Tuesday, November 17, 2015

Why Australia should invest in its relationship with Indonesia

We have a booming economy on our northern shore and it's an opportunity we can't miss.

McKinsey Global Institute report has predicted that by 2030 Indonesia will have added 90 million people to its consuming middle class, more than any other country over that period except China and India.

We shouldn't prioritise our other neighbours at the expense of Indonesia, which is a mere 344 kilometres from our shore.

As shadow treasurer Chris Bowen recently said: "Can you think of two countries anywhere on the planet that are so close geographically, and from such divergent cultural backgrounds? This makes the importance of nurturing the relationship so much greater."

But it also makes its success all the more rewarding.

Andrew Robb is leading a trade and investment mission to Indonesia later this month to attend the Indonesia Australia Business Council Conference and Indonesia Australia Business Week.

It's a timely trip. Earlier this year a PWC report showed Indonesia would be the fourth largest economy in 2050. The same report found Australia tumbling down the list from 18th to 28th. This represents a seismic shift in the economic power balance in south-east Asia away from Australia.

The question is: What can Australia offer? What will Indonesia want? Can we provide it, and if not why not?  

There are three policy areas that Australia should consider for an expanded Indonesian relationship.

Liquid natural gas

Australia is poised to become the world's biggest exporter and as the wider Asia Pacific region grows so does Australia's comparative advantage. McKinsey research suggests that by 2030 11 Asian countries – including China, India, and Indonesia – will account for more than a third of total global growth in gas demand in that period.

In the words of former treasurer Joe Hockey, we should be "having more of a go" in LNG.


Australia already exports live cattle to Indonesia but, as the country becomes more affluent, Indonesians will want more choices and better quality meat.

Australia has an opportunity to take up this consumer choice and create brand loyalty.  

A recent Credit Suisse consumer survey found food was still the largest component of Indonesian household spending, accounting for 28 per cent of the total spending.  

While meat consumption as a percentage of diet remains relatively low, mainly due to price, it won't stay like that for long.

Financial services

Australia's superannuation industry, which is projected to reach $7 trillion by 2035, is capital rich and looking to invest in infrastructure.

Indonesia is going to expand rapidly in the next 35 years. With an extra 90 million people it will need to develop and upgrade its infrastructure to reach its full potential.

Under President Joko "Jokowi" Widodo's five-year infrastructure plan, Indonesia needs 25 dams, 10 airports, 10 industrial parks and about 2000 kilometres of roads.

In his first budget, Widodo announced plans to invest a record US $22 billion in infrastructure projects. But according to reports it's a long way from the $US80 billion ($112.2bn) needed each year to improve its infrastructure.

While Australia won't be in a position to make up the shortfall, our infrastructure knowledge and the growing pool of capital in superannuation funds puts us in an ideal place to invest. Industry super funds already direct between 10 per cent and 15 per cent of strategic asset allocation to infrastructure.

All countries face a shortfall in funds and a lack of political willingness to borrow to finance infrastructure, despite the positive effects for to the economy in terms of jobs and improved quality of life. This means new and innovative approaches to infrastructure financing are needed.

Muhammad Hanif, president director of PT Mandiri Manajemen Investasi, which is the biggest Indonesian-owned funds manager, is looking for partners in Australia with experience in infrastructure financing. The opportunity for our superannuation industry to better partner with local funds could help make the difference.

Just as the cry in the US in the 1800s was to "go west", ours must be "look north".

Polo Guilbert-Wright is a public policy expert with the Transport Workers Union. 

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