST OF UNCERTAINTY
Another major challenge is tackling rampant corruption. Some of the country’s most prominent politicians have been tried and sentenced to jail terms, the latest being Nunun Nurbaeti, who received a four-year sentence for her role in bribing members of the House of Representatives banking commission with Rp480 billion in traveller’s cheques.
While such high-profile cases grab public attention, many businessmen complain about having to constantly pay lower-ranking government officials bribes to get things done. This is where it hurts companies as it drives up the cost of doing business and contributes to uncertainty.
Indonesia is currently basking in the glow of international attention and its stature as a member of the G-20. It continues to draw more foreign direct investments than any other country in Southeast Asia. But uncertain regulations — such as the new mining and manpower laws — have raised some concerns.
The new mining law, which restricts the level of foreign ownership and export of unprocessed raw materials, will take effect in 2014. The government also plans to levy a mining export tax of 25 per cent this year, jumping to 50 per cent next year.
The announcement sent mining stocks on the Indonesia Stock Exchange reeling and forced officials from the Ministry of Energy and Mines to retract the statement, saying no firm decision had been taken.
Such uncertainty is now par for the course for investors in Indonesia. Going forward, they will have to deal with growing economic nationalism, especially in the natural resources space — but at the same time, the opportunities that the country offers are too lucrative to ignore.
Doing business in Indonesia requires perseverance and stamina. It requires an ability to deal with unexpected challenges, as DBS Bank is finding out.
Although its S$9.1 billion (RM21.8 billion) acquisition of Bank Danamon last month is perfectly within the law, the country’s central bank wants equal treatment of Indonesian banks operating in Singapore as a precondition for approving the deal.
Nationalist sentiments were also on display in the House of Representatives as hackles went up when the deal was first announced. Achsanul Qosasi, chairman of the banking commission in Parliament, said that, going forward, his commission is looking into introducing a ruling limiting foreign ownership in Indonesian banks.
How this deal will play out is anyone’s guess but it illustrates the challenges in operating in Southeast Asia’s largest economy. The opportunities are huge — but so are the challenges. — Today
* Shoeb Kagda is group editor-in-chief of GlobeAsia, Indonesia’s top business magazine.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.