Mon, 10 Aug 2015

JAKARTA — Red cranes hover over the vast skeleton of a 660 megawatt coal-fired power plant under construction on the dusty coast of western Java, Indonesia.

The US$1 billion (S$1.38 billion) facility, majority-owned by Malaysia’s Genting Group, is set to be finished ahead of schedule next year — a rare success story as President Joko Widodo struggles to draw foreign direct investment (FDI) and develop much-needed infrastructure in South-east Asia’s largest economy.

Since sweeping to power in last year’s election, Mr Widodo and his team have been promoting investment opportunities in Indonesia and promising policy reforms that would cement his reputation as a business-friendly, hands-on leader. “Please come and invest in Indonesia,” the President said at the World Economic Forum earlier this year, grinning. “If you have any problem, call me.”

With economic growth slowing sharply, dropping below 5 per cent in the first quarter, government revenues are falling short of projections and Indonesia is increasingly reliant on FDI to boost growth and investment in infrastructure.

The needs are huge: Jakarta estimates US$450 billion of investment is required to fund its infrastructure plans for the five years to 2019, which include six new refineries, 35,000MW of electricity capacity and 15 airports.

A year on from the polls, in spite of official data showing approvals for large FDI projects on the rise, many of the President’s business supporters are disappointed, claiming that his policies have not matched up to the rhetoric, and that Indonesia’s first President from outside its political and military elite is struggling to push through hard-hitting reform.

“There has been very little concrete movement on projects,” said Mr Marius Toime, partner at Berwin Leighton Paisner, the law firm. “At this point of his first term in office, people are saying we actually need to see some concrete support at the top level.”

Though FDI numbers show a pick-up when denominated in rupiah, FDI inflows dropped to US$7.38 billion in the second quarter of this year from US$7.43 billion in 2014 when the then upcoming elections led to political uncertainty.

The business environment remains a major turn-off, as Indonesia languishes at 114 of the 189 economies covered in the World Bank’s Ease of Doing Business rankings.

In recent months, a string of policy announcements have rung alarm bells, suggesting Mr Widodo’s administration is issuing poorly coordinated policy and turning increasingly nationalistic.

The central bank’s decision to ban foreign currency transactions as of July confused financial planning. Meanwhile, raised import duties and the suggestion that expatriate workers will be required to speak the local language run counter to Mr Widodo’s talk of welcoming foreign investment.

“We need to make sure that you have the right ability for the flow of foreigners to come and live here,” said Mr Mark Wilson, chief executive of Aviva, the United Kingdom insurer that entered Indonesia last year in partnership with Astra International.

Mr Steven Tabor, country director at the Asian Development Bank in Jakarta, said investors must be patient.

Earlier this month, Indonesia’s investment coordinating body, BKPM, announced plans to extend tax exemptions and holidays for new sectors to encourage investment, and the government has introduced major changes expressly to cut red tape.

“The best solution would be regulatory reform, what they call in other countries a ‘regulatory guillotine approach’ to dispense with a lot of regulations that may not be necessary,” Mr Tabor explains, adding that a single-window system is a “second-best” alternative.

At the Banten power plant project, which kicked off in 2012, for example, construction was held up 15 months while the necessary licences were issued. The new service accelerates that process, the project’s finance manager said, but it does not include permits from local levels of government, which can prove most arduous.

Similarly, regulation earlier this year to expedite land acquisition for important infrastructure projects has been welcomed in a country where poorly defined property rights lead to lengthy disputes.

“People seem to be using the new law and, therefore, I assume they have some confidence in it — I’m optimistic, but it’s too early to say for certain if it’s working,” said Mr Julian Smith, an adviser at PwC.

Mr Danu Sambodo, the western Java power project project’s finance manager, said it only got under way because the team found a plot belonging to a single owner, and the new legislation will remove one of the biggest barriers to new investment — if it is implemented correctly.

“We were lucky,” he explained.