Wednesday, September 18, 2013

Indonesia's Investment Rules Unravel the Welcome Mat

ON paper, the fundamentals in favour of investing in Indonesia are so obvious it's no wonder the locals can't understand why Australians are not flooding the place.

In practice, it can be an absolute nightmare to deal with the bureaucracy. The consensus says you need deep pockets and the patience to stay for at least a decade to get the risk-to-reward ratio running your way. What's more, the country's constitution mandates that the nation's natural resources be used for the benefits of the locals.

Austrade's senior person in Jakarta, Kym Hewett, acknowledges, as most do, "it's a tough place to do business". The question then can be legitimately asked: if it's such a tough place to do business then what's the point?

On a diplomatic front, the Jakarta posting is arguably the busiest of all and, with a new government coming in, the local officials have the "pleasure" of a constant stream of prime ministerial and ministerial visits over the next few weeks, and that's on top of the visits to the APEC conference.

If Australia's finest diplomats are spending so much time getting to know the top brass of our nearest neighbour, then one could almost assume the business relationship between the two countries would be booming. It isn't.

Indonesia ranks as our 12th-largest export market and 11th-largest source of imports, and last year inbound investment totalled just $595 million while outbound investment stood at $6.8 billion.

There are a lot reasons for Australians to be close to Indonesia other than business -- defence, security and counter-terrorism being high on the list.

Thankfully since the Bali bombings, the Australian embassy explosion and Marriott Hotel attack in the first half of the last decade, terrorism seems to be under control, thanks mainly to Indonesian efforts along with Australia's help.

Two years ago McKinsey, in one of its landmark papers, laid out the bullish case for the country, noting the potential prize but also warning of the work that was needed to win it, starting with government policy.

The road map for taking the 16th-largest economy in the world to the seventh-largest by 2030 would bring with it extraordinary increases in middle-class consumers -- from 45 million today to 135 million.

But conversion of a $500m market to a $1.8 trillion one needs an increase in skilled workers from 55 million to 113 million over that period.

The McKinsey study has its critics, with Bower Group's Doug Ramage arguing that, on balance, the report didn't help because it created an expectation gap that the country was yet to fill.

Private equity firm Ancora International's Veronica Lukito said there was a perception that people could come to Indonesia to buy when what was needed was for those people to come to build.

Like Australia, the Indonesian economy rode the US and Chinese bull markets well, enjoying easy money and an explosion in commodity prices.

When the GFC hit both economies kept powering ahead, and this hid the consequences of a string of policy mistakes.

It also gave some in Indonesia the impression that they were bulletproof.

CIMB economist Winang Budoyo says his biggest concern is the current account deficit, which now stands at 2.5 per cent of GDP but until last year was non-existent.

The country imports more than it exports, and Budoyo says this is a structural issue, which may not be as short-term as many hope.

Other Asian countries, such as Thailand, throw subsidies at car firms to create local production, but Indonesia is less subtle with a string of controls such as forced mine divestment if foreigners don't meet certain value-added targets.

The leadership wants more than iron ore exports, just as Australia did in the 1980s when it forced Rio Tinto and BHP Billiton into ill-fated manufacturing moves.

This week new controls were placed on foreigners managing local assets and local content rules are strictly applied.

None of the above is exactly a welcome mat for intending foreign investors. Nor are new investment rules that require minimum capital requirements of $1.2m, which is not a problem for the likes of Leighton, but is for a small business or consulting firm.

The government spends $30bn a year on consumption subsidies, 70 per cent of which are for fuel and the rest for electricity and rice.

The belated phasing down of the fuel subsidies this year is one reason inflation jumped from 4.5 per cent to 9 per cent, but also explains why most economists are not concerned about inflation in the longer term after this one-off impact.

Still, as a policy instrument it is dumb, given the rich in big cities enjoy the bulk of the spoils while half the country is living below the poverty line and gets very little.

One reason Australia and Indonesia don't have stronger business ties is the relative complementarity of each others' key outputs, such as commodities.

Austrade's Hewett says education is an obvious sector for Australia to develop, given the close ties already there and the obvious need for more skills training in Indonesia.

Australian universities are all making an effort, but local campuses are seen by the locals as being a better start.

CIMB boss Arwin Rasyid half-jokingly says: "If you like Bali so much, why don't you put more money into the place?"

He has a point, and it echoes a common refrain with the Indonesians looking for actual dollars as opposed to more ministerial visits.

Joint ventures are the suggested starting points to minimise well-known negatives about investing in Indonesia.

It's a long-term game requiring a minimum of 10 years on the ground to really milk the rewards and, even then, success is not a given.

Then again, McKinsey's prize is a $1.8 trillion market that is a lot closer and less crowded than China -- at least for the moment. Courtesy Joyo News The Australian by John Durie

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