UNSW Business Think Indonesia – Jakarta 26 Nov 2015

Notes by Ian Wollff.

Apologies if notes incorrect or missing points – notes taken without recorder.

Introductory remarks by Chris Styles, Ian Jacobs, Eddy K. Sariaatmadja ;

• Generous welcomes to distinguished guests & audience (about 500 equally mixed men/women, with ages grouped in young adult and elderly adult). All sessions in English.
• Reference to Colombo plan (60 years between Australia & Indonesia) wherein hope such plan will be expanded. Some 650 Indonesian students presently attending UNSW.
• Previous Indonesian politics avoided “pro business’ in public speeches, as this was seen to contradict “pro poor”, wherein populace considered all business being out for greedy profit and not caring about people. However Indonesia’s growing middle class and increased connectivity now realize business provides jobs for the people, thus politicians now able to promote Pro business. The government now recognize its responsibility is to provide a climate for business to grow (not be the main employer itself).
• Luhut seen to be a minister to “bulldoze” people (government officers) into action, and has a reputation for thinking outside the box.

Keynote speaker – Minister Luhut Binsar Pandjaitan.

• Apologize for delay start, as just arrived from East Indonesia, and thanks to his young expert staff for preparing the material for this presentation. Luhut reminded audience of his military background (diverse remote locations & leadership), whereupon he relies upon his trusted team for technical financial matters etc.
• Main Challenges to Security & Foreign Policy.
  • Slide – No 1 threat radicalism has become a serious threat. Poverty and low education level have supported the increase in radicalism.
    • Indonesia has seen the failed approach of Afghanistan and other Mid East countries wherein hard / war approach has not stopped terrorism. Indonesia is adopting a “Soft Approach” emphasizing the use (talking with) of religious groups, and various civil society groups (including palm oil groups etc) to explain that good muslims are peace loving and not to become bad muslims.
    • Luhut spent 23 years in army, including training in Australia. Encourage by strong ongoing security cooperation, including a recent 1 week discussion program – including Australia’s chief of intelligence (Dunkin).
    • The difference between terrorists in Paris and a tough army is that terrorists have a 1 way ticket, but the army’s great concern is to extract its troops after an engagement.
    • Indonesia has some 600 – 700 foreign fighters in Syria, some of who have already returned.
    • ISIS has a powerful propaganda mechanism through social media, thus Indonesia, Australia along with other ASEAN countries need to join together on such security issues.
    • Indonesia is continuing to eliminate armed rebel groups – eg Sulawesi.
  • Slide – No 2.threat. Drugs is a serious problem that could ruin Indonesia’s young generation.
    • Drugs do not care about sections of society, religion etc, they affect all – with drug pushers targeting young children is a particular social threat.
    • Estimate 5.1 – 6 million drug users in Indonesia – that has grown from about 4.2 million in 2011.
    • Issues with drug dealers in prisons, rehabilitation centers. Of about 140,000 jailed prisoners, about 60% are drug related, with efforts to separate them from other prison population. Indonesia continues to uphold the death penalty, but government has preferred to focus on the economy.
  • Slide – No 3threat – South China sea.
    • Want to follow a dialog path to resolving disputed borders.

Factors affecting business decisions.

• • Indonesian economic markers show Indonesia is already at bottom of business cycle, with selected latest quarterly statistics suggesting mild recovery – expect this to become apparent in Feb-March 2016.
  • Did not realize recent targets in part because haze affected business (flights cancelled etc). Was expecting 3^rd Quarter 4.85% growth, but actually 4.73%.
  • Understands the effect of government & leadership has on business confidence. This president is showing consistency, straight forward decisions and take responsibility – such that subordinates are good followers.
  • Prioritize problems.
• • Reduce income inequality, if people see gap between rich & poor diminishing, then more civil stability.
  • Improve competitiveness – not allow one group to dominate an industry / sector – thus people can see there are opportunities for them.
    • There are about 300,000 small palm oil farms comprising about 30% of production. This is example where “gap” can be managed, and people feel they have business opportunity.
  • Want more labor intensive factories to adsorb labor. Factories also bring Value Added. Not want old raw Nickel ore export($298 mill), but smelter’s envisaged to provide 20X more income ($20 billion) for Indonesia. Such factories want to have local content, but not to the point of Nationalistic – be reminder that Indonesia is entering the ASEAN period.
  • Fuel subsidy (Rp 211 trillion) to counter Indonesia’s lack of competitiveness in the transport sector – reflecting Indonesia’s poor infrastructure etc. Note that Japan cash costs for goods transport is 4.9%, while Indonesia is 14%. Low fuel price is seen as a jobs stimulus.
  • Further job stimulus is the distribution of Rp 1 billion to the 74,000 villages – stimulate micro industry to grow from bottom up.
• Government infrastructure projects include Trans Sumatra, Trans Java, Trans Kalimantan toll roads. The trans Kalimantan road project is also designed to provide tighter control on the Kalimantan – Malaysia border. One response to the start up of these projects is the increase of cement consumption.
• Deregulation – President Jokowi said not to bother him until the number of permits drops from 3 digits to 2 digits.
  • Significant breakthrough in simplifying wage increase formula. Many investors declined to come to Indonesia as wage negotiations were carried out by demonstration, and unrelated to business economics. The new wage increase structure represents a disciplined democracy.
  • Recognition for the need for exports (and imports) wherein domestic production & consumption is not enough for the country to advance – to be left behind other ASEAN neighbours & competitors – thus Indonesia is only a market, not a full player.
  • Looking for 4 trillion in FDI in 2016.
  • Various financial indicator slides prepared by his staff, wherein Luhut not so familiar with background, but the indications is that the economy is about to get better. National objectives are to achieve a growth of 7.5% over the next few years, with 6% being the short term target. Next year (20160 feel can achieve 5.5% growth, with an upside to 6+%. Some of this growth will come from revaluation of state assets & pro business policy.
  • Hope Indonesia’s future is good – “smart people is not enough – need also people to have heart” (business ethics etc). Don’t do business just to get money, need to improve team work and move forward together (people & business continue to grow together).
  • In his military career, Luhut saw many remote places all over Indonesia, and can identify with today’s problems & issues for a peoples perspective. Emphasize the need for equal opportunity, and for government to serve the people. Luhut carries on direct two way discussions with village people. Promote “option to grow together”.

Panel Discussion.

• Tim Harcourt moderator & introduction.
  • Outline of some historic ties between Indonesia & Australia in the political security & political fields.
  • Guest panelists were invited to talk on individual topics as prompted by Tim.
• Dino Patti Djala
  • Is this the best time to be an Indonesian? – Not this year particularly, but certainly this era. Indonesia is no longer excluded from the world financial decision makers, as it has become a member of the G20. The Indonesian middle income group is expanding, and many political decisions are related to the financial improvement of general Indonesians. SEA is a fast growing region, giving self esteem and confidence / opportunity to the young population bias in Indonesia – for a bright future.
• Sofjan Wanandi
  • Good government is trying to overcome issues. Indonesia is experiencing headwinds now as Indonesian business & government became lazy with the easy boom, now Indonesia has to work harder to improve policy. It is said that “in good times bad policy is made, and in bad time there is a need to make good policy”.
  • Sofjan is now elderly, and for so many years he was outside the Government making recommendations. Now he is inside the Government and it is still hard to make good policy (so much party politics & administrators).
  • Indonesia is struggling to become competitive – Indonesia is a big country, large population, rich in resources but also an Island country where the logistics impose a high cost structure. Even the cost of building infrastructure & power plants is affected, requiring significant budget.
    • Indonesia needs to build such infrastructure quickly to reduce its infrastructure costs.
    • Bureaucracy is afraid of legal certainty – now that the administrators can be sent to jail if they make the wrong work. This is not straight forward as there are many overlapping regulations, grey laws and contradictions, along with issues of corruption that need to be overcome.
    • Start of 6 new economic packages, but will take time to implement, particularly as the bureaucracy is a large complex machine with the lower levels of poorly educated / motivated staff.
    • Equality, as per Luhut’s earlier comment, with budget’s for villages and reduced interest rates for small & medium business.
    • Government is moving in the right direction over the past year, but not happy with speed of implementation. Much of the bureaucracy is afraid to be criminalized on civil issues, with people need to be reminded that they do the right work.
    • Next year need GDP to be above 5% with emphases on employing labor and need upstream industries.
    • Need industrialization with Government & private sector working hand in hand. Need to remove some of the negative investment list.
    • Need skilled & trained manpower (thus need UNSW etc) to catch up with ASEAN neighbours.
  • Meshuara (Mei) Kanjaya
    • Is Indonesia just a low cost production centre, and what of the growing middle class ?
    • Indonesia is not just Java, but includes many islands wherein her extensive travel shows a growing middle class right across Indonesia. Indonesia has more than 100 cities with population over 200,000 – a bit like having 100 Perth sized cities. Indonesia is a highly diverse culture with a young population to support the work force (Australia has an aging population issue).
    • There are various negative issues associated with such growth, including the distinct lack of reliable electricity outside Java, this is particularly difficult for running a supermarket (Perth had 40 degree heat and not supermarket issues). Recently Mei hosted a delegation from Victoria wherein they could readily see there is real 2 way growth in the middle income field – eg high end food producers and customers wanting to buy good quality food and such prices. Indonesia is not just about quantity, but also about quality.
    • Indonesia is sometimes lazy, as it is naturally rich in food & shelter in some places (villages self sustaining) , but Indonesia is becoming urbanized wherein smart and working together is important.
    • New businesses, particularly start ups, are coming mainly from the young middle income group.
  • Shinta Widjaja Kamandi
    • What of female entrepreneur’s and good Government? (Initial response disappointment to moderator at being asked a gender question, rather than a serious business / political question).
    • There is roughly equal participation of men & women in the work force, so it is not a matter of women entering the work force. Today there is more emphases on women going into leadership positions, and upon marriage, most stay at work. It is common women take on the duel roll of worker & house responsibilities, though there is a growing trend for men to participate in house work. There is still a strong cultural influence that once a woman has children, she becomes the family care-holder.
    • Entrepreneurs comprise about 1.8% of the work force, and this is planned to become 2%. Women are strongly represented in the entrepreneurship areas, with some commentators suggesting more discipline, multi tasking etc.
    • Key challenge not enough skilled people, and particularly not good access to finance (banks will reject women, or need their husband / fathers signature etc). This is true in Jakarta & regions.
    • Women entrepreneur find it important to network. Shinta has created a “Angle Investment” small group of friends to support women start ups etc (now 30 members). There are many potential projects, but it is not just about the money, but mentoring is important for women.
    • Big shift is upon the men, as men now partake of house hold duties, and considerations about Paternity leave.
    • Look at roll and right path to take up the opportunities.
    • There are now regulations for women quota’s in parliament & certain mainstream industries. Indonesia has women ministers (more so than Australia).
  • Discussion – Dino – Follow on topic that Indonesia can recognize Pro Business.
    • Indonesia has around 65 million employees with most (98.7%) in the micro sector, 1.x% in the small industry sector and 0.x% in the medium sector. Need driver to focus on the micro sector.
    • Government workers comprise about 4 million people, so the Government is not a job creating center, with only about 200,000/year entering-turnover this sector.
    • Overall it is difficult to get statistics on the employment profile in Indonesia.
    • Foreign Direct Investment is seen as a desirable option for Indonesia to boost employment, and is promoting this benefit to the people. For example a FDI enters with a $1 bill investment, automatically about 30% goes to the government & boosts employment. Indonesia cannot achieve growth targets by itself. Some investors feel that they are welcomed upon investing the capital, but once profits flow, then they are unfairly hassled. Indonesia recognizes the need for fair profit together.
    • The temporary visa is a significant issue, with some Taiwan business people recently hesitating to invest due to uncertainty of visa’s. They want more certainity over the visa issue. This type of regulation adjustment is seen as “low hanging fruit” for government to improve upon.
    • The new Presidential economic package is good.
  • Discussion – Sofjan – Does Indonesia care where investment comes from eg China is a competitor or an investor?
    • China is not yet a significant investor, being only a recent significant investor in resources & government projects. More traditional investors such as Taiwan are larger investors.
    • FDI monetary input is always good for Indonesia, however the knowledge & technology this brings is also an important factor.
    • Indonesia needs labor intensive industries . The unemployed & informal labour pool is about 40 million, with about 10 million unemployed, and 30 million as disguised unemployment. Not many FDI invest in labour intensive industries, particularly as companies are afraid the labour regulations are difficult readily to hire & fire, and labour wages are determined by demonstration. The wage determination is changing with the new wage setting regulations etc.
    • Companies interested in FDI can discuss projects with the government, including structure of the investment, with this government being more open to discussion. Previously government outlook was that FDI was just about taking jobs away from Indonesians, but now government realize that FDI is a significant job creator in all fields – education, labour, general.
    • BKPM is a one stop for business permits, but national labour not yet well coordinated. This is creating many complaints for both small and big business – to be settled.
  • Discussion – Mei – Has infrastructure improvements made a difference?
    • The infrastructure is seen to be “in the process’ of improving, with main benefit reducing the cost of products in and out of Indonesia and within Indonesia.
    • Business still needs to be promoted in remote areas, for example opening a business in Balikpappan is difficult due to the electricity brown-outs (sitting on top of national reserves of coal, oil, gas) and there is no fixed shipping schedule. Government is trying to build a sea toll way, along with road & rail networks.
  • Discussion – Shinta – Advice to young Australian & Indonesian business people?
    • Immersion in the new culture.
    • Borderless world – particularly for young people.
    • Some small start up enterprises (and Colombo plan) need to be scaled up.
    • Look at the culture & language of each country, clearly more Indonesian language needs to be taught in Australia.
    • Indonesia has a youth-full workforce, and this is a “democratic bonus” , where Indonesia needs more Indonesia – Australia interaction. Australia has high wages and relatively more expensive place to live.
    • Indonesia has a curriculum that tends to build on a more nationalistic and conservative approach. Indonesia needs to start to revise its education with the right curriculum.
    • Need more collaboration amongst the different sectors of the private – public interface, and to get the youth involved such that when they graduate they can get the type of job that suits their education / aspirations.
  • Discussion – Question & Answer.
    • India has the largest ASEAN digital economy (31% of data services), whereas Indonesia <1% total internet sales, while China has about 5%. Indonesia has no data on E-trade in Indonesia. 1) E-commerce is not well regulated, 2) even though Indonesia has 4G data connectivity needs to be improved, 3) Indonesian buyers still want to see & feel the product, as there are many poor quality products, and Indonesia does not have adequate product quality control mechanisms – SNI not yet good enough.
    • Linkages between government, university, policy and business is weak.
    • China is increasingly important geopolitically and in trade, along with ASEAN. Indonesia has trade partnerships with some 120 countries around the world. Trade with China continues to grow, with biggest imports. Indonesia watches China trade movements, particularly the recent 13^th 5 year national plan, that reflects growth in China. The Chinese “one road, one belt system” is not so suitable for Indonesia. It is expected China will outsource some 80 million jobs, of which many are hoped to come to Indonesia. China economy is shifting towards a consumer of goods, which is good opportunity for Indonesia.
    • Much public talk about big investors from Australia, but small investors are also important for boosting local employment & growth. For example many Australians invest in small enterprises in Bali. In the past Australians were prominent in investing in the natural resource sector, and little in the manufacturing sector. Australia has many first class environment tourist resorts – Indonesia can develop this business model further. Indonesia would like to see more Australian investment & cooperation in farming & fish industries.
    • Sofjan has a business/factories in Australia where many of his family reside. Australia & Indonesia’s long term future is linked to universities & small business.
    • Now the Indonesian government has limited civil servant growth, and introduced a more open competitive recruitment process, even to S1 & S2 can be won by people from the private sector. Government manpower capacity still is largely second class, as the private sector pays better for better qualified people. The health sector civil servants is still growing. No longer does political parties / connections decide on civil servant employment opportunities.
    • Indonesia is developing a leaner government. However the civil service is not like a corporation, wherein it is not possible to fire staff, but can wait for retirements or reassign. Even more problems when departments are merged or stopped. The staff need to be accommodated in the total new structure. It is not just a matter of new structure, but coordinating is a key issue, particularly with daily operations. There are great plans for reforming the bureaucracy but restructuring the manpower is a big effort.
    • Government still lacking staff and budget for research & development, they need to put aside funds. The private sector does some according to its needs only.
    • People to people contact is very important between the close neighbours of Australia & Indonesia. Need to build up the two way flow of people between the countries, not only in tourism, but in trade & investment and more integrated approach that will further enhance the contact between the two countries.
    • Indonesia is no longer a single entity, but a part of ASEAN., but needs more time to get fully ready. For example Indonesia is behind Vietnam in some areas. This places more emphases for Indonesia to consider joining the TPP (trans Pacific trade pact) – and to consider the impact of NOT joining. Indonesia can not just look at domestic production & market only. More competition will lead to more opportunities.