Indonesia is the fourth most populous country in the world. Developing the agriculture, food and beverages sector is hence one of the industrial development priorities set by the Indonesian Government.
To foster development in this vital sector, a strong cooperation and coordination among all stakeholders is needed, be they public or private actors, domestic or foreign companies. This idea has been established by the Government of Indonesia, inspired by the World Economic Forum’s New Vision for Agriculture, together with global and Indonesian companies and key stakeholders from civil society and international organisations.
Agriculture is an important sector for Indonesia, not only in helping the country to secure its food security, but also in the spreading of wealth and prosperity to rural areas. At the same time, Indonesia’s population is expected to increase from 247 million people in 2013 to 293 million in 2050. Constraints in the maintainance of arable land and water supplies and the likely impact of climate change pose additional challenges to feeding a larger population.
Given the above challenges, Indonesia must double its agricultural output to meet the needs of its nearly 300 million people in 2050. This should be carried out in a sustainable way by advancing access to the latest international agricultural technologies and by exploring possibilities for private investment to help farmers boost production and secure a more stable income, and to ensure that the Indonesian people have access to sufficient, safe and affordable food.
Indonesia has long recognised the need for investment in its infrastructure and the wish list extends to hundreds of worthy projects and many billions of dollars to finance them. The challenge of legal certainty for foreign investors and the priority issue of land acquisition, particularly for much needed toll roads and power stations still holds back development. Without adequate road connectivity to provide a functional hinterland network, the upgrades to airports and seaports become somewhat academic. The optimism put forward in the last reporting period has had to be tempered by the slow progress made over the issue of land acquisition.
Power requirements are being addressed, albeit slowly, and the State Electricity Company (PLN) has made some progress towards improving the investment climate. However, additional transmission capacity needs a more positive recognition over the year now that, in order to attract investment for renewable types of energy, there needs to be an efficient distribution system and that remains far from complete. There has been increasing recognition that in order to attract investment for renewable types of energy, such as geothermal, improvements in the terms and conditions and returns for investors are required, but overall progress has been slow.
President Yudhoyono signed the Government’s Draft Bill on Land Acquisition in December 2010 and this was submitted to Parliament in early 2011, the 2010 deadline having been missed. While it was hoped to pass the Bill by mid-2011, the continuing debate in Parliament pushed agreement back to mid-December 2011 with the Law (No 2/2012) being effected in January 2012. The necessary following Presidential decree to activate implementation was passed in August 2012 and it was expected that by 2013 the law and regulations would receive their first tests but, to date, these remain untried. The importance of the law is that it sets out a clear procedure and time limits for objection against a given land purchase for a proposed infrastructure project to overcome the unlimited timetable for objection that has previously prevailed. There is concern, however, over the apparent unattractive nature of the proposed compensation scheme.
There is an ongoing inadequacy of the existing infrastructure, particularly in terms of the road network, and the significant negative impact this has on industry’s cost of doing business in Indonesia. There are significant delays in sea, rail and road transportation, with road transport now the most costly in Asia, and seaport operations that compare unfavourably with those of neighbouring countries.
The double digit growth in both domestic and international air travel has highlighted the complete inadequacy of the airport infrastructure across the country and its increasing inability to cater for the burgeoning number of aircraft being purchased by the domestically based air carriers in order to meet demand. There has been recent recognition by the Ministry of Transport that it needs considerable help in airport operations and management of these has been opened up to private sector interest.
A number of factors have contributed to this continuing overall unsatisfactory condition: the ratio of infrastructure spending to GDP continues to be inadequate; the funds that do exist are still often poorly allocated to peripheral services rather than physical infrastructure; disbursement of funds through the likes of the Public Works Department is slow in any budgetary year, and the enforcement of standards and regulations that control the quality of infrastructure built are weak. All these areas must continue to be addressed assiduously by the relevant Government departments, even though the budget allocation for infrastructure spending for 2013 has fallen well short of requirement. This situation has been compounded by the reluctance of the Government to remove, if not certainly reduce, the distorting influence of energy subsidies. This issue was addressed in mid-2013 but more remains to be done as the main beneficiaries are not the intended poorer sections of society. Budgetary savings from these subsidies would make a noticeable difference if applied to infrastructure investment, but current savings are badly affected by the deterioration in the value of the Rupiah against the dollar, fuel being purchased in dollars.
In the water sector, the Government is preparing a new medium term 5 year plan to 2019 with the vision of achieving 100% of the deemed Millennium Development Goal targets for water supply by the end of the period. However, the forecast budget allocation for this period will still leave a substantial funding shortfall, in the order of US$ 20 billion, which will have to be found from private sector or other sources. There is to be a greater focus than before over this period on sanitation projects, but once again there will require to be considerable support from private sector and bi/multi-lateral sources.
Earlier, in recognition of budgetary shortfalls and the continuing difficulty to attract private sector funding and, in order to bolster flagging growth in the many industries that have evolved on the back of heavy Japanese investment over a number of years, particularly in western Java, the Japanese Government signed a USD24 billion loan agreement in 2011 with the Indonesian government to fund targeted infrastructure. The prime focus of this is on the Greater Jakarta/ western Java area, with sea and land transportation and power being particularly indicated. This loan potentially makes a valuable contribution towards the amount that the Government has calculated as being required from non-budgetary sources for the current and ensuing 5 year period, estimated to be in the order of USD150 billion or more. Japanese funding support is now being applied to the feasibility stage of both seaport (Cilamaya) and airport (Karawang) projects in West Java.
Several other governments have also signalled their interest in providing funding support for infrastructure projects. This may take some pressure off the amount of funding that the Government is still hoping for and needs from private sources through various mechanisms. While Public-Private Partnership (PPP) arrangements have been emphasised, there has been increasing recognition that the PPP approach is not leading to adequate project delivery. Much of this can be ascribed to inadequate project preparation and a lack of understanding of the terms and conditions required to attract private sector project funding. Furthermore, a number of required projects would be better delivered by normal, well-tried methods.
Over the past few years, the Government has introduced some special organizations or arrangements to ease the facilitation of specific infrastructure projects. These are the Indonesia Infrastructure Fund (IIF), which also incorporates funding from the multilateral and some bilateral sources along with government inputs and which has been involved in large power projects, the Sarana Multi Infrastruktur (SMI), and the relatively new Indonesia Infrastructure Guarantee Fund (IIGF), which has been supporting the development of some main water projects. It had been hoped that these would have been awarded in the course of 2013 but lack of viability under the original terms and conditions has caused delay. This lack of viability highlighted the need to introduce a new mechanism, the Viability Gap Fund, to provide additional government-led funding in order to establish project feasibility and thence to allow sub-viable projects to be awarded and proceed. A Revolving Fund to ease the acquisition of land for toll road concessions has been in operation for a few years and been applied for some ongoing toll road developments. Discussion is underway over the possible introduction of a municipal bond scheme. As mentioned above, the new Land Acquisition law, promulgated in January 2012, two years later has yet to be put to the test and projects in place or in preparation stage are still working on the basis of the old law.
Arguably the most important step that the Government has taken has been the unveiling in mid-2012 of its 6-corridor economic development plan, MP3EI, which has divided the archipelago into 6 main self-contained areas for economic expansion. Within this significant framework document, 22 economic development targets have been highlighted, such as education with particular attention to science and technology, agriculture, tourism and very importantly infrastructure, without which many of the other goals could not be achieved. The plan recognises that Indonesia cannot optimise its potential without uplifting the economic development of the regions outside Java. It also will heavily rely on the political leadership of the regions to facilitate delivery. It is recommended that potential European investment interest take note of this and the opportunities that could be expected to emerge during implementation of the 6-corridor plan. However, it has also become clear that a significant uplift in regional skills levels is required before these local governments will be able to make the standard of contribution needed to match any interested outside investment focused on infrastructure.
The regulatory and administrative situation for cosmetics has significantly improved since 2010, as Indonesia has now moved to Notification instead of Registration for cosmetics products. This aligns Indonesia with the rest of the ASEAN member countries in implementing the ASEAN Cosmetic Directive (ACD). This facilitates dramatically access to the market, as instead of a long and unpredictable registration lead time of up to 15 months, the new system allows for launching in about one to two months.
The sales of cosmetics in Indonesia’s urban areas for the first half of 2013 was increased by 9.4 percent to Rp 606 billion (US$53.8 million) compared to the same period in 2012 (Nielsen Indonesia 2013 Survey). Rural areas in Java also show huge potential in cosmetics sales, as cosmetics sales in the rural areas of Java also jumped by 27.5 percent year-on-year to Rp 82 billion in the first half of 2013. This demonstrates that there are great opportunities for the cosmetics producers to maximize the potential of the industry.
Indonesia’s property industry has been booming in recent years, with rising profits for property companies and soaring property prices throughout 2012.
In the 1st – 2nd quarter of 2013, the strong economy and improved investors’ sentiment have significantly increased the demand for office space especially in Jakarta’s CBD area. Meanwhile, rising domestic consumption has encouraged retailers to expand their business, leading to higher occupancy levels and rental rates of retail space. The country’s improved tourism sector has also stimulated hotel development projects.
Although towards the end of 2013 and 2014, the property sector has experienced slow movement because of the increase in the bank interest rate, the impact of BI policy on Loan to Value (LTV), and inflation but analysts believe that the property sectors will continue to grow.
Indonesia is endowed with some of the world’s largest reserves of fossil fuels and, as the fourth most populous country in the world, with an annual growth rate of around 6% since 2010, the country has become an established and crucial player in the world’s energy markets. Furthermore, Indonesia’s domestic energy consumption surged by more than 50% over the past decade on the back of an emerging consumer class.
However, the country struggles to provide electricity to its growing economy. The challenges mainly derive from Indonesia’s geographic complexity, the unavailability of electricity imports, and the reluctance to rely on diminishing domestic oil supplies that fuel off-grid diesel generators on the nation’s 6,000 inhabited islands. It is noteworthy that, although Indonesia is one of Southeast Asia’s biggest economies, it has one of the lowest electrification rates in the region.
Over the coming decade, Indonesia’s energy demand will continue to increase due to population growth as well as rapid economic and industrial development. Therefore, Indonesia seeks massive power capacity increases, and recently embarked on an ambitious plan to develop at least 55.3 GW of new capacity and at least 49,299 kilometres of new transmission lines within the next decade.
In addition, Indonesia aims to redirect and diversify its energy mix. In order to mitigate the environmental impact of energy use, Indonesia plans to reduce the utilisation of fossil energy and to increase the renewable energy in the energy mix target, and also to optimise the energy efficiency of all activities from the exploration side to the end users. By 2025, the national energy strategy aims for alternative sources to account for 17% of energy needs, with the rest of demand fulfilled by coal (33%), natural gas (30%) and oil (20%).
To achieve a continuous and environmentally sustainable growth, a comprehensive development plan including massive financial and technological investments is needed.
Oil & Gas
Over the last 4 decades, Indonesia was characterized by its relatively stable and well-understood regulatory framework including the development of the “Production Sharing Contract” (PSC) model.
The basic principle of the Production Sharing Contract is a contract between the Government of Indonesia and a foreign Oil & Gas (O&G) company for oil and gas exploration and exploitation activities which defines how to share the production if a commercial discovery is made. The O&G Company carries all exploration and development costs and is entitled to recover its costs before the profit is shared with the government. This is called “Cost recovery”.
The age of stability in the O&G sector has likely ended, as O&G production in Indonesia is emerging from mature fields and has been in decline for a decade.
Oil and gas remains a leading sector in which to sustain Indonesian growth, with revenue still being the largest contributor to the country’s budget.
For this reason, government efforts to stimulate exploration and developments in the sector are required. While, for investors, the capability to understand the increasingly complex oil and gas business environment in Indonesia continues to be of vital importance.
For several years now, the investment climate in this energy sector has been deteriorating as a series of government regulations have impacted the profitability of on-going or future developments and operations. Several recent government decisions have impacted the key investment drivers of the O&G operators, such as cost recovery and explorations costs, and have generated concerns around contract sanctity and the level of returns on investment for increasingly complex developments.
The business climate has further deteriorated with the disbanding of BPMigas as well as when some PSC have faced criminalization of their industrial issues.
However, one can perceive some positive indicators coming from the Government; these main concerns mentioned above are well-known and have been extensively discussed with the authorities. It is expected that the long-awaited announcement of the new O&G law will address these concerns and further modify the upstream regulation framework allowing confidence to return for foreign companies to invest in new projects.
Significant progress has and is being made in improving access to modern energy services. Indonesia lifted its electrification rate from 53% in 2002 to 70% in 2011. Production of electric power in 2011 totalled 183,421 GWh, an increase of 8% over the 2010 output.
The Government has the objective to bring the electrification ratio from the actual figure of 72% to the challenging rate of 90% by 2021.
To do so, some milestones must be met:
Add new generation capacity up to 90 GW (USD 68 billion), 19% of which is planned to be undertaken by Independent Power Producers (USD 18.7 billion);
Enlarge the grid with ambitious transmission projects (such as Java-Sumatra undersea link cable), and substation enhancement (USD 15 billion);
Rationalize and expand distribution system (USD 13 billion);
In rural areas and islands, deploy renewable sources of energy and innovative technical solutions, such as micro-grids.
Demand for electricity in Indonesia will almost triple between 2001 and 2035, averaging a growth of 4.8% annually. In this scenario, it is already undergoing a large shift towards coal-fired generation, driven by its relative low cost and abundance, while fuel oil is currently being phased out.
With the State Budget stretched thin from growing energy subsidies, there is a lot of pressure to shift new installed capacity to the private sector, as demonstrated by the Fast Track Program II, reserving 63% of all projects for IPP development.
Indonesia’s primary energy supply is heavily dependent on fossil fuels; oil accounts for 45%, while natural gas and coal each account for 26%. This is posing great problems, especially since Indonesia became a net oil importer 10 years ago with only 12 years of reserves left. At the same time, energy demand is expected to grow by about 8-11% depending on the region according to the National Electricity General Plan (RUPTL). Thousands of inhabited islands and limited interconnection between local grids add to the challenges.
Consumer electricity prices, especially outside the Java-Bali grid where electricity is often generated by diesel generator sets, are generally below generating cost. This results in an annual loss of 90 trillion IDR; a loss covered by the Ministry of Finance and accounting for 5.5% of the total Indonesian State Budget. To reduce this burden, and to improve the overall sustainability of energy supply, the Indonesian Government has set clear renewable energy share targets and has identified the vast potential of renewable energy. This potential is far greater than current and expected future demand. To date, the share of renewable energy accounts for only 5%, mainly from hydropower sources. The Government of Indonesia is committed to increasing the renewable energy share to 17% by 2025 (PRESIDENTIAL REGULATION NO. 5/2006).
A framework has been put in place to support the development of the renewable energy potential by defining prices for renewable electricity and by simplifying the contracting procedures. In general, the Government and PLN are eager to promote and expand renewable energy supply.
However, the pace of project implementation remains disappointing, mainly due to out-dated tariffs and insufficiently attractive tariff structures as well as elaborate procedures that have room for further simplification.
Transport and Logistics
Indonesia’s overall position in the World Bank Logistics Performance Index (LPI) continues to improve (Table 1). However, that does not mean that the sector have performed efficiently. High logistics costs (calculating amounting to almost 26% of national GDP) exhibited a far from efficient, favourable performance. According to a study by the Bandung Institute of Technology (ITB), the high logistics cost in Indonesia is mainly caused by high transportation costs.
Further analysis of the World Bank’s LPI also reveals that Indonesia performed relatively low compared to its neighbouring countries in South East Asia. Figure 1 shows that Indonesia’s LPI rank is behind those of Singapore, Malaysia, Thailand, the Philippines, and Vietnam.
Table 1. Indonesia’s Logistics Performance Index: 2007, 2010 and 2012
International Shipments (Score)
Logistics Competence (Score)
Tracking and Tracing (Score)
Source: World Bank
Less than conducive regulatory framework, low infrastructure quality, and scarcity of adequately skilled logistics professionals were among the primary problems that continuously hamper the development of an efficient transport and logistics sector in Indonesia. Companies face difficulties in complying with recent regulations and were only provided limited guidance from the relevant Ministries and/or local business associations. In addition, slow implementations of MP3EI and Blueprint on National Logistics create further delays in resolving critical infrastructure issues.
Figure 1. Logistics Performance Index (LPI) Score in South East Asia: 2007, 2010 and 2012
Source: World Bank
Nonetheless, Indonesia’s logistics sector still offers huge potential. The sector has been growing steadily at 12.5% CAGR since 20071. It also provides an increasing contribution to national economy. According to Statistics Indonesia (BPS), the transport and logistics sector contributed approximately 4% of GDP throughout the years 2004-2012. In order to increase efficiency and competitiveness of transport and logistics sector, all stakeholders must collaborate in a coordinated manner to address the challenges of the sector.
The Asia-Pacific pharmaceutical industry has been continually growing in recent years, driven by rising healthcare and pharmaceutical demands. The pharmaceutical sector in Indonesia is also growing rapidly, above average compared to pharmaceutical market growth elsewhere in the region. However, challenges remain, namely regulatory and regional challenges presented by the size and geographical make-up of Indonesia.
Indonesia has an extensive generic market, which accounts for an estimated 75% share of the total pharmaceutical market. The market consists of approximately 200 companies including four state-owned companies and around 35 foreign-owned companies. Despite Indonesia’s enormous manufacturing capabilities, the lack of Research & Development in domestic companies has become an obstacle to developing an innovative pharmaceutical industry in Indonesia.
Total expenditure on health in Indonesia is estimated at being currently between USD 150 per capita per year, around 3% of GDP (WHO 2012 figures). The population of the elderly is estimated to increase in the next 5 years and the Indonesian population is increasingly moving to urban areas. Less than 50% of the population is covered by health insurance, with approximately 45%- 55% still paying out- of- pocket insurance.
Indonesia imports over 90% of raw materials used in pharmaceutical manufacturing, emphasising that its dependence on the overseas’ industry is high, with approximately 70% of the imported raw materials coming from China. Pharmaceutical products are one of the EU's most important export products to Indonesia, whereby exports from the EU grew by 72% (value) in 2008 compared to 2005.
Growth in Indonesia by the end of 2013 is projected to be weaker than that of last year, particularly because of the value of the Rupiah IDR against the US Dollar. This may lead some pharmaceutical companies to review their expansion plans. In 2012, the market size of the pharmaceutical industry in Indonesia was estimated to be worth around USD 4.6 billion, and forecasted to grow to USD 7.4 billion by 2015.
However, the partnership between the EU and Indonesia is strong, with EU - Indonesia bilateral trade accounting for approximately USD 13,780 billion by 2013 (Center of Data and Information, Ministry of Industry). The EU is one of the top three investors in Indonesia. For the first three quarters of 2013, the EU made investments worth nearly USD 2.04 billion in Indonesia. The EU pharmaceutical market has also grown substantially over the last 10 years.
It is clear that universal healthcare coverage, implemented in January 2014, will boost the generic medicine market. The potential growth of the generic market is estimated at 20-30% in Q2-Q4 of 2014. Generic medicine pricing will also be affected by increased competition.
It is important to look at how opportunities in the healthcare and pharmaceutical sectors can be developed, and how a ‘win-win’ situation can be created for both Indonesia and the EU in an agreement on investment and cooperation in the technology and pharmaceutical sectors.
The Ministry of Health is working hard to increase its budget to improve healthcare facilities. It is important to look at how to develop regulations, with the Government currently developing the healthcare system and the standardisation of the quality of healthcare, health workers, medical devices and regulation of fees.
Indonesia is an attractive market for the EU pharmaceutical industry, while EU companies are set to assist the Indonesian industry in becoming a major supplier and exporter of drugs as well as new herbal (jamu) products.
The current situation shows that the pharmaceutical industry is growing at 15-16 % going forward to 2016. This growth is based on an increased awareness and understanding of healthcare, and Government health spending, which is now estimated at only approximately 2.5% but, by 2025, is projected to increase to almost 5%.
Opportunities for the pharmaceutical industry will likely arise from the growing middle classes, growth in GDP, increasing health awareness, strong economic growth, and a shift in spending powers of the Government. By 2020, it is estimated that half of the population - 30 million people- will be part of the middle class. With limitations placed on foreign ownership of companies in Indonesia and with restrictions placed on the import of certain goods into Indonesia, investment in the pharmaceutical market remains relatively untapped and the potential to expand and develop the sector is plentiful.
Labor productivity continues to be one of the primary challenges in Indonesia’s economic development. Although, on average, labor productivity grows by 4.5% per year2(Figure 1), gains from productivity were deteriorating (Figure 2). Indonesia’s labor productivity is also lagging behind other ASEAN Member States in almost all sectors in the economy (Figure 3). Gap between demand and supply of skilled labor, as well as the absent of conducive policy are amongst primary factors that hampered labor productivity in Indonesia.
Aligned with increasing the national economy, the demand for educated and skilled labor is also rising. However, the supply of skilled labor in the market is still relatively limited. Approximately 65% of Indonesian labor force originates from high school level, senior high school, or primary school graduates2. As a consequence, there is a large share of informal workers in the labor market and, with it, a skill mis-match problem.
Figure 1. Growth of Labor Productivity in Indonesia: 1999-2011 (%)
Source: Ministry of National Development Planning (BAPPENAS) presentation at EuroCham Indonesia Quarterly Briefing, 18 September 2013
Figure 2. Average Productivity Growth by Sector: 2000-2011 (%)
Source: Ministry of National Development Planning (BAPPENAS) presentation at EuroCham Indonesia Quarterly Briefing, 18 September 2013
Figure 3. Value Added per Worker in South East Asian Countries (in 2005 PPP$)
Source: World Development Report 2013 Core Statistical Tables, I2D2
Sources and References
The material was retrieved from the Eurocham Annual Position Paper 2013