Indonesia FDI

Foreign investment flows into Indonesia

Indonesia is ready to realise its potential, according to Gita Wirjawan, chairman of Indonesia's Investment Coordinating Board, and the latest FDI figures indicate he is right to be optimistic.
Gita Wirjawan, chairman of Indonesia’s Investment Coordinating Board
Gita Wirjawan, chairman of Indonesia’s Investment Coordinating Board

Gita Wirjawan, chairman of Indonesia’s Investment Coordinating Board, has set himself and his country an ambitious target: attracting $60 billion of foreign direct investment (FDI) by the end of 2014, which is almost triple the current level.

The board’s latest figures, released last Thursday, suggest that he might be on course. FDI rose 21.1% to Rp43.1 trillion ($5 billion) during the second quarter of this year from Rp35.6 trillion in the same period last year, making up 70% of total realised investment. Total investment in Indonesia (including domestic sources) was valued at Rp62 trillion, up 22% from Rp50.8 trillion

“It’s no longer enough to talk just about Indonesia’s ‘potential’; instead we need to focus on and recognise ‘achievement’,” Wirjawan told FinanceAsia in an interview last week.

Wirjawan is a former head of J.P. Morgan in Indonesia, who later set up Ancora Capital, a private equity firm, and the Ancora Foundation, which funds educational programmes. He took up his position at the investment board in 2009 with a five-year tenure, reporting directly to the president, Susilo Bambang Yudhoyono.

He identified four investment stages: maximising returns from the resources and mining sectors; infrastructure development; large-scale industrialisation; and positioning Indonesia as a regional manufacturing base. However, these stages should not be discrete challenges, but instead continuous and concurrent.

For the full year of 2011, Indonesia’s investment board estimates total FDI will reach Rp170.4 trillion, up 15.1% compared to 2010’s level, on the back of expectations that the country will gain investment-grade status from the credit rating agencies within the next 12 months.

“But, our main emphasis is on the difficult stuff, rather than the low-hanging fruit. Rather than just pointing to obvious opportunities in the primary resources sector — such as coal and CPO [crude palm oil] — it is essential to stress the opportunities in manufacturing — such as electronics, autos and textiles — as Indonesia builds its position as a regional industrial base,” Wirjawan said.

Most of the FDI in the second quarter came from five countries: Singapore ($771.4 million in 203 projects), the Netherlands ($634.3 million in 51 projects), the US ($577 million in 47 projects), Japan ($389.8 million in 150 projects) and South Korea. It is the latter that Wirjawan is especially keen to emphasise.

Investment from Korean firms amounted to $199.1 million in 133 projects during the second quarter, representing 4.2% of total foreign investment, and was up in from $139.3 million in 109 projects in the first quarter of 2011. Based on cumulative foreign investments, Korea is now the sixth-largest foreign investor.

Posco, the state-owned steel company, has been at the vanguard of the Korean invasion, signing several projects last year, and has been followed by LG, Samsung and Hankook. According to Wirjawan, around 200 Korean companies have subsequently approached the investment board.

Posco has joined forces with Indonesian government-owned steel producer Krakatau Steel, spending $6 billion to build a plant in Cilegon, Banten; and tyre maker Hankook is building its seventh plant in Lippo Cikarang, in West Java, at a cost of $353 million.

Wirjawan is confident that Korea will continue to raise its presence in the country this year as several substantial infrastructure and petrochemical projects would be realised soon.

Of course, the poor state of Indonesia’s physical infrastructure — its transport systems, ports and power generation — is routinely cited as one of the biggest constraints on the country’s growth and its ability to attract investment. Overseas participation in its development would help, and also demonstrate the serious intentions of foreign investors.

A precondition for large and sustainable foreign investment is clearly the development of the country’s physical infrastructure,” said Wirjawan. An essential starting point is the passage and implementation of a land acquisition bill, so roads and facilities can actually be built — and Wirjawan is optimistic.

“There is multi-partisan support for a land acquisition bill, so it should be a matter of bringing those groups together and negotiating the price of compensation and the timing of implementation. I’m confident that the bill will be passed by parliament by the end of this year,” he said.

Meanwhile, domestic investment reached Rp18.9 trillion during the second quarter, up 24.3% from Rp15.2 trillion during the same period in 2010, and making a total contribution of 30.5% to total investments.

“In addition to FDI, there has also been an encouraging level of domestic capital formation,” said Wirjawan.

“Although it’s not part of our specific remit, we are also working with local and foreign partners to nurture domestic entrepreneurship,” he added.

Also notable was a slight shift towards more investment outside Java, comprising Rp33.1 trillion (53.4% of the total) compared with Rp19.4 trillion (47.9% of the total) in the second quarter of 2010.

Nevertheless, Greater Jakarta continued to attract the highest level of domestic investment (14.9%), followed by West Java (14.5%) and East Java (11.2%).

¬ Haymarket Media Limited. All rights reserved.

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