I was recently interviewed by Risk Assistance Network & Exchange (RANE) as part of an expert advisory panel on investor risks specific to the Indonesian market. The truncated version can be found here: http://bit.ly/2a9dYJ6
Any interested in the full interview, can continue reading below.
What makes Indonesia attractive for investment?
There are a few big draws to Indonesia from an investment perspective, much of which has to do with its demographics. It’s a massive country. With roughly 255 million people, it’s the fourth most populated country in the world. It has a stable and steady economy which has grown 5.35% on average since 2000. This growth has lead to the emergence of a burgeoning middle class of roughly 100 million people, with still ample room for expansion.
With such expansive growth, we’re seeing islands like Sumatra, Sulawesi and Kalimantan finally being included that growth in a meaningful way. This is unlocking many of those areas to goods and services that, from an economic standpoint, were previously not a viable option. Also, over 50% of the country’s population is under the age of 30 which is significant from a consumptive, employment and retirement perspective. It also means Indonesia is comparatively tech savvy. The archipelago is one of the top five global users of social media.
Finally, problems mean opportunities and Indonesia has plenty of those, from improving but still overall poor infrastructure and food sustainability issues to inadequate logistics services and the need for energy diversity and a whole host of other issues. Whether backing a venture that will solve these problems or taking a more direct route, Indonesia has a lot to offer.
What regulatory issues does Indonesia present for foreign investors? Legal issues?
Indonesia is a very young democracy and some of its institutions have only been up and running for a few years while others clearly still need reform. So there are issues of bureaucratic ineptness but it is also unnecessarily complex. It can take hundreds of days to obtain a building permit for some industries.
There are also issues of poor government coordination stemming from the country’s decentralization push in 1999 that saw much of the power shift from the central government to the local governments. The regulatory result has been a maze of overlapping regulations. President Joko Widodo’s administration seems to recognize the impediment this present to foreign investors and has revoked thousands of local regulations. New regulations are often difficult to decipher, lack private sector input and emerge without sufficient notice and it remains to be seen how this is improving under the current administration.
Indonesia also restricts foreign investment in certain sectors through a negative investment list. The latest version, issues in May 2016, lays out sectors where foreign investment is prohibited or restricted to certain equity limits between 20 and 95 per cent. When 100% foreign ownership in the relevant business sector is not permitted, the company must be a joint venture between foreign investors and Indonesian participants or through a public-private partnership scheme.
Other regulatory issues include:
- Land ownership may also be an issue for foreign investors. Only Indonesian citizens (and other corporate bodies designated by the government, such as state-established banks, associations of agricultural cooperation, religious bodies and social organisations), are permitted to ‘own’ land with the right of ownership. Similarly, a lack of clear land titles
- Any business and/or activity that may give rise to significant environmental impacts must prepare an environmental impact analysis (AMDAL) which is appraised by a commission of local government officials. Business that are not required to prepare an AMDAL must have an environmental management and monitoring program (UKL-UPL). Any business or activity that is required to obtain an AMDAL or UKL-UPL is also required to hold an environmental licence.
Key risks that can be identified as characteristic of the Indonesian legal system include:
- it is not uncommon to find conflicting laws from different authorities and it is often unclear which regulations are applicable. There is also often a time lag in passing implementing regulations;
- there is no reliable central source of obtaining comprehensive sets of relevant laws and regulations.
- court proceedings are generally lengthy and cumbersome and are likely to take many months, or even years, to complete; and
- judges are given a high level of discretion in deciding matters. Combined with a lack of sophistication, particularly in some regional courts, this can lead to inconsistency in judicial interpretation as well as corruption and bribery exposure.
- corruption in Indonesia’s courts is quite common
- judges are not bound by precedent and many laws are open to various interpretations.
What Indonesia-specific concerns around terrorism should investors keep in mind?
Indonesia is a secular democratic country and the largest Muslim-majority nation in the world. The overwhelming majority of Muslims in Indonesia are very moderate and accepting of other religions and cultures. Anyone who visits the country will feel that right away. However, anytime you have a group as large as 210 million people (the # of Muslims in Indonesia) you have to expect there will be some bad apples. Radical Islam does exist in Indonesia but in very marginal amounts. During the past 35 years, 381 people (roughly 10 each year) have died in acts of terror in Indonesia. Each person needs to decide how this risk may impact them but I think by and large most will feel that this risk is quite small, perhaps even less than the risk of terrorism in their own home country (as is the case for me).
That said, I do think there are precautions that foreign business people can take to mitigate this risk. I prefer to use local hotels and restaurants when I am there–more as a result of my preference for the Indonesian experience than a purposeful behavior change tied to terrorism but I do think avoiding these establishments will dramatically reduce the already small level of risk.
What economic sectors present the greatest risks?
This is not an exhaustive list but provides a few of the most risky industries in Indonesia.
Commodities – Indonesia is endowed in abundance with natural resources like oil, natural gas, coal, palm oil, rubber, ores, etc). Commodities account for roughly 60% of the country’s export market so it’s a big part of the country’s economy. Like anywhere else, Indonesia is exposed to the dips and peaks of commodity prices but
Mining – Indonesia has a healthy mining industry however, the regulatory environment has created numerous challenges, including a ban on mineral ore exports, setting benchmark prices for exports of coal and mandatory divestment obligation.
Alcoholic beverages – Alcohol is haram (forbidden) in Islam though many Indonesians are developing a taste for beer, wine and spirits. The industry has faced multiple challenges over the years and beer is currently forbidden from being sold in retail stores with the exception of large supermarkets and by beach vendors in Bali.
How do bribery concerns — as well as anti-bribery legislation (FCPA, etc) — play into Indonesian foreign investment?
Foreign businesses operating in Indonesia will be exposed to corruption. Sadly, that is a matter of fact. It is pervasive at all levels of society and is an obstacle to pursuing opportunities. The most common forms of corruption in Indonesia are bribes, embezzlement and extortion.
Despite a widely corrupt environment, there are clean channels that can be found through which foreign businesses can legitimately pass. Finding and accessing those channels with the purposeful intent of avoiding the corrupt channels to the fullest extent possible, depends upon the care taken during the due diligence to fully comply with the spirit of the FCPA and the UK Bribery Act. Where no clean channel can be found, a foreign investor is faced with the decision of what to do. Will it take the risk and pay the bribe or will is stick to its values and not pay even if that means missing out on lucrative business deals? Sometimes it just boils down to taking the ethical highroad no matter what the consequence.
Are there specific due diligence issues when looking into Indonesian business partners or third parties (compared to due diligence in other countries)?
Given the pervasiveness of corruption in Indonesia, the due diligence should look at government connections at both the national and local levels, political party connections and sources of wealth and/or other business interests. A thorough understand of ownership structure is also highly critical as shell companies and holding companies are quite common. If these are not conducted thoroughly, the risk exposure remains.