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Investing in Indonesia: Opportunities and Challenges

Posted by: , Posted on: - Categories: Indonesia, Investing in the UK

On 15 February the UKABC held a small roundtable with Dr. Chatib Basri, Chairman of the Indonesia Investment Coordinating Board (BKPM). This gave a small number of companies the opportunity to discuss issues around the Indonesian regulatory and investment environment. Many interesting issues were raised, and Dr. Basri’s ability to cover such a broad range of subjects as well as his openness was well received by participants. We wanted to share a summary of the discussions with everyone.

Dr Basri set the scene, outlining the 26% increase of UK FDI into Indonesia during 2012. This increase takes the total UK FDI for 2012 to an impressive $24bn. He also emphasised work the government is doing to improve the business and investment environment. Revisions to the negative investment list are currently being considered, and the overall regulatory environment is being improved and simplified for investors with the number of forms being reduced by almost half from 38. Ultimately, as Dr Basri said, “Good times make bad policy and bad times make good policy. Right now Indonesia is in good times but the Government is working hard to make good policy decisions.”

There was a broad discussion around perceptions of the Indonesian investment environment, and what the government was doing to counter negative perceptions. There was a particular focus on the banking and mining sectors. The reason for the Indonesian Government’s approach to the mining sector was learning the lessons of other countries to avoid the middle income trap. There is also a WTO tariff escalation issue which means world trade is not free from distortion. The Indonesian Government is looking to improve regulations around divestment in the mining sector.  It currently stands at 51% after 10 years, and consideration is being given to increasing the timeframe to around 25, 30 or 50 years enabling companies to derive a better return. Regarding the banking sector Dr Basri acknowledged there is a need to strengthen capital, and this is something the Government is working on.

The remainder of the discussions focused on broader infrastructure development – especially relevant given the large number of infrastructure projects either currently happening or planned. On airports and the role of PPP Dr Basri highlighted that 2013 is going to be the year of airport development, with a large number of airports scheduled for completion during 2013-14 (circa 14). He also explained that there will be a need to look more broadly at airports and the support infrastructure they require – e.g. transport connections between cities and airports. Finally, Dr. Basri explained that with the burgeoning middle class demand for air travel, and therefore airports, will continue to grow and that there is likely to be scope for PPP solutions.

Future development of water infrastructure was raised, especially given the public health benefits which this can bring. Dr Basri highlighted that within 10-15 years around 75% of the population will be living in urban areas, and that demand for clean water will continue to grow. He explained that investment in sanitation is actually the responsibility of local government but BKPM was working hard with local government and the Ministry of Finance to make the investment process as smooth as possible. He believed that in a couple of years these projects would start to become accessible as they come on-line, although the bidding process continue to be led by local government and the need for a local partner will remain.

Finally, on investment in the oil & gas sector Dr Basri explained there is a definite drive to reduce dependence on oil, as well as recognition that oil and gas production is not as smooth as it could be. The Government knows that inefficient production will lead to a decline in competitiveness as associated production and licensing costs rise. In response to this concern, at Cabinet just the day before, the President had instructed a group of Ministers to set up a team to tackle these issues. Dr Basri had also recently joined the Oversight Committee of the Oil & Gas sector to bring an additional investment focus. He also explained that the Pertamina monopoly had been broken and that the Government is encouraging private sector to take a more active role in the sector.

This was an excellent discussion which covered a large number of interesting, and topical, issues. All of the participants were very grateful for the opportunity to raise questions specific concerns – the information they received will be of great use to their future planning. We will certainly be looking to organise another briefing by Dr Basri later in the year.

Tom Burden
UK-ASEAN Business Council


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