The Indonesian government is looking to private investment as a key driver of economic growth for Indonesia next year in the midst of ongoing challenges to boost domestic output. Indonesia’s regional trading partners such as China are experiencing a slow-down which will have a direct impact on Indonesian exports. President Joko Widodo faces a tough challenge in boosting Southeast Asia’s largest economy, as GDP growth has decelerated to its lowest level in five years recording 5.01% growth y-o-y in the third quarter, down from 5.12% in the previous quarter. The pressure is therefore on to accelerate economic development and encourage both local and foreign investment in strategic sectors by improving Indonesia’s competitiveness as an investment destination.

During the National Coordination Meeting of the Working Cabinet at the start of November 2014, President Jokowi (as he is also known) announced his determination to increase the efficiency of Indonesia’s bureaucracy and make a truly one-stop service for investment across the archipelago (See Indonesia's Economic Potential: A Look Beyond Java). As testament to his commitment, he has ordered regional governors to implement a one stop service policy within their provinces over the next 12 months or else the central government will scrap their Special Allocation Fund (DAK) or reduce their General Allocation Fund. While this announcement has faced criticism for playing budgetary politics, this move will address the complacency that has taken hold among regional governors and delayed regional investment projects.

The Investment Coordinating Board (BKPM) has in the past fallen short of providing a ‘one-stop-shop’ for investment in a variety of sectors. However, recent regulations are already serving to simplify obligations placed on foreign investors. BKPM Regulation No. 5/2013 as amended by BKPM Regulation No. 12/2013 has improved the investment licensing regime which coupled with a reformation in the tax collection system, has seen Indonesia climb three places to rank 114th in the World Bank’s Doing Business Report 2015.

In addition, according to BKPM’s Official Investment Realization Report in Q3 2014, from January to September 2014, total investment value reached 342.7 trillion RP ($28.3 billion USD), which represents a 16.8% increase from the same period in 2013; indicative of investor optimism in the new government.

The newly appointed head of BKPM, Mr Franky Sibarani has already presented his plans to streamline business licensing procedures to the international press. Currently the process consists of three stages; the preparation stage, the construction stage and the commercial stage. Under his leadership, BKPM will offer an online system which should reduce the length of time taken for the preparation stage to three days for the issuance of a principal license. This new system has been pledged to be introduced within the next three to six months.

The second stage, which often involves other government institutions or local state government officials, is regarded as the most cumbersome and lengthy. To tackle the poor coordination across government ministries, BKPM will now place representatives from the relevant ministries within BKPM itself thereby centralizing the procedures required to issue the necessary licenses required to move to the next stage and commence commercial operations.

The upstream energy and mining sector presents the Jokowi government with similar challenges (See Indonesia’s Oil and Gas Sector – Upstream Challenges). Investors are faced with the need to obtain some 289 licenses for oil drilling activities in Indonesia, or 101 licenses for mining operations in other commodities. This has understandably put off investors in what are already capital intensive and high risk industries. While there has already been a significant decentralisation of the power to award mining licenses, a lack of effective coordination between the national and provincial governments has resulted in the overlapping of titles as well as weak enforcement of legislation and regulations.

A shift towards re-centralisation of authority in upstream energy resources may be the answer to rebooting weak investment in the sector. This sentiment has already been demonstrated in the geothermal energy sector by the previous government. The New Geothermal Energy Law (See Legal Update: The New Geothermal Energy Law: New Hope for Geothermal Energy Development) has returned the power for issuing an IPB license back to Jakarta to combat the repeated failure of geothermal energy projects to get off the ground due to local government inefficiency. The new administration may well seek to tread a similar path in other energy and mineral resources which bodes well for local and foreign investors alike.

The announced reforms at BKPM to shorten licensing and registration procedures are a welcome move by the Jokowi administration. Foreign investors should see these as a firm step in the right direction. However it is crucial that the Jokowi administration continues to reform in this vein. In the lead up to the ASEAN One Market, such efforts are catch up measures when comparing Indonesia with regional neighbors such as Thailand and Malaysia against which the country will be competing with to attract investment. The working cabinet will therefore have to live up to its name in ensuring that BKPM’s efforts are complemented by sound policy programs and legal certainty to secure investor interest in Indonesia.

Global Business Guide Indonesia - 11th December 2014

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)

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