Indonesia – what makes it attractive to investors?

Much has already been published as to why Indonesia is a very good place to do business in, and quite a lot also as to what some of the difficulties are, which are specific to Indonesia.

For purposes of this paper, let’s focus just on reasons for doing business there. We will look at the problem areas, in a separate post.

Indonesia has a large economy. In fact, it has the largest economy in South East Asia, contributing almost half of South East Asia’s aggregate GDP. As a measure of its global importance, note also that of all the South East Asian nations, only Indonesia is a member of the G20 group.

The rate of growth of Indonesia’s economy has been more or less steady for a number of years[1], and that too is good for investors.

Indonesia has been generally shielded from the worst adverse effects of major economic downturns, such as we saw in 2008, and following. Why is that? Economists point out that the country’s domestic consumption contributes to more than half of its GDP, whereas countries which are more dependent on the good health of the global economy would be harder hit by global recessions.

We note also, that by 2025, well over half of global growth is expected to originate in and from Asia.

So, as a would-be investor, what kinds of thing should you be looking to invest in?

Trade associations[2] remind us that Indonesia is the:

  1. world’s largest producer and exporter of crude palm oil

  2. world’s second largest exporter of coal

  3. world’s second largest producer of cocoa and tin

  4. world’s fourth largest exporter of natural gas

That the country is also rich in mineral deposits, for example gold and nickel, and that its forests and surrounding oceans are likewise, resource-rich.

Indonesia’s membership of regional trade-related groups is also an advantage for the investor. The country is a member of ASEAN[3]. As a consequence, it benefits from the tax free movement of goods and services among the ten members of the ASEAN group. This means that any non-ASEAN country operating in Indonesia can benefit from the flow of goods and/or services within the ASEAN region. Any foreign business which produces and ships goods within the ASEAN region, can likewise benefit from the reduced tariffs payable within the region.

The economic partnerships and free trade agreements which Indonesia is currently negotiating with Australia, and separately with the European Union, promise to add to the benefits of doing business in Indonesia.

There are several areas of economic growth, and areas of local demand, which investors can take advantage of.

For example, airport construction, and refurbishment, with plans to build several new airports, and air cargo facilities, and to redevelop and upgrade a very large number of existing airports. In this particular industry sector, there are opportunities for businesses who specialise not just in airport design and construction, and the manufacture of aircraft and aircraft parts, but also in avionics, navigation and other communication systems, and of course in training and knowledge transfer, as well as specialised aircraft maintenance services.

Those of us who are familiar with the general geography of Indonesia will be aware that it is a very large archipelago, comprising several thousands of islands.

This necessitates ocean travel (and not just air travel) within Indonesia’s major islands.

As with the further development and refurbishment of Indonesia’s airports, the country has ambitious plans for the development and renovation of a number of seaports also.

There are plans to substantially increase the country’s maritime capability by the year 2025. This will require not just the building of a large number of new vessels, both merchant marine as well as naval, but also the infrastructure that is typically associated with maritime trade, such as ports and harbours, roads and storage facilities.

Indonesia has for a number of decades been well known for its hydrocarbon resources, including crude oil and natural gas (including LNG) – it has a number of world-class upstream facilities, as well as active downstream services, both for domestic as well as overseas markets.

For example, Indonesia is third in terms of crude oil production among the Asian nations, behind only China and India.

Undoubtedly, many of the proven and probable reserves which are as yet untapped in Indonesia, are in difficult and/or deepwater fields, but with increased domestic demand for oil and gas, and competitive prices, the hydrocarbons industry in Indonesia will continue to be a major source of revenue for many years to come[4].

So, the development of these reserves will continue to be a fertile area of foreign participation and investment, just as it has been for the past fifty or so years.

In addition to more traditional sources of energy, such as oil and natural gas, Indonesia has a growing capacity and interest in developing sources of renewable energy (including solar and geothermal energy). That too is an area of growth which investors should take note of.

I have said that Indonesia is an archipelago, necessitating air and sea travel intra-island. But it is also the case that the country’s main islands of Java, Sumatra, Kalimantan, Irian Jaya, and Sulawesi, are each very large land areas.

This means, the country needs an efficient and sufficiently widespread land transportation system also, in addition to its air and sea infrastructure.

Indonesia has ambitious plans to add to its existing railway network, both inter-city as well as intra-city.

Jakarta has in recent years embarked on the development of a state-of-the-art underground metro system, which I had the pleasure of using during one of my recent business trips to Indonesia. It is certainly comparable in many respects to the MRT system in neighbouring Singapore.

So, in the context of rail development, the investor will find opportunities not just in the supply of rolling stock, and rail track, but also in connection with planning and development (even legal planning, an area closer to my own heart), as well engineering design, and construction services.

Given Indonesia’s population (now only a little short of 300 million), and the pace of the country’s economic growth, and the growth of its so-called middle income or middle class citizens, it has a pressing need to better and more efficiently manage its levels of municipal solid waste. Waste disposal and sanitary technology is an urgent requirement for a rapidly modernising nation.

There are clear opportunities therefore, for investors who specialise in waste processing and disposal, and in the design and engineering which is relevant for waste processing and disposal systems, as well as in the supply, installation, operation and maintenance of waste disposal sites and equipment and technology.

This is really only a snapshot of the kinds and breadth of opportunity which Indonesia is better known for, and there are many more opportunities besides, which readers will be able to identify.

In subsequent posts, I will explore the key legal and regulatory pitfalls and difficulties which investors can face when doing business in Indonesia, as well as the key legal and contractual structures which are common in this jurisdiction, so that the reader has a clear and comprehensive roadmap to assist the process of due diligence and initial enquiry.

This post is for information purposes only. It is not intended to provide legal advice. If the reader of this post has a specific enquiry in connection with doing business in Indonesia, please contact the author at allbless@inarakconsultants.com.

[1] A much more steady rate of growth than is evident in either the OECD or the BRIC economies.

[2] See for example, the annual updates published by organisations like the UK Department for International Trade, for the relevant economic statistics.

[3] The Association of South-East Asian Nations.

[4] In a subsequent post, I will examine some of the key issues currently facing the oil and gas sector in Indonesia.

#FTA #Asianeconomy #construction #ASEAN #infrastructure #energy #trade #fdi #telecoms

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