joko

As Joko Widodo nears his second term as president, Indonesia is maintaining its focus on attracting private infrastructure investment. But this is not without its challenges, as Alex Irwin-Hunt reports.

Indonesian president Joko Widodo has pledged to make his final five years in office his legacy, as he pursues sweeping reforms and infrastructure investment to leave his stamp on the world’s largest Muslim country.

“The president was quite clear when he mentioned that the next five years should be his legacy, [as] he will have no burden at all to deliver the economic reform,” said Bambang Brodjonegoro, minister of national development planning, at the Indonesian Infrastructure Investment Forum (IIIF) in London in July 2019.

Infrastructure investment has been identified as the most important of the six investment priority sectors outlined by the Indonesian government, above manufacturing, maritime, agriculture, tourism and lifestyle industries. 

Mr Widodo hopes to achieve his legacy through the promotion of infrastructure investment – a continued goal from his first term – alongside wider goals of bureaucratic reform, labour reform and human resource development. With his second term beginning in October 2019, Mr Widodo has also stated his intention to shake up his economic cabinet

The president hopes to improve the investment climate in Indonesia by reducing red tape at both the local and national level, including the process of licencing and getting a permit, says Mr Brodjonegoro. Indonesia beats even China and Russia as the most restrictive country in terms of FDI regulation, according to the OECD’s index in 2018.

Infrastructure potential

Indonesia attracted almost $39bn of inbound greenfield investment in 2018, which was just $800m short of the record $39.8bn accumulated in 2015, according fDi Markets, a data service from the Financial Times that has been monitoring greenfield investment since 2003. Almost half of this greenfield investment is attributable to a $17.8bn commitment by state-owned PowerChina in April 2018 to develop five hydropower plants in North Kalimantan, the world’s most costly renewable energy project.

Although an outlier in terms of its size, the project gives some indication of the huge potential of Indonesian infrastructure projects, and especially those due to provide basic services to the country’s population of some 260 million.

“I think Indonesia is one of the most attractive countries for infrastructure investment in the world right now. [Yet] the challenges are real, [as] they still have a long way to go in terms of transparency and ease of doing business,” says John Kjorstad, global services infrastructure leader KPMG, and a panel moderator at the IIIF.

In his first term, Mr Widodo highlighted a requirement of $359.2bn of infrastructure investment, and under his leadership the world’s 16th largest economy successfully constructed 3400km of national roads, 940km of toll roads, along with new airports and seaports, according to Nikkei Asian Review.

In his forthcoming second term (from 2020 to 2024), he has set out further plans for more than $441.3bn-worth of infrastructure projects. The government plans to fund 40% of that colossal amount, while 25% will be funded through state-owned enterprises (SOEs) and the remainder by the private sector.

“Government funding will definitely not be adequate, so investment from the private sector is critical. [This will come from] domestic investors too, but specifically foreign. I think the role of that capital inflow, specifically the FDI type, is critical for a country like us,” Indonesia’s minister of finance Sri Mulyani told fDi.

SOE and PPP reliance

As Indonesia authorities strive to make up the gap in infrastructure investment, it has proposed the use of public-private partnerships. Seventeen PPPs have been signed in the past two years. This could be partially attributable to mechanisms in place to attract private infrastructure investments, such as the Indonesia Infrastructure Guarantee Fund (IIGF), a government agency founded in 2009 which provides financial support to well-structured PPPs and works towards a better legal framework for investments.

Nonetheless, there are concerns among investors and commentators that the focus on PPPs is not the best approach to ensure private entities make up the remainder of investment required.

“One strong criticism I would have of Indonesia is that they rely too much on the SOE system. The challenge this presents when they are trying to promote private investment as an infrastructure market is that the private investors are coming into a market that is dominated by SOEs and they wonder if they are going to get a fair shake at the best projects,” says Mr Kjorstad.

FDI restrictiveness

Indonesia’s position as the most restrictive country in terms of its FDI regulation is something Mr Widodo has pledged to address, despite it being a highly politicised issue within the country. The country’s long negative list of sectors banned to foreign investment including casinos and alcohol, is partially as a result of the strong vested interests of the domestic elite, and seems unlikely to be reduced significantly.

Indeed, this restrictiveness is evident in Indonesia’s FDI performance relative to its south-east Asian neighbours: between 2013 and 2017 its average net FDI to GDP was lower than both Malaysia’s and Vietnam’s at just 2.1%, according to research firm TS Lombard. Moreover, in the 12 months to May 2019, Indonesia attracted 24.5% less greenfield FDI projects than in the same period a year earlier, according to fDi Markets.

With potential liberalisation of FDI regulation on the horizon, there may be many more opportunities for foreign investors in Indonesia soon. Nonetheless, with some sectors open to 100% foreign ownership, including real estate activities, waste collection and management, the country will continue to extend its charm offensive to foreign investors.

This article is sourced from fDi Magazine
fDi Magazine

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