Plans by a Chinese-led private investment group to pour $5bn into a new West Java industrial park signal that the Indonesian government’s efforts to attract additional foreign direct investment (FDI) may be yielding the desired results.
In late October China Minsheng Investment (CMI) confirmed plans to construct the CMI Indonesia Industrial Park as part of Beijing’s One Belt, One Road strategy aimed at boosting connectivity and commerce between Asia and Europe.
“We welcome this project as it fits well with the Indonesian government’s aim to develop more manufacturing industries and generate more jobs,” Suryo Bambang Sulisto, a member of CMI’s Global Advisory Council and chairman of the Indonesia Chamber of Commerce and Industry, told media in late October.
The announcement came on the heels of a recent investment promotion campaign, with Indonesia launching several FDI-related reforms aimed at sparking wider interest in a series of upcoming infrastructure mega-projects.
The country’s near-term investment needs are significant: an estimated $450bn is required to fund six new refineries, 35,000 MW of electricity capacity and 15 airports – all to be built by 2019.
The government has launched six investment reform packages in the last two months, each designed to ease the path for foreign investors looking to enter the Indonesian market.
Revealed in September, the incentive strategy includes a new tax holiday scheme and plans for significant deregulation of key industries such as manufacturing, trade and agriculture. New companies with a minimum investment of Rp1trn ($73.9m) in so-called pioneer industries will also receive a 10-100% tax cut for up to 15 years.
Defined as sectors with strategic value for the national economy, pioneer industries eligible for the tax break include energy, telecommunications, maritime transport and agricultural processing, the government has stated.
According to the most recent of the six reforms, announced in early November, foreign investors will also be permitted to operate special economic zones (SEZs) within the country, through a plan that mirrors earlier measures adopted by nearby Vietnam.
Under the scheme, investors will be eligible for income tax discounts of between 20% and 100% for 15-25 years, depending on the investment amount, in addition to a value-added tax exemption on raw material imports. Investors will also be allowed to own residential property within the zone.
While the reforms are expected to create significant scope for investment – particularly in the country’s manufacturing sector, which already accounts for around 40% of greenfield investment – some investors have noted that the list of restricted sectors, which include oil and gas services, has expanded in recent years.
Furthermore, the central bank’s move to ban foreign-currency-denominated domestic transactions in July, rising import duties and earlier discussions of an Indonesian language requirement for expatriate workers have sent some mixed signals to the investment community.
Some argue that the administration of President Joko Widodo could benefit from an even more open stance towards investment, particularly against the backdrop of an increasingly volatile international climate, low commodity prices and weak export figures.
“While the stimulus packages show a good overview of the government’s goals and are helping improve the country’s attractiveness in terms of FDI, there is still room for improvement in terms of implementation” Erick Wihardja, director of Bekasi Fajar Industrial Estate, told OBG.
Rajiv Biswas, Asia-Pacific chief economist at IHS, agreed that further work is needed to meet the government’s objectives for investment. “The new reforms planned by the [Widodo] administration are important positive steps, but boosting Indonesian competitiveness will require wide-ranging economic reforms,” he told regional press in September. “There are tremendous hurdles to overcome, so the task of deregulation will be very challenging to implement.”
Nonetheless, initial figures indicate that the government’s pro-investment campaign has begun to take effect.
According to the Indonesia Investment Coordinating Board, foreign and domestic direct investment in Indonesia was up 16.2% year-on-year (y-o-y) in 2014 at Rp463.1trn ($34.1bn). In the first half of 2015 capital expenditure on greenfield projects by foreign companies rose by some 62% y-o-y, cross-border investment monitor fDi Markets reported in October.
This year has also seen the successful launch of the $4bn Batang coal-fired power plant project in Central Java, where protracted land procurement issues delayed development for four years. Built using a public-private partnership structure, the project was funded by the Japanese government – Indonesia’s largest foreign investor – through the Japan Bank for International Cooperation.
The 2000-MW Batang project is seen as necessary step for reaching the 35,000-MW electricity generation target announced in May, a strategic priority for the country, which is experiencing an 8% per annum increase in domestic power consumption.
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