Infrastructure and Simplicity - Indonesia

Infrastructure and Simplicity

By Jochum Haakma, Global Director of Business Development
(July 2013)

When I recently flew into Soekarno-Hatta airport to mark the opening of TMF Group’s office in Jakarta, the experience reminded me of two things: how far the country has come in the 20 years since I was based at the Royal Netherlands Embassy in Jakarta and the challenges it still faces as one the world’s emerging economic powerhouses. Whilst Indonesia has been a hub of international trade since at least the 7th century, thanks largely to its abundant natural resources and attractive geographical location, it is the country’s future potential that is the most striking.

For the last decade, the big growth story has been China, but there is no denying that the second decade will belong to Indonesia. In fact, Indonesia is predicted to become the world’s fourth largest economy by the middle of this century. This shows that its growth will not only be strong but also sustainable.

And it is easy to see why. Despite the recent global financial crisis, Indonesia has been enjoying an economic boom, outperforming the global economy with an annual growth rate north of 6%. This growth is expected to continue, fuelled by the country’s young population, consumption by its expanding middle class, its rapid rate of urbanization and its natural resource wealth. Consequently it’s not surprising that, as a percentage of GDP, it is a bigger recipient of FDI than China, India or Brazil.

Foreign investment is crucial to the long-term prospects of the country. However, there are in my mind two considerations critical to Indonesia’s ability to attract investment. The first is improving the ailing infrastructure, much of which has failed to keep up with the country’s rapid growth. My recent experience at Soekarno-Hatta was a stark reminder of this: the airport is still run-down, dirty and overcrowded, and the subsequent drive through Jakarta’s gridlocked streets is a challenging experience for most. With this in mind, it is perhaps unsurprising to learn that Indonesian companies can spend 30% of their production costs on local transportation alone.

The second consideration is that, whilst the government has made significant progress in improving the business environment such as reducing corporation tax, the country’s overly complicated bureaucracy can still significantly impair a company’s ability to conduct business there. For example, starting a business such as a limited liability company can be cumbersome, taking around 45 days compared to just 12 in OECD countries, and costing four times as much as in neighbouring Thailand.

Paying taxes is also more time-consuming, requiring on average 51 payments per year compared to the OECD average of 13. An additional headache is that Indonesia operates a tax withholding system with companies required to retain a portion of vendor payments for submission to the tax office on a monthly basis, creating even more paperwork.

Much has been said about Indonesia’s vast potential. However, until the authorities do more to cut red tape, especially for international companies, as well as providing adequate infrastructure to facilitate ease of doing business, Indonesia is at risk of remaining where it is today: a potential economic power.

Originally published in Forbes Indonesia (July 2013)