Photographer: Dimas Ardian/Bloomberg

Here’s How the World Bank Thinks Indonesia Can Spur Foreign Investment

Updated on
  • Foreign investment being hampered by unpredictable regulations
  • Private sector help needed to bridge infrastructure gap

Indonesia needs to ease rules requiring foreign companies to use locally produced materials to spur foreign direct investment, the World Bank said, as the government chases billions of dollars in private investment.

Easier terms for foreign manufacturers and fewer restrictions on ownership in some sectors will attract more funds, Rodrigo Chaves, World Bank country director for Indonesia, said in an emailed response to questions.

"Businesses don’t like unpredictable regulations," Chaves said, referring to multiple changes to the so-called negative investment list since its introduction in 2007. "We would like to encourage smart regulations, which are efficient and predictable."

President Joko Widodo, known as Jokowi, has taken steps to wean the country off commodities and push investment in value-added manufacturing and services to generate more jobs and to finance hundreds of billions of dollars needed for infrastructure. Indonesia’s economy has expanded at an average of about 5 percent, below the 7 percent target set by Jokowi when he came to power three years ago.

Joko Widodo

Photographer: Dimas Ardian/Bloomberg

The president has said Indonesia is open to local and foreign private investors, as he seeks to ease concerns among foreign investors over the nationalist agenda.

Click to read Jokowi saying Indonesia is not protectionist

While the introduction of the negative investment list was initially greeted favorably as it "increased transparency," a series of revisions since 2010 meant "its usefulness has been undermined", Chaves said.

The list covers a range of sectors from banking to brewing and places limits on levels of investment and ownership, and in some cases prohibits foreigners altogether. The local content requirement rules, which apply across industries from dairy to automotive, had seen Apple Inc.’s market access being curbed. The company has since overcome the barriers by building a domestic research facility.

The U.S. too has taken aim at the content requirements, with its Ambassador Joseph Donovan last week blaming the regulation for a "significant and persistent trade imbalance" between the two countries. The U.S. recorded a trade deficit of almost $12 billion with Indonesia last year, according to the International Monetary Fund.

Infrastructure

While thousands of kilometers of new roads and more than half-a-dozen new airports have been opened, the World Bank has said Indonesia still needs about $500 billion over the next five years to bridge its infrastructure gap. Chaves said that even if state revenues increase, "private sector participation is critical to close the infrastructure gap.”

Indonesia has jumped 19 places to be ranked 72 out of 190 countries in the World Bank’s ease of doing business index, but Chaves said challenges remain "especially with respect to predictability of the rules". Foreign direct investment into Indonesia rose 11 percent to $24 billion in the first nine months of the year, according to official data.

Foreign investors also cite dominance of state-owned enterprises and a lack of level-playing field. Finance Minister Sri Mulyani Indrawati has said it will be “impossible" for SOEs -- there are 118 operating in Indonesia -- to alone handle the more than 240 projects already announced by the government.

The World Bank forecasts Indonesia’s economy to expand 5.3 percent next year and Chaves said he remains “optimistic” that the country could do even better.

"While many countries wish they could grow at 5 percent, Indonesia can aspire to much higher growth rates if it continues on the path of reforms to facilitate private investments and improve human capital, the two key ingredients not just for growth but for growth that will create good jobs for Indonesians," Chaves said.

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