After nearly a decade of subpar investment, Indonesia’s manufacturing sector is set to receive a major shot in the arm in 2011.
Industry Minister MS Hidayat said last week that tax breaks could generate as much as Rp 125 trillion ($13.9 billion) in manufacturing output, the amount needed for the sector to reach its growth target of 6.1 percent in 2011 from 5.2 percent this year.
Hidayat said his ministry would prioritize tax breaks, which offer tax holidays for a number of years, for resource-based, heavy and pioneering industries, as well as industries located in low-infrastructure areas.
“The government has agreed to give tax breaks to these industries. We’re expecting to finalize it in January,” he said
Hidayat said that, in principle, the tax breaks and other incentives were meant to lure investors to local industries that process raw materials domestically.
“Fiscal incentives, credit facilities, revitalizing aging machines and improving infrastructure are among the things we’re going to do next year,” he said.
In addition to the revitalization plans, small- and medium-sized companies will receive access to credit facilities, government-led promotions and workshops.
“For automakers, the ministry will promote more local content and cleaner and more economical vehicles,” Hidayat said. “We’re also planning to increase the export duty for commodities such as cocoa and palm oil. The idea is to stimulate commodity-related industries, such as oleochemicals.”
The ministry estimated it would need Rp 125 trillion next year to meet its targets.
Hidayat said the manufacturing sector would absorb 14.9 million workers, up from this year’s target of 14.4 million, and exports would reach $92.3 billion if the rate of growth continues.
Manufacturing exports in the first nine months of this year increased by 34.1 percent, reaching $68.8 billion and accounting for 62 percent of total export value.
Several projects have been finalized and are ready to begin construction next year, the minister said. These include a $6 billion factory being developed by state steel maker Krakatau Steel and South Korea’s Posco, the Lafarge cement factory in Aceh and three projects in East Java: the Nestle factory in Pasuruan, Panasonic’s new manufacturing plant and Holcim’s cement factory in Tuban.
In the first nine months of this year, the manufacturing sector grew by 4.69 percent, higher than the ministry’s target of 4.65 percent. Domestic investment in the sector for the first nine months reached Rp 17.5 trillion, while foreign investment was $2.5 billion.
Suryo Bambang Sulisto, chairman of the Indonesian Chamber of Commerce and Industry, urged the government to increase investment in regional areas, develop labor-intensive industry and speed up infrastructure construction.
“Even though the government has implemented the National Single Window and National Logistics System to reduce red tape and speed up delivery, neither initiative has worked effectively,” he said. “Domestic inter-connectivity is something that we’re all waiting for.”
He also said bank lending was still mostly aimed at consumer credit rather than investment or capital credit. “The trickle-down effect to the real sector that we hoped for from bank loans is still for too little.”
Sofjan Wanandi, chairman of the Indonesian Employers Association, highlighted the lack of infrastructure, an uncertain legal situation and red tape as the main challenges for the sector.
“Infrastructure is still lagging,” he said. “Logistics costs are high due to bottlenecks in ports. Lack of infrastructure is disturbing the fuel and power supply. The central-regional government relationship is not very well-coordinated. The land acquisition bill was not deliberated, and this creates uncertainty for expansion.”
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