Thomas Lembong, Chairman, Indonesia Investment Coordinating Board: Interview

Interview: Thomas Lembong

How do you correlate the vision for an open economy with the revisions to foreign investment laws?

THOMAS LEMBONG: Indonesia has never made any revisions that move backwards; they always move towards greater openness. The president has successfully shifted the paradigm towards regional and global production chains. Greater openness helps local industries because they need to attract international interest. However, ratifying revisions to the Negative Investment List (DNI) depends on timing and the political cycle. Considering that the elections are going to take place in April 2019, the revisions cannot be passed at an inauspicious moment, as they could give rise to a backlash.

What opportunities are there for further private sector participation in the tourism sector?

LEMBONG: The global economy is growing at an annual rate of 3.5%, and the global tourism sector is growing at more than 7% per year. According to Bloomberg, one in four jobs will come from the tourism sector in the next 20 years. The sector is also seeing one of the highest growth rates for investment in Indonesia. Our 2018 data suggests that FDI in tourism rose by 40% . At this stage the main issue is project execution and administration related to lengthening airport runways or broadening the turning radius to accommodate wide-body jets.

How can Indonesia compete with its regional peers in attracting foreign direct investment (FDI)?

LEMBONG: Following a pro-business agenda, the president has put it very simply: whenever a neighbouring country gives 30-year tax loyalties, we have to give 40. Investors have a lot of choice these days, and competition for FDI is strong between Indonesia and its regional peers. On another level, Indonesia has to be creative and innovative, because digitalisation and technology are game-changers. In cyberspace users or companies may pay no income tax, thus making tax declarations irrelevant for certain e-commerce platforms or digital players. Therefore, new incentives have to be introduced that would apply in the digital domain.

Since 2014 two sectors have maintained FDI flows into Indonesia. First, the metal smelter segment has made Indonesia one of the world’s top-three producers and exporters of stainless steel. This occurred on the back of the country’s position as one of the world’s largest nickel producers. Second, the e-commerce sector has gone from virtually nothing to roughly 15-20% of Indonesia’s total FDI. If governments make it challenging and complicated to operate in the formal economy, consumers will eventually abandon the conventional laws of the marketplace and do business in an unregulated informal sector. Therefore, we are competing against not only neighbouring countries, but also the internet. This is a phenomenon most policymakers in frontier and emerging markets do not fully realise yet: people are escaping bureaucracy and corruption through self-organisation in cyberspace.

What are the economic benefits of opening the education sector to foreign universities?

LEMBONG: One revision of the DNI is to open up the education sector to 100% private investment. This constitutes a classic supply-side reform, in which a barrier is lifted by allowing producers and suppliers to enter. The lack of university graduates and skills shortages are a significant drag on economic growth. Indonesia has a very low ratio of universities per capita and lacks graduates in key disciplines such as medicine, law and science. The flipside to that is that people are more business-oriented. In March 2019 Indonesia signed a Comprehensive Economic Partnership Agreement with Australia, and discussions are being held with investors in the latter country to open universities, vocational training and polytechnic institutes. Australia is among the top-three countries in the world when it comes to vocational and technical training, notably in tourism and hospitality, as well as nursing and health care services.