PERTH CEDA AIBC Event
State of the Nation Series
Indonesia: Asia’s other Dragon? Opportunities and challenges
Insights from HE Greg Moriarty, Australia’s Ambassador to Indonesia
Tuesday 15 May 2012
7:30 to 9:00 am
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Thank you for the opportunity to be here today. It’s a great pleasure to address the members of the Australia Indonesia Business Council and CEDA today.
The Australian Embassy in Indonesia has enjoyed strong cooperation with the AIBC and its various chapters, as well as the sister chamber in Indonesia, the IABC over the years.
Australian business interests in Indonesia span the range of sectors, with Indonesia an important market for cattle, beef, wheat, petroleum and services. And being originally from WA, I want to see WA business doing well!
Overview
When I arrived in Jakarta as Ambassador in October two years ago, I was struck by the level of business interest. That interest has continued, because the opportunities in Indonesia are very real.
The other things that struck me was how far Indonesia has come – politically, strategically and economically- since I was posted there in the late nineties.
Indonesia can only become more important to Australia. There are great investment opportunities to be had, as many companies already present in the country will attest.
But we need to be clear-sighted about the accompanying risks and challenges, including infrastructural weaknesses, skilled labour shortages, and increasing levels of protectionism in some sectors, which can dissuade foreign investors.
The question that I hope to address today is: how can we maximise the opportunities while minimising the risks: Or what can businesses can do for themselves, and how can the government support you.
The opportunity
I have heard from a range of funds managers, entrepreneurs and analysts that Indonesia is an attractive place to be. There are some good reasons why.
Indonesia deserves credit for the great strides made since the Asian Crisis. It has achieved average annual growth of 5-6 percent and has come through the more recent Global Financial Crisis looking better than the pack, with growth of 6.5 percent last year.
Indonesia boasts dropping levels of GDP-to-Debt ratio and a stable socio-political outlook.
It is the only Southeast Asian country in the G20, and forecasts see it joining the club of 15 countries - with annual GDP of about US$1 trillion - in the next few years.
It has a rapidly growing middle class and a consumption-driven economy.
Indonesia’s stock exchange ranks third in Southeast Asia, and its value has doubled since 2008.
For the above reasons, over the past year, two of the three global ratings agencies now assess Indonesia’s sovereign credit rating as investment grade.
And the evidence of more investment flows is there. Foreign Direct Investment has increased 20 percent since 2010.
Trade Minister Gita Wirjawan recently announced record levels of investment – a 30.3 percent increase on the figure from last year. (about a third of this in mining – US$1.1 billion)
And from Australia, investment has increased by 11 percent to $5.3 billion and two-way trade by 14 percent to $13.8 billion.
There are tremendous opportunities inherent in Indonesia’s economic development in which Australian companies can play a role.
The Indonesian Government has an ambitious development blueprint based on public private partnerships (the MP3EI), in which it envisages 70 percent of the funding coming from the private sector, including foreign sources.
If the right action is taken by Indonesia to underwrite risk, there will be tremendous scope for Australian companies to apply their expertise in the infrastructure sector.
Consumption accounts for three quarters of the country’s fast-growing economy, and the burgeoning middle class is demanding more choice and more high-end products with new malls and supermarkets springing up.
In the services sector, companies already in-country have described Indonesia as a market with “endless opportunity”.
And that’s not surprising, given the massive unbanked, uninsured population.
But there is also rising demand for quality health and education services.
Middle class Indonesians are increasingly prepared to travel to Singapore and to Australia for specialist health care.
Further opening and collaboration in this sector is good for Australian business, and will help provide access for Indonesians to a greater range of healthcare options in-country.
In education, the Indonesian government wants a more skilled labour force and greater numbers of post-graduates.
As we look to further opening in this sector– we should be ready to service that need, both in Australian institutions and through in-country programs, especially in vocational education.
Some of the large Australian companies with a presence in Indonesia have a great story to tell – indeed some have doubled their business in recent years.
In the resources sector, I could point to BHP Billiton and Newcrest as big players who know what Indonesia has to offer.
And they are only two of a total 38 Australian (ASX-listed) companies with an interest in approximately 120 mining projects across Indonesia.
In services, ANZ and the Commonwealth Bank have made major commitments to Indonesia.
We also have a number of companies doing very well in manufacturing and distribution, for example Arnotts, Detmold and Coca Cola Amatil.
And there are many more doing well, out of the 400+ Australian companies we know are already operating in Indonesia.
Yet overall, Indonesia still is only our 13th largest merchandise trading partner and investment levels are relatively low.
The bilateral business relationship between Australia and Indonesia is clearly yet to reach its full potential.
As Trade Minister Dr Emerson has said March, we see no other country in this region where the gap between the actual level of economic cooperation and the potential for cooperation is greater.
We want to bridge that gap.
We are presented with the combination of a neighbouring, democratic country that is well-disposed to Australia and needs investment in its booming economy,
- which is seeking a role for foreign investors in its rapid development plans
- and which is experiencing rising consumer demand for the full range of goods and services.
The challenges
Of course there are caveats.
Like every investment destination, developing or otherwise, Indonesia presents risks.
Infrastructure weaknesses are unlikely to be resolved any time soon.
The costs of transporting goods within Indonesia are high, and foreign investment is very much focused on Java as a consequence – though of course Jakarta has its own infrastructural delights – as anyone who has experienced road travel after the rains will appreciate.
Companies need to invest in training and education programs, because sourcing people with the rights skills and education is difficult and adds to operational costs and timeframes.
Corruption is a serious problem which the Indonesian Government is frank about and wants to address.
But it will take time to tackle this endemic problem and to change entrenched practices.
Australian companies, subject to strict requirements in their operations, need to spend time instilling new work practices and standards in their staff.
But the major challenge, if I can summarise it in one phrase – is regulatory uncertainty.
It’s a problem that has been increasing in recent months, and I fear we are unlikely to see any significant improvement in this uncertainty at least until after the 2014 election.
Several regulatory changes with uncertain implications for foreign investors and exporters have been introduced or are rumoured to be on the horizon.
And some investors already operating in Indonesia have expressed concern about this.
It’s in this environment that Standard and Poors recently decided not to follow suit with the other ratings agencies and did not lift Indonesia to investment grade.
S&P based its decision on the Indonesian government’s decision not to increase fuel prices by reducing subsidies but also the uncertainty generated by recent regulatory changes, notably in the mining sector.
As in many countries, especially since the GFC, there is an increasing sentiment of economic nationalism, particularly in the parliament.
New policy proposals are being advanced which seek to protect domestic industry and manufacturers, and favour domestic businesses over foreign companies.
While these policies are not aimed specifically at Australia, they do affect Australian interests, including in the food trade, mining and banking sectors.
Australia is well-placed to provide quality produce to Indonesia to meet its food security needs.
Indonesia’s growing middle class is driving up demand for quality agricultural produce and the government wants to increase protein consumption.
But restrictions over food imports are contrary to those goals.
And recent restrictions over the horticulture trade are very worrying.
We are working closely with the Indonesian government to keep the trade flowing.
Many of you will be familiar with the challenges facing in the beef and live cattle trade – it’s a big market for WA I know.
While we understand Indonesia’s desire to be self-sufficient, demand is such that Indonesia will continue to need imported product for some time.
We continue to stress to the Indonesian Government that exporters need certainty about the level of demand for the trade to be viable, and so we can meet those food security needs.
Indonesia’s wealth of natural resources is an obvious investment attraction.
But the Indonesian Government’s mining regulations have caused considerable uncertainty.
As many of you will be well aware, in 2009 the Indonesian Government introduced a new Law, and the implementing regulations include requirements for mining and mining service companies to divest ownership levels, to process ores domestically and to source more products and services locally.
There are additional restrictions on the export of minerals.
Some companies are able to find ways to cope with these regulations, others will find it more difficult.
For the banking sector, recent reports that the government might introduce caps on ownership in the banking sector send negative signals to our investors.
And to the investment community more broadly.
In all of the above areas, the Australian Government is asking for clarity and certainty from the Indonesian government.
Within this kind of environment, I really can’t stress enough how important it is for companies to invest the right amount of time and energy in finding the right local partner.
Almost without exception, it’s the companies that have an ethical partner they can trust, who have the right connections and the right strategies that are doing well
Companies with the right partner are better able to weather the changes in regulation that we have already outlined.
In Indonesia, as well as in other countries in Asia, strong business partnerships require trust and personal contact.
My advice to business is take the time to develop a relationship and to be confident that you will be able to work together to achieve mutual goals.
Australia’s value-add
The other key for Australian business is to leverage of the great reputation for best practice, value-add and other strengths which sets us apart from the competition.
This is a message that we should all continue to reiterate.
Most of the Australians companies I talk to, regardless of the sector, are doing great things with CSR.
Not only through standard business practices, noting that it is often necessary to bring employees up to scratch with the right skills and to instill in them the practices of good governance that Australian companies expect.
But also through dedicated education and training programs and significant CSR programs and initiatives that in many cases go beyond those required by the Indonesian Government.
Our banks offer first-class corporate governance and have the backing of Australia’s broader reputation for prudent financial regulation.
Indonesian customers can be confident in the security of the financial assets entrusted to these banks.
The mining industry present great examples of how Australian companies are contributing.
Over the past 18 months as Ambassador, I have been lucky to see first-hand a number of mining projects involving Australian companies – from Kalimantan to North Maluku.
While the impact of a mining project can be complex and sometimes have negative consequences, a well-run project can transform a community.
In Balikpapan, Australian companies are running Australian-accredited training programs for up to 400 apprentices a year, with a particular focus on opening up opportunities for women.
In other locations, I have seen companies undertaking detailed social impact surveys to support the development of comprehensive CSR activities.
Examples are scholarship schemes, supporting local schools, undertaking revegetation projects, enhancing the capacity of local businesses to supply the mine site, establishing health clinics and complex environmental projects such as bio-diversity mapping.
I should point out that the Australian government is working to build capacity and improve practices in the sector, including through the Extractive Industries Transparency Initiative and the Mining for Development Initiative, with a program about to kick off through the International Mining for Development Centre here in WA.
Business can leverage off Australia’s good reputation, and the ways in which our excellent corporate practices can contribute to Indonesia’s future development.
Time invested more broadly in people-to-people links can pay great dividends.
Businesses on both sides do a great job in building those vital personal links
I’d like to thank the AIBC for its work on that front. I know Ian Satchwell in particular puts great effort into building his relationships in Indonesia, as does the WA Government rep, Martin Newbery.
And I understand that in October this year WA and East Java will re-sign the sister state MOU for another five years which is great news.
People-to-people links are ultimately the backbone to the bilateral relationship more broadly.
We are fortunate that many senior Indonesians have studied in Australia and know us well – including several in the current Indonesian Cabinet.
But on our side – the way Australians see Indonesia – there is a long way to go, as we have seen from the recent reporting on the decline in Indonesia studies.
We want more people to go to Indonesia to see what a great place it is, to appreciate its culture, history, incredible geography and tourist spots – to go beyond Bali!
More positive perceptions both ways have to be good for business.
Government support
The Australian Government, and the Embassy in Jakarta, want to help you build your business links.
We want to contribute where we can in improving the investment environment in Indonesia.
We work with a number of Indonesian ministries on reform and other programs under the Indonesia Australia Development Partnership.
And we try to invest time in building the relationships with and sending the right messages to senior members of the Indonesian Government
We tell them we want to support their goal of attracting foreign investment.
Because the fact is that Indonesia needs foreign investment for its continued economic growth.
But this will require certainty and security of investments.
Predictable and resilient commercial and regulatory frameworks are vital to encourage development and long term investor commitment.
For businesses looking to enter the Indonesian market, the office of the Australian Trade Commission at the Jakarta Embassy can help.
They have a large team of well networked local Business Development Managers covering all sectors from education to infrastructure.
On the trade front, we are saying that a more balanced trade policy will mean long-term sustainability and competitiveness of the Indonesia economy, food security, and affordable prices for Indonesian consumers.
And we continue to stress that the kind of uncertainty we are seeing of late could scare away investors who are and could be making considerable contributions to Indonesia’s future growth prospects.
We hope this year to commence formal negotiations on the Indonesia-Australia Comprehensive Partnership Agreement (IA-CEPA).
The agreement can potentially address barriers to services and investment between our two countries
It’s more that an FTA – and includes investment and capacity building pillars.
It is intended to boost mutual trade facilitation and competiveness while strengthening governance, regulation and accountability to foster long term, viable sectoral partnerships and investment guarantees.
While we are still in early pre-negotiation phase for this agreement, we have identified four clusters marked for a special capacity building element (extractive minerals; green economy/sustainable trade; services; and agriculture).
It builds on another important agreement that Indonesia became part of earlier this year – the ASEAN-Australia Free Trade Agreement, or AANZFTA.
We have been consulting closely with Indonesian business as well as Australia business about what they would like to see in an agreement
So let us know what you would like to see in an agreement – because its businesses who know what will really work for them on the ground.
Finally, to wrap up – my main message is that there are good opportunities in Indonesia.
The country will continue to increase in importance and there is scope for win-win cooperation between Indonesia and Australia businesses as Indonesia’s economic development progresses.
But it would be remiss not to point out – both to our business community but also to the Indonesian Government – that some of the challenges - and most notably I refer to the regulatory uncertainty- creates risks for investors that could mean lost opportunities both ways.
Australian companies have a lot to offer. We need to keep emphasising that.
Australian companies have strong credentials in CSR, safety standards, innovation, skills transfer and training in good environmental management.
And Australian companies in Indonesia are known for maintaining good corporate governance and high standards of legal and financial practices.
Let’s continue together to showcase the value-add that Australia-inc has to offer, and to ensure that we continue to build on our reputation for excellence.
Because if, as some analysts predict, Indonesian grows to be the 10th largest economy in the world by the end of this decade, our businesses should be positioning themselves now to contribute to Indonesia’s development.
And it is in the interest of both the Australian Government and Australian Business that Indonesia continues to get its economic policy settings right and for Indonesia to become an increasingly prosperous, stable and democratic partner for Australia in this the Asian Century.
Thank you