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For the past couple of months we have frequently heard President Joko Widodo and other top government officials refer to the upcoming omnibus laws as key tools or solutions to improve the quality and attractiveness of Indonesia’s investment environment.
On Sunday 14 July 2019 Indonesian President Joko Widodo unveiled his vision for Indonesia in the 2019-2024 period, which will be his second – and final - term as president of Southeast Asia’s largest economy (with the inauguration of his new cabinet scheduled for late-October 2019).
Next week, Indonesia's Investment Coordinating Board (BKPM) plans to launch an upgraded version of its Online Single Submission (OSS) system. The OSS system is a web-based business licensing system that aims at cutting the red tape that is involved when investors try to obtain business permits in Indonesia. Massive red tape is considered to be one of the major obstacles in Indonesia's investment climate.
Hariyadi Sukamdani, Chairman of the Indonesian Employers Association (Apindo), said investors continue to complain about the difficulty of obtaining all necessary investment permits in the regions of Indonesia even though, generally, there has been an improvement in the degree of bureaucracy under the Joko Widodo administration.
Not the lack of (soft and hard) infrastructure development in Indonesia, or the lack of quality human resources, nor corruption or protectionism but the difficulty to obtain the necessary permits from the local governments are the biggest obstacle to investment and business in Indonesia according to a survey that was conducted by the Regional Autonomy Watch (KPPOD) in the 32 regional capital cities across the Archipelago.
For a company it is very difficult to start activities in Indonesia's upstream oil and gas sector. As a result, not unoften, activities related to exploration and production are delayed. This is the major reason why Indonesia's oil production has been declining for the past two decades, while Indonesia's gas production today does not differ much from production one decade ago. Why is it difficult for an oil and gas company to get started in Indonesia?
Recently, most attention has been paid to Indonesia's tax amnesty program launched last Monday (18/07), while the 12 economic policy packages - released between September 2015 and April 2016 by the Indonesian government - have been pushed to the background. These packages, which include tax incentives, deregulation, and somewhat open foreign investment opportunities in Indonesia, were implemented in a bid to boost Indonesia's economic growth. However, according to the latest information, not all 12 economic stimulus packages have been implemented in full force.
The Indonesian government released the 12th economic policy package on Thursday (28/04). This latest edition focuses on enhancing the ease of doing business for the small and mid-sized companies in Indonesia in a bid to attract more investment, hence giving a boost to economic growth. In the 12th package the government announces it has cut a number of procedures and permits, as well as costs, required for the development of a business. Indonesia's Chief Economics Minister Darmin Nasution unveiled the package on Thursday in Jakarta's Presidential Palace.
Indonesia improved 11 positions in the World Bank Doing Business 2016 ranking. Southeast Asia's largest economy jumped from rank 120 in the (revised) 2015 index to 109 in the 2016 ranking. The 'Doing Business 2016: Measuring Regulatory Quality and Efficiency' is an annual flagship publication of the World Bank, monitoring the regulations that enhance the ease of doing business in the following areas: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
Earlier this month the Indonesian Ministry of Energy and Mineral Resources said that Indonesia will require an additional 3,100 million standard cubic feet per day (mmscfd) of gas supplies in the next five years to meet domestic gas demand for the country’s power stations and fertilizer plants. About 1,100 mmscfd of gas is needed for Indonesia’s plan to establish 13,400 MW of gas-fired power stations by 2020. A further 2,000 mmscfd is needed to fuel fertilizer plants in Southeast Asia’s largest economy.
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Indonesia is facing the risk of becoming a net importer of energy by 2019 as the nation’s energy demand will reach 6.19 million barrels of oil equivalent per day (boepd) whereas the domestic energy supply will only reach 6.04 million boepd by that year. Provided that the economy of Indonesia remains expanding at a pace of +5 percent (year-on-year) while investments in energy exploration do not rise accordingly, Southeast Asia’s largest economy will become dependent on foreign energy supplies.
A total of 35 American companies are interested to invest a combined USD $61 billion in Indonesia over the next five years according to a survey conducted by the Paramadina Public Policy Institute, the American Chamber of Commerce in Indonesia (AmCham Indonesia), the Indonesian Employers Association (Apindo), and the Indonesian Chamber of Commerce and Industry (Kadin Indonesia). These 35 US companies have already invested a total of USD $65 billion in Indonesia over the period 2004 to 2012.
President Joko Widodo’s unexpected visit to the Indonesia Investment Coordinating Board (BKPM) on Tuesday (28/10) signals that the new president of Indonesia is serious about wiping out severe bureaucracy that causes time-consuming and difficult procedures to obtain permits, licenses and certificates in a bid to ease doing business in Indonesia for both foreign and domestic investors. Joko Widodo, popularly known as Jokowi, is eager to tackle the country’s ‘red-tape’ problem as it curtails the pace of economic growth in Indonesia.
With Indonesia's presidential election approaching (9 July 2014), investors - both domestic and foreign - have become more hesitant to commit to large investments, instead preferring to wait for the election results first. Obviously, investors want to see a 'market friendly' president to lead Southeast Asia's largest economy for (at least) the next five years; a ruler who can safeguard a conducive investment climate. For the Indonesian people, a just ruler is needed; one who can improve Indonesia's political and social issues.
Mitsui & Co, one of the largest trading companies in Japan, believes that Indonesia is one of the most prospective investment destinations for the middle and longer term. After Brasil and Chile, Indonesia is currently the third-largest investment market for Mitsui & Co, which is part of the Mitsui Group. The latter has stakes in various sectors including energy, food, logistics and finance. The CEO of Mitsui & Co, Masami Iijima, stated that Indonesia is lucrative due to its large and young population as well as its rapidly expanding middle class.
A survey released by The British Chamber of Commerce Indonesia (BritCham) showed that United Kingdom (UK) investors’ confidence on doing business in Indonesia in 2013 and 2014 dropped but is still positive overall. One hundred corporate and other members of BritCham, 95% of whom hold Senior Management posts, participated in this survey. The survey showed that 60% of the total respondents remained confident about their business in Indonesia, down from 83% in 2012, while the Ease of Doing Business score fell by 15% from 65% to 50%.
One of the major problems which is blocking Indonesia's economic growth is the country's infrastructure. The lack of quality and quantity of Indonesia's infrastructure causes logistics costs to rise steeply and thus makes investors (particularly the foreign ones) hesitant to invest as high logistics costs imply a weakening of the country's competitiveness. The problem of Indonesia's infrastructure is both 'hard' infrastructure (roads, airports and electricity supply) and 'soft' infrastructure (social welfare and health care).
Apart from the five tax incentives that I have mentioned in a previous column, the Indonesian government also intends to ease two other tax rules in order to boost investments in Indonesia from 2014 onwards. These are the tax holiday and tax allowance. Relaxation of the tax holiday involves an alteration to the period as well as the size of the investment, and relaxation of procedural difficulties. Relaxation of the tax allowance involves the revision of the number of sectors that are eligible and a relaxation of procedures in the form of tax clearance.
Indonesia's Chamber of Commerce and Industry (Kadin) said that it signals a lot of foreign interest in infrastructure projects in Indonesia. However, the country's unconducive investment climate blocks investors from initiating or participating in these projects. A number of matters that cause the unconducive investment climate are discrepancies in regulatory framework between central and regional governments, land acquisition, and a lack of human resources with adequate skills.
Despite the fact that Indonesia reported the world's third-highest GDP growth in 2012 (behind China's 7.4 percent and Saudi Arabia's 7.1 percent), supported by rising consumption by a burgeoning middle class and significant increased foreign direct investment, the country's performance in terms of competitiveness is disappointing. It is cheaper to import products from countries that contain competitive businesses than to produce them in Indonesia.
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