Business in Indonesia: Investment Growth Solid but Bottlenecks Persist

As the current government of Indonesia has mentioned (foreign and domestic) investment as an important pillar for economic growth, it has made efforts to smoothen the domestic investment climate in order to attract more investment. This investment climate is currently still being plagued by bottlenecks. Therefore, in the World Bank's Doing Business 2015 index Indonesia ranked 114th, lagging behind its regional peers. One of the major obstacles for investment in Indonesia is arranging the necessary business permits and licenses; this is a time-consuming and relatively costly affair.

In January 2015, Indonesian President Joko Widodo officially launched the integrated one-stop service center (Pelayanan Terpadu Satu Pintu, abbreviated PTSP) at the Indonesia Investment Coordinating Board (BKPM). This new service aims to simplify licensing procedures for investment projects. Since the start of this service, investors will no longer need to visit various ministries or government agencies to obtain permits but can simply turn to the BKPM’s one-stop service center. However, after six months in operation we are now waiting for an analysis whether this service has really impacted significantly on investment realization.

Doing Business 2015 Ranking:

1.	Singapore
2.	New Zealand
3.	Hong Kong
4.	Denmark
5.	South Korea
6.	Norway
7.	USA
18.	Malaysia
19.	Taiwan
26.	Thailand
29.	Japan
78.	Vietnam
90.	China
95.	Philippines
114.	Indonesia

^{Source: World Bank 'Doing Business 2015'}

Ease of Doing Business in Indonesia:

Please note that - when you click on the links below that lead you to the World Bank website - the 2014 ranking mentioned on the World Bank website is not last year's published ranking but a comparable ranking for the Doing Business 2014 Report that captures the effects of such factors as data corrections.

Subject	2014 Rank	2015 Rank
Starting a Business	158	155
Dealing with Construction Permits	150	153
Getting Electricity	101	78
Registering Property	112	117
Getting Credit	67	71
Protecting Minority Investors	43	43
Paying Taxes	158	160
Trading Across Borders	61	62
Enforcing Contracts	171	172
Resolving Insolvency	71	75

^{Source: World Bank 'Doing Business 2015'}

Franky Sibarani, Chairman of the BKPM, said that the BKPM is currently coordinating with several ministries and other government agencies to improve 7 out of 10 business indicators for Indonesia. These are starting a business, dealing with construction permits, registering property, getting electricity, tax payments, enforcing contracts, and resolving insolvency cases. Sibarani announced that the Indonesian government had already presented improvements for these categories to the World Bank and therefore hopes to see an improvement in the next World Bank ranking (to be released later this year).

Another subject that needs improvement in order to build a stronger economy and accelerate economic growth is growth of domestic entrepreneurs. Currently, only 1.6 percent of the total Indonesian population (which numbers around 250 million people) is an entrepreneur. Raising the number of businessmen in Indonesia is highly important in the context of job creation. Alarmingly, Indonesia lags behind its regional peers in terms of the number of entrepreneurs. For example, in Singapore about 7 percent of the population is entrepreneur, in Malaysia 5 percent and in Thailand 3 percent.

Besides the creation of new jobs that is generated by entrepreneurs, they also contribute to state income through taxes. Approximately 70 percent of state revenue originates from taxes.

Key Findings:

• Indonesia’s economic growth cannot reach its full potential due to bureaucracy (red tape)

• President Joko Widodo is eager to combat the country’s bureaucracy in an effort to optimize and maximize foreign and domestic investments

• The number of domestic entrepreneurs in Indonesia is very low (1.6% of the total population), hence limiting job creation and state income (tax)

• The World Bank is not positive about the ease of doing business in Indonesia. In its latest ‘Doing Business Ranking’ (published on 29 October 2014) Indonesia ranks 114^th

Foreign and Domestic Investment in Indonesia (in IDR trillion):

	2014				2015
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Domestic Direct Investment	34.6	38.2	41.6	41.7	42.5
Foreign Direct Investment	72.0	78.0	78.3	78.7	82.1
Total Investment	106.6	116.2	119.9	120.4	124.6

 

	2011				2012				2013
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Domestic Direct Investment	14.1	18.9	19.0	24.0	19.7	20.8	25.2	27.5	27.5	33.1	33.5	34.1
Foreign Direct Investment	39.5	43.1	46.5	46.2	51.5	56.1	56.6	65.5	65.5	66.7	67.0	71.2
Total Investment	53.6	62.0	65.5	70.2	71.2	76.9	81.8	83.3	93.0	99.8	100.5	105.3

^{Source: Indonesia Investment Coordinating Board (BKPM)}

Further Reading:

• Investment Realization in Indonesia in Q4-2014 and Full-Year 2014
• BKPM Press Release on Investment in 2014

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