Global Business Guide Indonesia

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Indonesia's Economic Potential: A Look Beyond Java
In the past decades, most foreign investment to Indonesia went to the industrial estates around Jakarta, but recent years have shown that in terms of economic development, the centre of gravity is shifting eastwards across the island of Java, while in the longer run new opportunities await investors in regions across the entire archipelago.

Indonesia's Economic Potential: A Look Beyond Java
The island of Sulawesi merits special attention from investors thanks to promising developments in numerous sectors, such as agriculture, transportation, electricity generation and mineral processing

Supported by improving infrastructure, rising spending power and government incentives, regions outside of Java can outperform in terms of both investment and economic growth. Investors willing to look beyond the mainstays of Jakarta, West Java and Bali benefit from early-mover advantages.

Masterplan to spread economic opportunity

While government officials have long stressed the need to spread economic development more evenly across the country, there are grounds to be optimistic that this is finally happening. Indonesia's masterplan for national development from 2011 to 2025, known as MP3EI, acknowledges that economic development needs to be carried further afield.

The regional growth centers will be in the form of special economic zones and industrial clusters that facilitate vertical and horizontal integration. The incentives are to include favourable taxation and customs policies, some of which are already in force. For instance, income tax allowances in line with Government Regulation No. 144/2012 are applicable to investment projects particularly outside of Java. MP3EI aims to promote regional development by connecting the growth centres with each other and with their surroundings.

With these goals in mind, Indonesia has improved the business environment for public-private partnerships (PPP) on infrastructure projects, notably with the implementation of the Land Acquisition Act in 2012 (See An Update on Indonesia’s Land Acquisition Law) and an overhaul of the PPP framework in the past years. To reduce regional disparities, PPPs and other investment projects pursued by the government focus on the development of six so-called economic corridors: Sumatra, Kalimantan, Java, Sulawesi, Bali & Nusa Tenggara and Papua & Maluku.

Areas outside of West Java are gaining appeal

Figures from the Indonesian Investment Coordinating Board (BKPM), the agency tasked with promoting and coordinating investment in Indonesia, suggest that measures to spur development outside the industrial heartland of western Java are bearing fruit. The proportion of direct investment – both foreign (FDI) and domestic (DDI) – in Jakarta and West Java declined from 45.4% of the total in 2010 to 26.8% in 2013. The importance of East Java gained over the same period, as the province reaped 16.8% of total realized direct investment in 2013 compared to 11.6% in 2010. Domestic investors are particularly fast to embrace opportunities in Central Java and East Java, increasing their investment more than 10-fold and 3-fold, respectively, from 2010 to 2013, while reducing their commitment to West Java.

Realized FDI and DDI by economic corridor and province:

Realized FDI and DDI by economic corridor and province

Source: BKPM

Go east

Central Java and East Java are increasingly on the radar of manufacturers, not least because space closer to the capital has become crowded and minimum wages in the area have increased to the highest levels nationwide. In Jakarta, the minimum wage was set at 2.44 million RP for 2014, and similar levels are in place for many industrial areas of West Java and Banten. Typical minimum pay in Central Java, Yogyakarta or East Java is around 40% lower. A high-speed rail line being built across the island will connect more closely Jakarta and Surabaya and all the cities on the route.

Central Java has become particularly popular with the labour intensive textile industry (See Indonesia’s Textile and Clothing Industry); according to the Indonesian Employers Association (APINDO), numerous companies from West Java are looking to relocate to the province, which is home to around 33 million people living on an area of 33 thousand square kilometres. Provincial authorities are promoting investment in three new industrial zones to be established in addition to some 19 that already exist. Singaporean investors and two Indonesian industrial park developers have announced plans to jointly develop one of those estates, the Kendal Industrial Park (KIP), a 2,700 hectare sea-fronting integrated industrial park.

Larger than Central Java in terms of both population and area, East Java surpassed Jakarta to become the third-most popular location with foreign direct investors in 2013, behind only the industrial core provinces of West Java and Banten. Among domestic investors, East Java, which is seeing particularly fast development in the SME sector, easily beats all other provinces. Having committed itself to infrastructure improvements, the provincial government in Surabaya is seeking investment in the construction of port projects, rail links and toll roads (See Indonesian Infrastructure: Tremendous PPP Opportunities). Juanda International Airport, despite a new terminal starting up in early 2014, is already nearing its intended capacity and requires additional runways and facilities to cope with booming air traffic (See Indonesia’s Aviation & Airports Sector). The Java Integrated Industrial and Port Estate (JIIPE) in Gresik will be a boon to manufacturing industries in the province.

Look beyond Java

While central and eastern Java are fast gaining popularity for manufacturing industries not least due to their large populations and because they are in easy reach of Jakarta, regions beyond the country's most populated island offer long-term opportunities for investment in agriculture, infrastructure, health services and downstream mineral industries.

In agriculture, investment options largely ignored by investors so far spring to mind outside the primary plantation product of crude palm oil (CPO). As the heartland of Indonesia's cocoa industry (See Indonesia's Booming Cocoa Industry Puts Farmers to the Test), the island of Sulawesi, for example, offers promising prospects for cacao cultivation. Sulawesi already accounts for about two thirds of national cacao production, and the development of downstream industries in the same area is set to keep it that way. Cocoa processing capacity has far outpaced bean production in recent years, leaving a widening supply gap for high-quality beans. Most Indonesian cacao is produced by smallholders who often employ suboptimal methods. Bringing to bear modern technology and knowhow, investors could create the necessary economies of scale to boost productivity and capitalize on growing cocoa and chocolate consumption in Indonesia and Southeast Asia. Other alluring investment opportunities exist in horticulture cultivation (See Organic Growth – Horticulture in Indonesia) and cattle rearing, with per-capita beef consumption in Indonesia rising fast and the government trying to wean the country off imports. MP3EI states the goal of developing “new food production centres outside of Java.”

While the lack of infrastructure in many areas of Indonesia poses a challenge for industries, it is also a chance to engage in construction. In the transportation sector, railway links and seaports offer perhaps the most appealing prospects for foreign investors. Investors from numerous countries have expressed interest to participate in the development of a rail network in Sulawesi, the first phase of which is a link between Makassar and the port of Pare-Pare, estimated at 9 trillion RP. In energy infrastructure, power generation both from fossil fuels and renewable sources comes to mind, as boosting electricity output is of paramount importance for national development. State-owned utility PLN cannot achieve the immense capacity increase itself, which opens the door for independent power producers. Sumatra holds particularly large geothermal potential (See Re-energised: Opportunities in Indonesia’s Geothermal Sector). The need for better infrastructure also extends to the natural gas industry, where the domestic market is increasingly replacing exports as local demand rises. Alas, the pipeline network, LNG plants, receiving terminals and regasification units are not yet up to the task of supplying gas to domestic consumers, necessitating substantial investment, especially outside of Java.

Universal health insurance is being rolled out across the country and is scheduled to be fully implemented in 2019. Because it is subsidised by the central government and because affluent patients pay more into the system than the poor, it suddenly makes the provision of healthcare services much more feasible in remote areas where people have lower income. Thanks to funds flowing from the central government to municipalities and households across the archipelago, this is now one industry that depends less than others on regional economic development, which makes the construction of hospitals and clinics an interesting option for investors in underdeveloped regions outside of Java (See Indonesia’s Healthcare Sector).

The controversial Mining Law that compels mining companies to process their ores within Indonesia rather than export them abroad is beginning to show effect. The policy is designed to boost investment into smelters and mineral processing facilities and hence help Indonesia extract greater value from its wealth of copper, nickel, bauxite and other minerals. As many as 63 smelters may be built by 2017, including 40 nickel plants, 10 iron ore smelters and four copper-cathode smelters, according to government data. Yet more investment is required in smelters and supporting roads and power plants, as mines are idling due to the export ban and the government appears adamant to see its policy through. Most Indonesian Nickel is found on the island of Sulawesi, while bauxite deposits are concentrated in the Riau Islands and West Kalimantan. South Kalimantan holds the largest iron ore reserves, whereas copper is mainly found in Papua and West Nusa Tenggara.

Sulawesi ticks many boxes

The above overview suggests that among areas outside of Java and Bali, the island of Sulawesi merits special attention from investors thanks to promising developments in numerous sectors, such as agriculture (cocoa, but also coffee and rubber), transportation (rail and road connections), electricity generation (high power consumption for mineral processing) and mineral processing (nickel smelting, but others, too). In addition, tourism is developing rapidly in North Sulawesi, particularly around the provincial capital of Manado, thanks among other things to attractive diving spots. Not surprisingly, then, the provinces of Sulawesi significantly surpassed the national average in terms of economic growth in recent years.

The combined effect of the above-mentioned industries across the archipelago will obviously generate multiplier effects into sectors that benefit from rising employment and consumer spending, such as retail. Good governance remains a challenge in far-flung regions of Indonesia, which usually lag behind Jakarta in perceptions of corruption and the efficiency of public administration. It is to be hoped that continued efforts by government authorities and international organizations to support capacity-building at the local and provincial level will yield results by lifting the competence of governance, reigning in graft and cutting red tape.

Global Business Guide Indonesia - 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)