Forbes Indonesia talks with representatives of international chamber of commerce on investment climate.
Foreign direct investment (FDI) realization continues its downward trend for three consecutive quarters in the end of September. The country’s Investment Coordinating Board (BKPM) data showed that FDI realization dropped 20.2% year-on-year Rp 89.1 trillion in the third quarter of 2018. Chairman of BKPM Thomas Trikasih Lembong, during the quarterly presentation at his office, admitted that internal factors such as poor pro-investment policy implementation are the one to blame for lowering investment appetite. Thomas’ statement is in line with the World Bank yearly survey on ease of doing business-indicating an economy’s position to its regulatory practice-which also shows that Indonesia’s rank also slipped to 73rd from 72nd in 2017, below countries like Thailand and Vietnam.
And this year, additional internal factor that would make investor to wait-and-see are the legislative and presidential election. To find out more on foreign investor concerns and what can be done to improve the numbers in 2019 and onward, Forbes Indonesia sits with representatives of International Chamber of Commerce in Indonesia, Noke Kiroyan; Philippe Augier of French Chamber of Commerce; Hirofumi Takeda of Jakarta Japan Club; and Lin Neumann of American Chamber of Commerce to hear their perspectives. Here is the edited excerpt of the Interview.
Forbes Indonesia (FI): How do you see the current investment climate in Indonesia?
Philippe Augier (PA): Globally speaking, we are very happy about the opportunity to invest in Indonesia. However, we have difficulties to find an area of investment that will guarantee a long-term return. Also, from what I advocate through the chamber is that the key of success of French or any foreign company in Indonesia over the last few years has been a foreign investment, alongside with capable technology and local content that will allow them to develop services to domestic market first before using Indonesia as an export platform for ASEAN. But we need more favorable climate for investment since Europeans are always looking with a long-term view. It is not three to five years, but over 10, 15 to 20 years.
FI: Do you still prefer to invest in other countries like Vietnam or Thailand although we have a population of more than 260 million?
Hirofumi Takeda (HT): In 2013, Japan Bank for International Cooperation (JBIC) conducted a survey involving the Japanese manufacturers, the result showed that Indonesia rank number one as the most promising country in the world. Especially because there was a big trouble in Thailand at that time, manufacturing people needed to find somewhere else and lots of them came to Indonesia. However, the ranking dropped year by year falling to number 3 in 2016 and to number 5 in 2017. They believe that China, India, Vietnam and Thailand are better. A lot of people say they can enjoy more profit in Thailand and Vietnam. As we are coming from private sector, we need to think of how the investment is profitable or not.
I know that Indonesia has more than 260 million people, but another question is, can we enjoy the profit out of it? President Joko “Jokowi” Widodo and his government are trying so hard to improve the investment climate and we highly appreciate it. However, this is a volatile situation for investors, especially for Japanese investors.
FI: How do you see the ease of doing business in Indonesia?
Lin Neumann (LN): I think one of the problems is there is a fundamental ambivalence in the Indonesian bureaucracy, about whether they really want to attract foreign investment and foreign investors. We can look at the ongoing push-me-pull-you struggle over work permit, the regulatory environment that is overlaid and the growth in the state-sector, which is something that the Indonesian Chamber of Commerce complains as well. The opportunity seems to be going to the state-owned companies rather than to the private companies.
There is a split there, even in the current presidential campaign. You will hear talks about stopping reliance on foreign investments and what they call as “food sovereignty”. It is not food security, which I think will support the idea of stable supply chain of food for your people, but food sovereignty that fearfully translated into “everything should be grown in Indonesia”. That is not going to happen because Indonesia does not have the climate to grow all the soybeans it needs to produce staple foods.
It is not a question of Prabowo versus Jokowi. I believe that whoever the president is, eventually he will talk about winning the foreign investment because you can’t get passed 5% growth without it. But the bureaucracy remains ambivalent and we see this in sector after sector.
This government has been really open and helpful on certain issues. We got extremely good reception from the government in talking about various issues. But it remains extremely difficult to create the necessary environment to realize the level of investment that would grow the economy.
FI: Do you see any improvement in facilitating business and investment in this country?
Noke Kiroyan (NK): Undoubtedly the situation has improved, but it is not improved enough. Public services have improved accesses for the citizens, like to cash-in pension fund or to issue new taxpayer (NPWP) card. But the problem is that the number of licenses in any industry is mind-boggling. For every little thing you need a license and each license takes time to process.
I think Jokowi has already mentioned that we have too many regulations, but it has not been translated into action yet. The president has stated many times that we need to simplify things. But how to make it happen?
HT: It is true that they are trying to do something for us, but I think Japanese investors’ interests in Indonesia are decreasing. The issues on tax and labor costs are currently circulating around the members. In Cikarang, the minimum wage is higher than in Bangkok, Thailand. We are happy to pay more to the workers, but at the same time we would like to expect an improved productivity. Otherwise, the private sectors cannot survive.
The key is to improve the productivity in Indonesia because that is the biggest matter. Manufacturing labor cost makes up more than 50% of the total cost for the company. That is why labor issue is very important. If the productivity is low, it makes manufacturing expensive.
FI: Does the tax holiday incentive give a high contribution towards the decision to invest in Indonesia?
NK: If the legal certainty is there, no matter what tax incentive you give, people will come. So it is a secondary issue I would say. If the general climate of investment is good, then of course tax holiday will be adding to the decision to invest. However, if the general climate is not good, it is irrelevant.
FI: How do you think the revised negative investment list (DNI) will interest foreign investors?
LN: It depends on what the rules are if some of them will be quite attractive. What attracts investors is when sectors go from 80% or 85% to 100%, because that means you can come in and control your investment. You don’t have to take a minor partner and you can actually operate on your own.
FI: How do foreign businessmen in Indonesia look at the situation regarding the upcoming legislative and presidential election, and are they taking precautionary measures?
PA: We believe that continuity in what needs to be done is necessary, regardless of the results. We are not too concerned, as we believe that Indonesia will stay as a large market, an important country where we have to be.
LN: I don’t think that any of our companies are overwhelmed or worried about the outcome of the election. We can’t predict what’s going to happen, but I think Indonesia will largely continue on the same path. Thus like all business organizations we are not going to take any political stance. Indonesia passed a lot of turmoil and has managed its stance as a rock of stability, and we feel pretty confident that the system will be well.
FI: What are some investment-related concerns that you think we need to improve?
NK: I think what we need to do more is capacity building. For example, there is a qualification in international trade called certified documentary credit specialist who are responsible for the processing, which is accepted worldwide. India has probably 10,000 of them, and China has double of that number, but Indonesia has less than 1,000 people who are qualified in the banking world. That seems like a small issue, but without these experts you cannot drive international trade because there are not enough people to process, which can lead to disputes, misunderstandings, proclaims, counterclaims.
PA: For a specific case, we are concerned about the implementation of the halal law, which should be in place by August 2019. The application is still very controversial, and whether it’s going to be applied impartially or partially is still unclear and up to the government discussion.
There is also concern on many SOE’s (state-owned enterprises) investing in all sector of the economy. We have to be totally sure that their financial stability is strong enough for the future, since right now we don’t know the exact situation of these SOE’s.
LN: Adding on the aforementioned capacity crunch issue, Indonesia is not performing as it could in the academic research and technical issue, other than in finance and insurance – which shall be addressed since there will be more demand for higher level of skills over the time.
While in further propelling the country, the government is going to have to bring the private sectors more aggressively into infrastructure development and go after foreign investments. If that drive really happens in the next government, I think you’ll see foreign investors respond positively because then they could be doing better here with more climate certainty. But it’s not a bleak picture by any means, and I think the future of Indonesia is good.