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INDONESIA
Country Profile | EU-Indonesia Relations
| Industries Overview

III

2014

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INDONESIA

Contents
I. Country Profile ........................................................................................................................ 3
Introduction ............................................................................................................................ 3
1. Socio-Political Overview ..................................................................................................... 5
2. Economy of Indonesia ........................................................................................................ 8
4. Trade and Investment climate............................................................................................14
5. Indonesias Economic Master Plan ....................................................................................18
II. EU-Indonesia Relations ........................................................................................................21
1. Political and Economic Overview .......................................................................................21
2. Trade and investment ........................................................................................................22
III. Indonesia industries overview ..............................................................................................25
1. Agriculture .........................................................................................................................25
2. Infrastructure .....................................................................................................................25
3. Cosmetics..........................................................................................................................28
4. Property.............................................................................................................................29
5. Energy ...............................................................................................................................29
9. Transport and Logistics .....................................................................................................32
9. Pharmaceuticals ................................................................................................................34
10. Human Resources ...........................................................................................................36
Sources & References ..............................................................................................................39

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I. Country Profile
Introduction

Since the Asia crisis struck Indonesia in 1997, it has undergone exceptional development. As a stable
democracy following a sustained growth path with outstanding rates, the country has become an
economic powerhouse and a crucial player both in the region and globally. This development is enhanced
by the fact that Indonesia is by far the largest economy in the Association of Southeast Asian Nations
(ASEAN), a intergovernmental organization that aims to deepen the economic, political cultural
relationship between its members. More specifically, Indonesias recent economic performance placed as
1
the second fastest growing G20 economy in 2013 after China, with a real GDP growth of 5.8% .
Furthermore, the country is likely to play an even greater role in the global economic system if it manages
to live up to the ambitions set out in its Master Plan for the Acceleration and Expansion of Indonesias
Economic Development (MP3EI), a comprehensive roadmap announced in 2011 by the Indonesian
government. The aim is to make Indonesia one of the 10 biggest economies in the world by 2025 through
2
a per capita GDP increase to $15.000 from $3.000.
With a large domestic market, a sizeable young work force, abundant natural resources and sound
macroeconomic fundamentals, Indonesia is likely to further thrive and keep up with its economic
dynamics leaving ample room for business opportunities for European Companies.

IMF, World Economic Outlook Database, April 2014, www.imf.org


Strategic Asia, Implementing Indonesias Economic Master Plan (MP3EI): Challenges, Limitations and Corridor
Specific Differences, 2012
2

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Table1: Selected social, political and economic indicators (year 2013 unless otherwise specified)
Political

Economic

Official name
Capital
Political System

Republic of Indonesia
4
Jakarta (9.121 million)
6
Democracy (Republic)

Land area

1,904,569 km

Social
Population
(2013 est.)
Religions
(2000 census)
Labor force
(2013 est.)
Language
Age distribution

251,000,000

11

Muslim (86.1%), Christian


(8.7%), Hindu (1.8%), other
13
(3.4%)
15
120 million

Bahasa
Indonesia
regional languages
0-14 years: 26.6%
15-24 years: 17.1%
25-54 years: 42.2%
55-64 years: 7.6%
17
> 65 years: 6.4%

and

GDP (PPP)
GDP growth
GDP growth 20072013
Inflation
Unemployment rate

$1.3 trillion
5
5.8%
7
6.0%

Government debt
GDP ratio
GDP composition
sector of origin

to

26.1%

by

Agriculture: 14.3%
Industry: 46.6%
14
Service: 39.1%
Machinery & equipment,
chemicals,
fuels,
16
foodstuffs
Indonesian Rupiah (IDR),
freely convertible
Petroleum, tin, nickel,
natural
gas,
timber,
bauxite, copper, gold,
18
coal, silver, fertile soils

Import commodities

Currency
Natural Resources

6.4%
10
6.4%
12

IMF, World Economic Outlook Database, April 2014, www.imf.org


The World Factbook: Indonesia, Central Intelligence Agency, 2014, https://www.cia.gov/library/publications/theworld-factbook/geos/id.html
5
IMF, World Economic Outlook Database, April 2014, www.imf.org
6
The World Factbook: Indonesia, Central Intelligence Agency, 2014, https://www.cia.gov/library/publications/theworld-factbook/geos/id.html
7
IMF, World Economic Outlook Database, April 2014, www.imf.org
8
The World Factbook: Indonesia, Central Intelligence Agency, 2014, https://www.cia.gov/library/publications/theworld-factbook/geos/id.html
9
IMF, World Economic Outlook Database, April 2014, www.imf.org
10
IMF, World Economic Outlook Database, April 2014, www.imf.org
11
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
12
IMF, World Economic Outlook Database, April 2014, www.imf.org
13
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
14
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
15
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
16
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
4

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INDONESIA

Urban population
(2012)

50.7%

19

Export commodities

Literacy
(2011)

92.8%

21

Ratings

rate

Oil & gas, vegetable oils,


electrical appliances,
plywood, textiles,
20
rubber
Fitch: BBB-/ Outlook:
Stable
Moodys: Baa3/ Outlook:
Stable
S&P:
BB+/
Outlook:
22
Stable

1. Socio-Political Overview
The Republic of Indonesia was founded under the values of respect for diversity, reflected in the official
motto of the Republic: Bhinneka Tunggal Ika, or Unity in Diversity. This founding statement reflects a
political will to create a national identity comprising of a wide diversity of culture, people and geography in
a country which dimensions are illustrated below.
Indonesia is:
The 4th most populous country in the world, having a population of around 250 million people;
The 3rd largest democracy in the world following its transition into a stable and thriving
democracy since 1998;
The largest Muslim country in the world with over 80% of the Indonesian population following the
Muslim Faith;
The biggest archipelago in the world consisting of over 17.000 islands spanning three time zones.
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With around 250 million people, social diversity is an omnipresent topic when discussing the culture and
people of Indonesia, reflected in almost all aspects of society.
Religion
The constitution of Indonesia guarantees religious freedom and recognizes six religions: Islam (86.1% of
the population), Protestantism (5.7%), Catholicism (3%), Hinduism (1.8%), Buddhism (about 1%) and

17

The World Factbook: Indonesia, Central Intelligence Agency, 2014,


https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
18
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
19
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
20
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
21
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
22
Indonesia Investment Coordinating Board, 2014, http://www.bkpm.go.id/
23
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

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Confucianism (under 1%) . Both in the academic realm and in popular discourse, the Islam practiced in
2526
Indonesia is said to be inclusive and tolerant , as illustrated in a survey conducted in Indonesia by the
Indonesia Survey Circle in 2012, which found that 88.84% of the respondents favored equality among all
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religious groups .
Population
Indonesias population stands at around 250 million inhabitants, and the country records a population
28
th
growth rate of around 1% per year . Already the 4 most populated country in the world, Indonesias
ethnically diverse population has been and still is constantly growing. It is estimated that the nation will
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consist of 265 million inhabitants in 2020 and some 306 million by 2050 . Moreover, Indonesia,
especially when compared to most European states, is still a relatively young nation in terms of its
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population age, with more than 43% of the population below 25 years .
Indonesia is not only a large country in terms of its population but also in terms of its geographical area.
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It consists of more than 17,000 islands, totaling a land area of 1,904,569 km , almost equal to the
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combined land area of France, Spain, Germany, Italy and the UK . However, only around 1,200 of the
17,000 islands are permanently inhabited, and more than half of Indonesias population lives on the
Island of Java. Not surprisingly, the three biggest cities of the country are located on this island. The
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largest is Jakarta (9.121 million inhabitants and a metropolitan area of more than 28 million inhabitants) ,
which is also the capital and main financial and business centre of Indonesia. The next largest is
Surabaya (2.509 million), followed by Bandung (2.412 million). These three urban centers contribute
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Javas claim as one of the most densely populated areas on Earth . The urban share of the population in
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Indonesia is around 50%, which contributes around 74% to the national GDP , with an almost 2.5%
36
annual rate of change per year . The literacy rate (defined as persons older than 15 years who are able
37
to read and write) was 92.8% in 2013.
24

The World Factbook: Indonesia, Central Intelligence Agency, 2014,


https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
25
Achmad Munjid, Is Indonesian Islam Tolerant?, The Jakarta Post, 2012,
http://www.thejakartapost.com/news/2012/09/14/is-indonesian-islam-tolerant.html
26
Philip Shenon, A Tolerant And Inclusive Muslim Tradition Thrives, The New York Times, 1999,
http://www.nytimes.com/1999/10/21/world/a-tolerant-and-inclusive-muslim-tradition-thrives.html
27
Margareth, S. Aritonang, Indonesia More Tolerant Than Perceived: LSI, The Jakarta Post, 2012,
http://www.thejakartapost.com/news/2012/12/24/indonesia-more-tolerant-perceived-lsi.html
28
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
29
Oxford Business Group, The Report: Indonesia 2013, 2013
30
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
31
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
32
http://en.wikipedia.org/wiki/List_of_countries_and_dependencies_by_area
33
http://en.wikipedia.org/wiki/Jakarta
34
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
35
McKinsey Global Institute, The archipelago economy: Unleashing Indonesias potential, 2012
36
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
37
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

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Language
The fact that Indonesia is an extremely diverse country is also reflected by the 350 spoken languages in
existence on the archipelago. Nonetheless, since Independence in 1945, the vast majority of Indonesians
speak the official language of the country, Bahasa Indonesian. In bigger cities such as Jakarta, Bandung
and Surabaya, it is easier to find English speakers.
History
The history of Indonesia has been shaped by its strategically important position along the seaway
connecting India with the Orient. For centuries, the territory has been a place of trade, firstly among the
peoples of East Asia, then setting a perimeter for intense trade competition between colonizing powers,
attracted by its richness of natural resources.
The country was first colonized by the Portuguese in the 16th century and later by the Dutch. Their
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dominance prevailed from the mid-18 century, lasting more than two centuries, and ceasing only during
the Second World War, when the Japanese invaded and occupied the territory. With the Japanese
surrender, Muhammed Hatta and Sukarno (born Kusno Sosrodihardjo) declared Indonesias
independence on August 17th 1945. Sukarno was Indonesias first President, remaining in office until
1965, the year when he was superseded by General Suharto, following political turmoil and an attempted
coup dtat. General Suhartos regime, the so-called New Order, lasted until 1998, when the pressures
of the Asian crisis forced him to step down, clearing the way for elections and reforms and leading to a
genuine and thriving democracy.
Politics & government today
Since 1998, Indonesian politics has undergone a formidable transition from authoritarian rule to a healthy,
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vibrant and thriving democracy with recognized political stability . Both the President and the VicePresident are elected by direct popular vote, with the former being Chief Executive, the Head of State and
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Commander-in-Chief of the Armed Forces . The highest authority is the Peoples Consultative Assembly
(MPR), which meets annually to hear accountability reports from the President and government agencies,
and provides policy guidance. The MPR consists of two chambers: The Peoples Representative Council
(DPR), also frequently referred to as the House of Representatives and the Regional Representative
Council (DPD). Both members of the MPR and the President are elected for five-year terms.
The current president (2009-2014) is Susilo Bambang Yudhoyono (often abbreviated to SBY), who was
first elected in 2004 then re-elected in 2009. His two government terms have been considered stable and
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reform-minded , promoting fiscally conservative policies, which have lowered the government debt-toGDP ratio. New elections for both the MPR and the Presidency are to be held in 2014. Since SBY has
already served his maximum of two terms, these elections will result in a new president.
Within Indonesias political system, a significant amount of power lies within the governments of the
regional provinces. The so-called big bang decentralization, a reform introduced in the immediate years
after Suhartos New Order was established, was a response to a call for more self-sufficiency in many
38

Oxford Business Group, The Report: Indonesia 2013, 2013


KPMG, Investing In Indonesia 2013, 2013, http://www.kpmg.com/Ca/en/External%20Documents/investing-inindonesia-2013.pdf
40
Oxford Business group, The Report: Indonesia 2013, 2013
41
KPMG, Investing in Indonesia 2013, 2013, http://www.kpmg.com/Ca/en/External%20Documents/investing-inindonesia-2013.pdf
39

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provinces: as a result, the 34 provinces gained a high degree of political autonomy . Each province has
its own legislative body and governor, elected for a duration of five years. Presently, a significant amount
of power and administrative responsibilities lie within these provincial governments. For instance, the
minimum wages are set by the respective governor province-wide. Also, they have the autonomy to
control the provincial investment policy, reflected, for example, in the frequent obligation when investing in
certain provinces to obtain additional licenses beyond those required by the Indonesian Investment
Coordinating Board.
A more detailed dissertation on the topic can be found in the sectionSet up a business.
There are five provinces that enjoy a special status and consequently have decision power in an even
wider range of topics: Aceh (in implementing, for instance, the Sharia law as regional law), Yogyakarta,
Papua, West Papua and Jakarta.

2. Economy of Indonesia
Overview
Since the Asian crisis struck Indonesia in 1998, resulting in the subsequent downfall of Suhartos regime,
the country has not only undergone a formidable political shift from an authoritarian state to a stable and
thriving democracy, but it has also developed into an economic-powerhouse, with an impressive
macroeconomic performance. A look at the macroeconomic fundamentals of the country shows that it is
economically stable and following a sustained growth path. As such, not even the impacts of the global
financial crisis in 2008 were able to significantly harm the growth of Indonesia. In 2009 it still grew by
more than 4%, thus gaining momentum and growing by more than 6% in the following year, resulting in
an average real GDP growth rate of 6% between2007-2013 (IMF data).
Figure 1, 2 and 3: Development of real GDP, inflation and government gross debt

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Oxford Business group, The Report: Indonesia 2013, 2013

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Fitch: BBB-

Outlook: Stable

Moodys: Baa3 Outlook: Stable


S&P: BB+

Outlook: Stable

Source: IMF, World Economic Outlook Database April 2014, retrieved 18.04.2014 from
www.imf.org
The reason for the immunity of Indonesia to unfavorable economic environments is its domestic
consumer base, contributing the lions share of its GDP. With a growing population and an everexpanding middle class, this locomotive pulling Indonesias GDP growth has bestowed impressive
economic development on Indonesia.

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Economic development has also been underpinned by sound economic policies. On the fiscal side, the
government of Indonesia promoted fiscally conservative policies reducing the gross government debt-toGDP ratio from more than 90% in 2000 to less than 30% in 2013. Also, monetary authorities have
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carefully tried to contain inflation , which has been on a stable level, especially since 2007.
In the light of former, it should not come as a surprise that Indonesias sovereign credit rating has been
44
upgraded by Fitch in late 2011 and Moodys in early 2012 . For 2013-2014, Moodys, Standard & Poors
45
and Fitch foresee a stable outlook for the country, motivating even higher inbound investment flows .
Outlook
Indonesia is not completely immune from global economic trends, showing a particular vulnerability in
regards to the slowdown of the Chinese economy, which makes up much of the demand for Indonesias
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natural resources and could weaken Indonesias growth. However, the main engine of growth for the
Indonesian economy is its large domestic consumer base. The latter is estimated to continue growing,
47
both in terms of population growth rate and a continuous rise of the middle class .
In conclusion, Indonesia is likely to keep up its economic dynamics. In 2012, the business consultancy
McKinsey, projected a base of 5-6% GDP growth per year until 2030.

Structure of the Indonesian Economy


Figure 4: Composition of Indonesian GDP, 2013

Notes: Domestic consumption defined as sum of household and government consumption


Net exports defined as volume of export minus value of imports

43

Oxford Business Group, The Report: Indonesia 2013, 2013


Oxford Business Group, The Report: Indonesia 2013, 2013
45
Oxford Business Group, The Report: Indonesia 2013, 2013
46
KPMG, Investing In Indonesia 2013, 2013, http://www.kpmg.com/Ca/en/External%20Documents/investing-inindonesia-2013.pdf
47
McKinsey Global Institute, The Archipelago Economy: Unleashing Indonesias Potential, 2012
44

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Source: The Indonesian Statistics Bureau, preliminary figures for years 2011-2013, retrieved
01.07.2014 from http://www.bps.go.id/eng/
Unlike Indonesias neighbours in the region and the so-called Asian Tigers, the growth of the Indonesian
economy is largely based on a strong, domestic consumer base. This should come as no surprise given
the vast population of 250 million people of which an estimated 15% belong to the middle class (defined
48
as spending between 4$ - 20$ per day) . The contribution of domestic consumption to the total GDP, i.e.
the combined consumption of households and the government, has over the past years constantly been
exceeding 60% (see Figure 4). This has helped to shield Indonesia from adverse economic trends,
especially the global financial crisis. The following graph underpins Indonesias independency of trading
partners economic performance:
Figure 5: Comparison of export/ GDP ratio of selected countries, 2012

Source: The Worldbank, retrieved 01.07.2014 from


http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS
According to the Worldbank the value of exports was only equal to 24% of the GDP in 2012. In contrast to
that, Indonesias neighbours Thailand (75%), Malaysia (87%) and Singapore (201%, explained by the
importance and activity of Singapores port) had significantly higher export/ GDP ratios. This confirms that
unlike these economies that depend on the demand of their trading partners to a large extent, Indonesias
economy is much more self-sufficient fuelled by its own domestic consumption as motor of GDP growth.
Even though the Indonesian government is aiming at moving up the value chain by promoting policies for
processing natural resources mined in the country, the main share of Indonesias exports is still in the
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commodities field . The country is rich in petroleum, tin, natural gas, nickel, timber, bauxite, copper,
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49

Oxford Business Group, The Report: Indonesia 2013, 2013


McKinsey Global Institute, The Archipelago Economy: Unleashing Indonesias Potential, 2012

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fertile soils, coal, gold and silver . Consequently, the main export commodities of Indonesia are oil & gas,
plywood, rubber and palmoil (Indonesia is the largest producer of palmoil worldwide providing about half
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of the world supply ). On the manufacturing side, the main export products are electrical appliances and
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textiles .
Figure 6: Indonesian exports by sector, 2013

Source: Trademaps, retrieved 18.04.2014 from www.trademaps.org


Sector contribution to overall GDP
Figure 7: Sector contribution to overall GDP in Indonesia, 2013

50

The World Factbook: Indonesia, Central Intelligence Agency, 2014,


https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
51
http://www.theguardian.com/global-development/2013/sep/11/indonesia-palm-oil-destroy-forests
52
The World Factbook: Indonesia, Central Intelligence Agency, 2014,
https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

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Source: Indonesian Bureau of statistics, preliminary figures,


retrieved 28.03.2014 from www.bps.go.id/eng/tra
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Even though some 38.9% of the population is employed in agriculture , this sector only contributes
around 12% of the national GDP. Having exhibited rising productivity growth rates over the past few
54
years , the biggest share of the GDP is contributed by the manufacturing sector, mainly food and
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beverages, chemicals, automotive equipment and tobacco .
Partners
Figure 8 and 9: Indonesian export destination and import origins, 2013

53

The World Factbook: Indonesia, Central Intelligence Agency, 2014,


https://www.cia.gov/library/publications/the-world-factbook/geos/id.html
54
McKinsey Global Institute, The Archipelago Economy: Unleashing Indonesias Potential, 2012
55
The Indonesian Statistics Bureau, 2014,
http://www.bps.go.id/eng/tab_sub/view.php?kat=2&tabel=1&daftar=1&id_subyek=09&notab=3

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Source: Trademaps, retrieved 17.04.2014 from www.trademap.org


The relationship between the EU and Indonesia has historically been close and positive, and over the
past few years other countries have also been able to increase their economic ties with Indonesia.
th
Presently, the EU28 ranks 4 with a share of 7.38%, behind China, Singapore and Japan in terms of the
rd
countries from which Indonesia imports. Conversely, the EU28 is the 3 biggest export destination for
Indonesian products making up 9.5% of Indonesias total exports.

4. Trade and Investment climate


As the fastest growing G20 economy second only to China, Indonesia is a land of opportunity for
business, allowing benefits to those trading with and investing in the country. Indonesias general
characteristics can be summarized as having:
Impressive growth rates
Fiscal, monetary and political stability
An abundance in natural resources
A large domestic market
A young expansive labor force
These general elements may help to explain why Indonesia is a highly attractive destination for doing
business. This is verifiable when analyzing the Global Competitiveness Index (GCI), which ranks
countries according to their global competitiveness on the basis of various indicators, such as

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Infrastructure, labor and goods market efficiency and macroeconomic environment. The GCI is published
th
annually by the World Economic Forum. In 2013, Indonesia ranked 38 out of 148 countries, a significant
th
improvement since 2012, when Indonesia placed 50 out of 144.
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This was the biggest progression of all the G20 economies in 2013 and can mainly be attributed to
improvements in infrastructure and labor market efficiency (despite beginning from a low position).
Increased spending on infrastructure by the Indonesian government, as a result of the aforementioned
Master Plan for Acceleration and Expansion of Indonesias Economic Development (MP3EI), has
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therefore produced its first fruitful results . The overall positive performance seen on the GCI is also due
th
to Indonesias large market size (ranking 15 globally) as well as its sound macroeconomic environment
th
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(ranking 26 globally), offering historically low inflation rates and a very small government deficit .
Despite the aforementioned improvements in labor market efficiency, this area, together with weak
institutional performances as a result of high levels of corruption, remain the weakest links in Indonesias
competitive performance.
Table 2: Country comparison of Indonesia with neighbors and BRIC countries (2013)

Real
GDP
growth
Inflation
Government
Debt/
GDP
ratio (%)
GCI
overall
rank
Sources:

Indonesia

Malaysia

Thailan
d

Philippine
s

Vietnam

Brazil

Russi
a

India

China

5.8%

4.7%

2.9%

7.1%

5.4%

2.3%

1.3%

4.4%

7.7%

6.4%

2.1%

2.2%

3.0%

6.6%

6.2%

6.8%

9.5%

2.7%

26.1%

58.2%

45.3%

38.3%

55.0%

66.3%

13.4%

66.8%

22.4%

38

24

37

59

70

56

64

60

29

IMF, retrieved 17.04.2013 from www.imf.org and


World Economic Forum, Global Competitiveness Index 2013-2014,
http://www.weforum.org/reports/global-competitiveness-report-2013-2014

2014,

For detailed information on investing in and trading with Indonesia, please consult our Business
guide

56

World Economic Forum, The Global Competitiveness Report 2013-2014, 2014, http://reports.weforum.org/theglobal-competitiveness-report-2013-2014/
57
World Economic Forum, The Global Competitiveness Report 2013-2014, 2014, http://reports.weforum.org/theglobal-competitiveness-report-2013-2014/
58
World Economic Forum, The Global Competitiveness Report 2013-2014, 2014, http://reports.weforum.org/theglobal-competitiveness-report-2013-2014/

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Main opportunities
Young, expansive population
In contrast to many industrialized countries, Indonesia is a young nation., with 43.7% of the population
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younger than 24 years . Furthermore, with wage levels still significantly lower than in neighboring or
BRIC countries, Indonesia offers great opportunities in industry and production.
Abundance of Natural resources
Rich in natural resources such as petroleum, tin, natural gas, rubber, nickel, bauxite, copper, coal gold
and silver, the country is not only attractive as a production base, but also as trading partner.
Large domestic market
The population of Indonesia, standing at around 250 million people with an estimated consuming class of
15%, not only drives Indonesian growth, but also great market opportunities. The consuming class is also
expected to grow to some 135 million people by 2030, as estimated by the McKinsey Global Institute.
Figure 10: Population development prediction

Note: Consuming class is defined as population group with an annual net income of above $3,600 at
2005 purchasing power parity. Predictions for 2020 and 2030 are based on an annual GDP growth of 56%
Source: McKinsey Global Institute, The archipelago economy: Unleashing Indonesias potential,
2012

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The World Factbook: Indonesia, Central Intelligence Agency, 2014,


https://www.cia.gov/library/publications/the-world-factbook/geos/id.html

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Indonesia as a gateway to ASEAN


While Indonesia alone constitutes a high potential business country, its alliance with ASEAN further
increases its prospects. Indonesia, together with nine other member states, form an economic block with
a total market size of almost 600 million people and a progressively more integrated economic area,
moving towards the realization of an ASEAN Economic Community (AEC) in 2015. Therefore, long-term
investors in Indonesia are offered the opportunity expand their horizons beyond the Indonesian market.

To learn more please consult the section ASEAN


Challenges to doing business in Indonesia
While Indonesia offers a lot of business opportunities, some challenges still remain. The following are the
most cited issues raised by respondents of the Global Competitiveness Report:
Corruption
The most cited problem of respondents in a survey among business executives by the World Economic
Forum (Global Competitiveness Report 2013-2014) is corruption. However, recent political action in
Indonesia has contributed towards lowering corruption levels. New legal mechanisms and a strong and
60
independent Corruption Eradication Commission (KPK) have already led to several success stories.
This is reflected by the countrys recent performance in the Perceived Corruption Index, published by
Transparency International. Over roughly the last decade, Indonesia has improved its 2001 score of 19,
rd
making it the 3 most corrupt country in the world, to a significantly better score of 32 in 2013. It was
th
ranked 114 out of 177 countries, which are attributed scores ranging from 0 (highly corrupt) to 100 (very
61
clean). .
62

Excessive bureaucracy and regulatory uncertainties


Especially since the big bang decentralization reform was implemented in the years following Suhartos
New Order, regulations related to business and administrative procedures have proved burdensome.
Legal uncertainty arises from a lack of legal clarity, which leaves much room for interpretation and often
lacks technical guidelines. Furthermore, an overlap of regulations at the local, provincial and central level
636465
can occur
.
Infrastructure
66
Infrastructure underinvestment, resulting in high transportation costs, bottlenecks , congested road
networks and over-utilized ports and airports, has been a problem in Indonesia. As a result, the
government has been taking proactive steps to improve the situation. For example, 45% of total
investment in the aforementioned comprehensive policy plan MP3EI relates to infrastructure
60

Doing Business In Indonesia: 2013 Country Commercial Guide for U.S. companies, U.S. Commercial Service, 2013
Transparency International, Corruption Perception Index 2013, retrieved on 18.04.2013 from
http://cpi.transparency.org/cpi2013/results/
62
World Economic Forum, The Global Competitiveness Report 2013-2014, 2014, http://reports.weforum.org/theglobal-competitiveness-report-2013-2014/
63
KPMG, Investing In Indonesia 2013, 2013, http://www.kpmg.com/Ca/en/External%20Documents/investing-inindonesia-2013.pdf
64
McKinsey Global Institute, The Archipelago Economy: Unleashing Indonesias Potential, 2012
65
2013 Investment Climate Statement, p. 1
66
Oxford Business Group, The Report: Indonesia 2013, 2013
61

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67

investments . Given the active promotion of infrastructure investment in terms of Private-PublicPartnerships, this also offers many opportunities for European companies.

5. Indonesias Economic Master Plan


The Master Plan for Acceleration and Expansion of Indonesias Economic Development (MP3EI) is a
comprehensive policy roadmap announced by the Indonesian Government in 2011. It aims to help
Indonesia become one of the ten largest economies in the world by increasing the per capita GDP from
68
$3000 to $15,000 by 2025 .
This will be achieved by three methods: firstly, identifying six distinct economic corridors in Indonesia,
based on respective comparative advantages; secondly, by improving human resources, science and
technology; and thirdly, by increasing the connectivity within Indonesia and throughout the ASEAN region
69
by investmenting in infrastructure . The implementation of the MP3EI will be coordinated by the
Committee on Economic Development, Acceleration and Expansion of Indonesia 2011-2025 (KP3EI), a
newly established body.
The implementation of the plan is split into the three phases shown in the flowchart below:
Figure 11: Implementation phases of the MP3EI

67

Oxford Business Group, The Report: Indonesia 2013, 2013


Strategic Asia, Implementing Indonesias Economic Master Plan (MP3EI): Challenges, Limitations and Corridor
Specific Differences, 2012
69
Strategic Asia, Implementing Indonesias Economic Master Plan (MP3EI): Challenges, Limitations and Corridor
Specific Differences, 2012
68

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Based on: Coordinating Ministry for Economic Affairs Republic of Indonesia, Masterplan for
Acceleration and Expansion of Indonesia Economic Development, 2011
Six economic corridors
The MP3EI divides Indonesia into six distinct economic corridors, according their comparative strength.
These corridors and their respective advantages are as follows.
Figure 12: Economic Corridors according to MP3EI

Source: Coordinating Ministry for Economic Affairs Republic of Indonesia, Masterplan for
Acceleration and Expansion of Indonesia Economic Development, 2011, p. 36

Table 3: Economic Corridor Purposes according to MP3EI


Java Economic Corridor
Kalimantan Economic Corridor
Sulawesi Economic Corridor
Bali-Nusa Tenggara Economic
Corridor
Papua-Kepulauan Maluku
Economic Corridor
Sumatra Economic Corridor

Driver for National Industry and Service Provision


Centre for Production and Processing of National Mining and
Energy Reserves
Centre for Production and Processing of National Agricultural,
Plantation, Fishery, Oil & Gas and Mining
Gateway for Tourism and National Food Support
Centre for Development of Food, Fisheries, Energy, and National
Mining
Centre for Production and Processing of National Mining and
Energy Reserves

Infrastructure development: opportunities for EU companies


In order to increase connectivity within Indonesia, investments in physical infrastructure are planned,
70
taking up approximately 45% of the MP3EI investments . Of these, only 7% are foreseen to be provided
70

Oxford Business Group, The Report: Indonesia 2013, 2013

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directly by the government, while much bigger shares are expected to come from State-Owned
71
Enterprises (25%), the private sector (22%) and PPPs (Public-Private Partnerships) (19%) .
These PPPs provide infrastructure through a cooperation agreement between a governmental body and a
72
business entity responsible for construction, management activities and maintenance . Therefore,
infrastructure development under the MP3EI offers ample opportunities for private entities.

71
72

Oxford Business Group, The Report: Indonesia 2013, 2013


Oxford Business Group, The Report: Indonesia 2013, 2013

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II. EU-Indonesia Relations


1. Political and Economic Overview
In spite of a certain degree of disparity between the EU and Indonesia, both sides share common values:
a similar motto (United in Diversity for the EU and Unity in Diversity for Indonesia); a belief in a
multicultural and pluralistic society; a commitment to democracy and human rights, and a dedication to
73
multilateralism and regional cooperation.
The political and economic relations between the EU and Indonesia are generally healthy. Indonesia
74
already enjoys trade preferences with the EU under the Generalized Scheme of Preferences . In an
attempt to deepen the relationship between these two bodies, the EU and Indonesia signed a partnership
and
cooperation
agreement
in
2009
(PCA

Hyperlink
to
http://eeas.europa.eu/delegations/indonesia/documents/eu_indonesia/eu_idnpca_en.pdf).
This
st
partnership agreement came into force on the 1 of May 2014 and will intensify EU-Indonesia relations.
Besides confirming and deepening the shared commitment of the two partners, the PCA will act as an
instrument of bilateral cooperation in numerous sectors, such as migration, education, climate change,
75
energy and customs cooperation . The EU-Indonesia PCA is the first agreement of its kind between the
EU and a Southeast Asian partner. The importance the EU accords in deepening the relationship with
Indonesia has been expressed by Catherine Ashton, the EU High Representative for Foreign Affairs and
Security Policy, also the Vice President of the European Commission:
I warmly welcome the entry into force [] the EU-Indonesia Partnership and Cooperation Agreement
(PCA). Indonesia is a key partner in the region of strategic importance for the EU and an increasingly
important player on the global scene. We look forward to implementing the PCA together with our
76
Indonesian partners in order to forge a more mature and broad-based relationship .
The two partners will also attempt to tap their mutual economic potential. In 2009 Commission President
Jose Manuel Barroso and the Indonesian President Susilo Bambang Yudhoyono set up a vision group,
77
tasked to explore and identify how the economic relationship can be deepened . The vision group
consisted of academics, government officials, representatives of business support organizations and
government representatives of both Indonesia and the EU.
The vision group concluded that EU-Indonesia economic ties were generally healthy, but offered clear
potential
for
further
depth.
Their
recommendations
(
Hyperlink
to
http://eeas.europa.eu/delegations/indonesia/documents/press_corner/20110615_01_en.pdf)
were
handed over to their respective governments in 2011. Their key conclusions were that an ambitious

73

European
External
Action
Service,
EU
Delegations:
Indonesia,
retrieved
from
http://eeas.europa.eu/indonesia/index_en.htm
74
European
Commission:
DG
Trade,
Countries
and
Regions:
Indonesia,
2014,
http://ec.europa.eu/trade/policy/countries-and-regions/countries/indonesia/
75
European External Action Services, Press Release: The EU-Indonesia Partnership and Cooperation Agreement
Enters Into Force, 01.05.2014
76
European External Action Services, Press Release: The EU-Indonesia Partnership and Cooperation Agreement
Enters Into Force, 01.05.2014
77
European
Commission:
DG
Trade,
Countries
and
Regions:
Indonesia,
2014,
http://ec.europa.eu/trade/policy/countries-and-regions/countries/indonesia/

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bilateral agreement between the EU and Indonesia should be established, especially given the strong
complimentary nature of the Indonesian and the European economies.
This Comprehensive Economic Partnership Agreement (CEPA) would depict a Free Trade area-plus-plus
agreement that would tap the potential of this complementarity based on the following architecture:

Market
Access

CEPA
Facilitation
(Trade &
Investment)

Capacity
Building

78

Since then, there have been intensive talks between the EU and Indonesia in preparation for a CEPA .

2. Trade and investment

Data for trade given for year 2013, data for FDI given for 2012
Source: European Commission, DG Trade, Countries and Regions Indonesia, 2014, retrieved
from http://ec.europa.eu/trade/policy/countries-and-regions/countries/indonesia/

78

European
Commission:
DG
Trade,
Countries
and
http://ec.europa.eu/trade/policy/countries-and-regions/countries/indonesia/

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Regions:

Indonesia,

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In 2013, trade between the EU28 and Indonesia almost exceeded its all-time high of 2012 (25 billion)
reaching more than 24 billion. European exports alone increased from 7.4 billion in 2011 to 9.7 billion
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in 2013, making the EU28 Indonesias fourth largest trade partner behind Japan, China and Singapore .
With regards to Foreign Direct Investment (FDI), the EU ranked as the third largest investor in Indonesia
in 2012, providing some 1.8 billion revenue, just behind Singapore and Japan.
Even with these record numbers, there is still much trade and investment potential between the EU and
Indonesia. Even though Indonesia accounts for around 40% of both the population and GDP of ASEAN,
only some 10% of both the total EU FDI and EU exports entering ASEAN are flowing into Indonesia. This
shows that, especially when compared with Indonesias neighbors such as Singapore, Malaysia and
Thailand, the EU-Indonesia relations have great future potential.
A look at the mutual trade flows between Indonesia and EU28 shows that the two economies are strongly
complementary. The main products exported from Indonesia into the EU are commodities (e.g. palm oil,
rubber), electronic equipment and textiles. Conversely, the main products imported to Indonesia by the
EU28 are machinery, aircraft parts and electronic equipment.
Figure 10 and 11: EU-Indonesia Import/Export Product distribution (2013)

79

European
Commission:
DG
Trade,
Countries
and
http://ec.europa.eu/trade/policy/countries-and-regions/countries/indonesia/

www.eibn.org
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Regions:

Indonesia,

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Source: Trademap, retrieved 17.04.2013 from www.trademap.org

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III. Indonesia industries overview


1. Agriculture
Indonesia is the fourth most populous country in the world. Developing the agriculture, food and
beverages sector is hence one of the industrial development priorities set by the Indonesian Government.
To foster development in this vital sector, a strong cooperation and coordination among all stakeholders
is needed, be they public or private actors, domestic or foreign companies. This idea has been
established by the Government of Indonesia, inspired by the World Economic Forums New Vision for
Agriculture, together with global and Indonesian companies and key stakeholders from civil society and
international organisations.

Agriculture is an important sector for Indonesia, not only in helping the country to secure its food security,
but also in the spreading of wealth and prosperity to rural areas. At the same time, Indonesias population
is expected to increase from 247 million people in 2013 to 293 million in 2050. Constraints in the
maintainance of arable land and water supplies and the likely impact of climate change pose additional
challenges to feeding a larger population.

Given the above challenges, Indonesia must double its agricultural output to meet the needs of its nearly
300 million people in 2050. This should be carried out in a sustainable way by advancing access to the
latest international agricultural technologies and by exploring possibilities for private investment to help
farmers boost production and secure a more stable income, and to ensure that the Indonesian people
have access to sufficient, safe and affordable food.

2. Infrastructure
Indonesia has long recognised the need for investment in its infrastructure and the wish list extends to
hundreds of worthy projects and many billions of dollars to finance them. The challenge of legal certainty
for foreign investors and the priority issue of land acquisition, particularly for much needed toll roads and
power stations still holds back development. Without adequate road connectivity to provide a functional
hinterland network, the upgrades to airports and seaports become somewhat academic. The optimism
put forward in the last reporting period has had to be tempered by the slow progress made over the issue
of land acquisition.

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Power requirements are being addressed, albeit slowly, and the State Electricity Company (PLN) has
made some progress towards improving the investment climate. However, additional transmission
capacity needs a more positive recognition over the year now that, in order to attract investment for
renewable types of energy, there needs to be an efficient distribution system and that remains far from
complete. There has been increasing recognition that in order to attract investment for renewable types of
energy, such as geothermal, improvements in the terms and conditions and returns for investors are
required, but overall progress has been slow.

President Yudhoyono signed the Governments Draft Bill on Land Acquisition in December 2010 and this
was submitted to Parliament in early 2011, the 2010 deadline having been missed. While it was hoped to
pass the Bill by mid-2011, the continuing debate in Parliament pushed agreement back to mid-December
2011 with the Law (No 2/2012) being effected in January 2012. The necessary following Presidential
decree to activate implementation was passed in August 2012 and it was expected that by 2013 the law
and regulations would receive their first tests but, to date, these remain untried. The importance of the law
is that it sets out a clear procedure and time limits for objection against a given land purchase for a
proposed infrastructure project to overcome the unlimited timetable for objection that has previously
prevailed. There is concern, however, over the apparent unattractive nature of the proposed
compensation scheme.

There is an ongoing inadequacy of the existing infrastructure, particularly in terms of the road network,
and the significant negative impact this has on industrys cost of doing business in Indonesia. There are
significant delays in sea, rail and road transportation, with road transport now the most costly in Asia, and
seaport operations that compare unfavorably with those of neighboring countries.
The double digit growth in both domestic and international air travel has highlighted the complete
inadequacy of the airport infrastructure across the country and its increasing inability to cater for the
burgeoning number of aircraft being purchased by the domestically based air carriers in order to meet
demand. There has been recent recognition by the Ministry of Transport that it needs considerable help in
airport operations and management of these has been opened up to private sector interest.
A number of factors have contributed to this continuing overall unsatisfactory condition: the ratio of
infrastructure spending to GDP continues to be inadequate; the funds that do exist are still often poorly
allocated to peripheral services rather than physical infrastructure; disbursement of funds through the
likes of the Public Works Department is slow in any budgetary year, and the enforcement of standards

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and regulations that control the quality of infrastructure built are weak. All these areas must continue to be
addressed assiduously by the relevant Government departments, even though the budget allocation for
infrastructure spending for 2013 has fallen well short of requirement. This situation has been
compounded by the reluctance of the Government to remove, if not certainly reduce, the distorting
influence of energy subsidies. This issue was addressed in mid-2013 but more remains to be done as the
main beneficiaries are not the intended poorer sections of society. Budgetary savings from these
subsidies would make a noticeable difference if applied to infrastructure investment, but current savings
are badly affected by the deterioration in the value of the Rupiah against the dollar, fuel being purchased
in dollars.

In the water sector, the Government is preparing a new medium term 5 year plan to 2019 with the vision
of achieving 100% of the deemed Millennium Development Goal targets for water supply by the end of
the period. However, the forecast budget allocation for this period will still leave a substantial funding
shortfall, in the order of US$ 20 billion, which will have to be found from private sector or other sources.
There is to be a greater focus than before over this period on sanitation projects, but once again there will
require to be considerable support from private sector and bi/multi-lateral sources.
Earlier, in recognition of budgetary shortfalls and the continuing difficulty to attract private sector funding
and, in order to bolster flagging growth in the many industries that have evolved on the back of heavy
Japanese investment over a number of years, particularly in western Java, the Japanese Government
signed a USD24 billion loan agreement in 2011 with the Indonesian government to fund targeted
infrastructure. The prime focus of this is on the Greater Jakarta/ western Java area, with sea and land
transportation and power being particularly indicated. This loan potentially makes a valuable contribution
towards the amount that the Government has calculated as being required from non-budgetary sources
for the current and ensuing 5 year period, estimated to be in the order of USD150 billion or more.
Japanese funding support is now being applied to the feasibility stage of both seaport (Cilamaya) and
airport (Karawang) projects in West Java.

Several other governments have also signaled their interest in providing funding support for infrastructure
projects. This may take some pressure off the amount of funding that the Government is still hoping for
and needs from private sources through various mechanisms. While Public-Private Partnership (PPP)
arrangements have been emphasized, there has been increasing recognition that the PPP approach is
not leading to adequate project delivery. Much of this can be ascribed to inadequate project preparation

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and a lack of understanding of the terms and conditions required to attract private sector project funding.
Furthermore, a number of required projects would be better delivered by normal, well-tried methods.
Over the past few years, the Government has introduced some special organizations or arrangements to
ease the facilitation of specific infrastructure projects. These are the Indonesia Infrastructure Fund (IIF),
which also incorporates funding from the multilateral and some bilateral sources along with government
inputs and which has been involved in large power projects, the Sarana Multi Infrastructure (SMI), and the
relatively new Indonesia Infrastructure Guarantee Fund (IIGF), which has been supporting the
development of some main water projects. It had been hoped that these would have been awarded in the
course of 2013 but lack of viability under the original terms and conditions has caused delay. This lack of
viability highlighted the need to introduce a new mechanism, the Viability Gap Fund, to provide additional
government-led funding in order to establish project feasibility and thence to allow sub-viable projects to
be awarded and proceed. A Revolving Fund to ease the acquisition of land for toll road concessions has
been in operation for a few years and been applied for some ongoing toll road developments. Discussion
is underway over the possible introduction of a municipal bond scheme. As mentioned above, the new
Land Acquisition law, promulgated in January 2012, two years later has yet to be put to the test and
projects in place or in preparation stage are still working on the basis of the old law.
Arguably the most important step that the Government has taken has been the unveiling in mid-2012 of
its 6-corridor economic development plan, MP3EI, which has divided the archipelago into 6 main selfcontained areas for economic expansion. Within this significant framework document, 22 economic
development targets have been highlighted, such as education with particular attention to science and
technology, agriculture, tourism and very importantly infrastructure, without which many of the other goals
could not be achieved. The plan recognises that Indonesia cannot optimise its potential without uplifting
the economic development of the regions outside Java. It also will heavily rely on the political leadership
of the regions to facilitate delivery. It is recommended that potential European investment interest take
note of this and the opportunities that could be expected to emerge during implementation of the 6corridor plan. However, it has also become clear that a significant uplift in regional skills levels is required
before these local governments will be able to make the standard of contribution needed to match any
interested outside investment focused on infrastructure.

3. Cosmetics
The regulatory and administrative situation for cosmetics has significantly improved since 2010, as
Indonesia has now moved to Notification instead of Registration for cosmetics products. This aligns

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Indonesia with the rest of the ASEAN member countries in implementing the ASEAN Cosmetic Directive
(ACD). This facilitates dramatically access to the market, as instead of a long and unpredictable
registration lead time of up to 15 months, the new system allows for launching in about one to two
months.

The sales of cosmetics in Indonesias urban areas for the first half of 2013 was increased by 9.4 percent
to Rp 606 billion (US$53.8 million) compared to the same period in 2012 (Nielsen Indonesia 2013
Survey). Rural areas in Java also show huge potential in cosmetics sales, as cosmetics sales in the rural
areas of Java also jumped by 27.5 percent year-on-year to Rp 82 billion in the first half of 2013. This
demonstrates that there are great opportunities for the cosmetics producers to maximize the potential of
the industry.

4. Property
Indonesias property industry has been booming in recent years, with rising profits for property companies
and soaring property prices throughout 2012.
st

In the 1 2

nd

quarter of 2013, the strong economy and improved investors sentiment have significantly

increased the demand for office space especially in Jakartas CBD area. Meanwhile, rising domestic
consumption has encouraged retailers to expand their business, leading to higher occupancy levels and
rental rates of retail space. The countrys improved tourism sector has also stimulated hotel development
projects.
Although towards the end of 2013 and 2014, the property sector has experienced slow movement
because of the increase in the bank interest rate, the impact of BI policy on Loan to Value (LTV), and
inflation but analysts believe that the property sectors will continue to grow.

5. Energy
Indonesia is endowed with some of the worlds largest reserves of fossil fuels and, as the fourth most
populous country in the world, with an annual growth rate of around 6% since 2010, the country has
become an established and crucial player in the worlds energy markets. Furthermore, Indonesias
domestic energy consumption surged by more than 50% over the past decade on the back of an
emerging consumer class.
However, the country struggles to provide electricity to its growing economy. The challenges mainly
derive from Indonesias geographic complexity, the unavailability of electricity imports, and the reluctance
to rely on diminishing domestic oil supplies that fuel off-grid diesel generators on the nations 6,000

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inhabited islands. It is noteworthy that, although Indonesia is one of Southeast Asias biggest economies,
it has one of the lowest electrification rates in the region.
Over the coming decade, Indonesias energy demand will continue to increase due to population growth
as well as rapid economic and industrial development. Therefore, Indonesia seeks massive power
capacity increases, and recently embarked on an ambitious plan to develop at least 55.3 GW of new
capacity and at least 49,299 kilometres of new transmission lines within the next decade.
In addition, Indonesia aims to redirect and diversify its energy mix. In order to mitigate the environmental
impact of energy use, Indonesia plans to reduce the utilisation of fossil energy and to increase the
renewable energy in the energy mix target, and also to optimise the energy efficiency of all activities from
the exploration side to the end users. By 2025, the national energy strategy aims for alternative sources
to account for 17% of energy needs, with the rest of demand fulfilled by coal (33%), natural gas (30%)
and oil (20%).
To achieve a continuous and environmentally sustainable growth, a comprehensive development plan
including massive financial and technological investments is needed.

Oil & Gas


Over the last 4 decades, Indonesia was characterized by its relatively stable and well-understood
regulatory framework including the development of the Production Sharing Contract (PSC) model.
The basic principle of the Production Sharing Contract is a contract between the Government of
Indonesia and a foreign Oil & Gas (O&G) company for oil and gas exploration and exploitation activities
which defines how to share the production if a commercial discovery is made. The O&G Company
carries all exploration and development costs and is entitled to recover its costs before the profit is shared
with the government. This is called Cost recovery.
The age of stability in the O&G sector has likely ended, as O&G production in Indonesia is emerging from
mature fields and has been in decline for a decade.
Oil and gas remains a leading sector in which to sustain Indonesian growth, with revenue still being the
largest contributor to the countrys budget.
For this reason, government efforts to stimulate exploration and developments in the sector are required.
While, for investors, the capability to understand the increasingly complex oil and gas business
environment in Indonesia continues to be of vital importance.
For several years now, the investment climate in this energy sector has been deteriorating as a series of
government regulations have impacted the profitability of on-going or future developments and

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operations. Several recent government decisions have impacted the key investment drivers of the O&G
operators, such as cost recovery and explorations costs, and have generated concerns around contract
sanctity and the level of returns on investment for increasingly complex developments.
The business climate has further deteriorated with the disbanding of BPMigas as well as when some PSC
have faced criminalization of their industrial issues.
However, one can perceive some positive indicators coming from the Government; these main concerns
mentioned above are well-known and have been extensively discussed with the authorities.

It is

expected that the long-awaited announcement of the new O&G law will address these concerns and
further modify the upstream regulation framework allowing confidence to return for foreign companies to
invest in new projects.

Power sector
Significant progress has and is being made in improving access to modern energy services. Indonesia
lifted its electrification rate from 53% in 2002 to 70% in 2011. Production of electric power in 2011 totaled
183,421 GWh, an increase of 8% over the 2010 output.
The Government has the objective to bring the electrification ratio from the actual figure of 72% to the
challenging rate of 90% by 2021.
To do so, some milestones must be met:
Add new generation capacity up to 90 GW (USD 68 billion), 19% of which is planned to be
undertaken by Independent Power Producers (USD 18.7 billion);
Enlarge the grid with ambitious transmission projects (such as Java-Sumatra undersea link
cable), and substation enhancement (USD 15 billion);
Rationalize and expand distribution system (USD 13 billion);
In rural areas and islands, deploy renewable sources of energy and innovative technical
solutions, such as micro-grids.
Demand for electricity in Indonesia will almost triple between 2001 and 2035, averaging a growth of 4.8%
annually. In this scenario, it is already undergoing a large shift towards coal-fired generation, driven by its
relative low cost and abundance, while fuel oil is currently being phased out.
With the State Budget stretched thin from growing energy subsidies, there is a lot of pressure to shift new
installed capacity to the private sector, as demonstrated by the Fast Track Program II, reserving 63% of
all projects for IPP development.

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Renewable Energy
Indonesias primary energy supply is heavily dependent on fossil fuels; oil accounts for 45%, while natural
gas and coal each account for 26%. This is posing great problems, especially since Indonesia became a
net oil importer 10 years ago with only 12 years of reserves left.

At the same time, energy demand is

expected to grow by about 8-11% depending on the region according to the National Electricity General
Plan (RUPTL). Thousands of inhabited islands and limited interconnection between local grids add to the
challenges.
Consumer electricity prices, especially outside the Java-Bali grid where electricity is often generated by
diesel generator sets, are generally below generating cost. This results in an annual loss of 90 trillion
IDR; a loss covered by the Ministry of Finance and accounting for 5.5% of the total Indonesian State
Budget. To reduce this burden, and to improve the overall sustainability of energy supply, the Indonesian
Government has set clear renewable energy share targets and has identified the vast potential of
renewable energy. This potential is far greater than current and expected future demand. To date, the
share of renewable energy accounts for only 5%, mainly from hydropower sources. The Government of
Indonesia is committed to increasing the renewable energy share to 17% by 2025 (PRESIDENTIAL
REGULATION NO. 5/2006).
A framework has been put in place to support the development of the renewable energy potential by
defining prices for renewable electricity and by simplifying the contracting procedures. In general, the
Government and PLN are eager to promote and expand renewable energy supply.
However, the pace of project implementation remains disappointing, mainly due to out-dated tariffs and
insufficiently attractive tariff structures as well as elaborate procedures that have room for further
simplification.

9. Transport and Logistics


Indonesias overall position in the World Bank Logistics Performance Index (LPI) continues to improve
(Table 1). However, that does not mean that the sector have performed efficiently. High logistics costs
(calculating amounting to almost 26% of national GDP) exhibited a far from efficient, favourable
performance. According to a study by the Bandung Institute of Technology (ITB), the high logistics cost in
Indonesia is mainly caused by high transportation costs.

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Further analysis of the World Banks LPI also reveals that Indonesia performed relatively low compared to
its neighbouring countries in South East Asia. Figure 1 shows that Indonesias LPI rank is behind those
of Singapore, Malaysia, Thailand, the Philippines, and Vietnam.

Table 1. Indonesias Logistics Performance Index: 2007, 2010 and 2012


2007

2010

2012

LPI Rank

43

75

59

LPI Score

3.01

2.76

2.94

Customs (Score)

2.73

2.43

2.53

Infrastructure (Score)

2.83

2.54

2.54

International Shipments (Score)

3.05

2.82

2.97

Logistics Competence (Score)

2.90

2.47

2.85

Tracking and Tracing (Score)

3.30

2.77

3.12

Timeliness (Score)

3.28

3.46

3.61

Source: World Bank

Less than conducive regulatory framework, low infrastructure quality, and scarcity of adequately skilled
logistics professionals were among the primary problems that continuously hamper the development of
an efficient transport and logistics sector in Indonesia. Companies face difficulties in complying with
recent regulations and were only provided limited guidance from the relevant Ministries and/or local
business associations. In addition, slow implementations of MP3EI and Blueprint on National Logistics
create further delays in resolving critical infrastructure issues.

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Figure 1. Logistics Performance Index (LPI) Score in South East Asia: 2007, 2010 and 2012
Vietnam
Thailand
Singapore
Philippines
2012
Myanmar

2010

Malaysia

2007

Lao PDR
Indonesia
Cambodia
0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Source: World Bank

Nonetheless, Indonesias logistics sector still offers huge potential. The sector has been growing steadily
80

at 12.5% CAGR since 2007 . It also provides an increasing contribution to national economy. According
to Statistics Indonesia (BPS), the transport and logistics sector contributed approximately 4% of GDP
throughout the years 2004-2012. In order to increase efficiency and competitiveness of transport and
logistics sector, all stakeholders must collaborate in a coordinated manner to address the challenges of
the sector.

9. Pharmaceuticals
The Asia-Pacific pharmaceutical industry has been continually growing in recent years, driven by rising
healthcare and pharmaceutical demands. The pharmaceutical sector in Indonesia is also growing rapidly,
above average compared to pharmaceutical market growth elsewhere in the region. However, challenges
remain, namely regulatory and regional challenges presented by the size and geographical make-up of
Indonesia.

80

Frost and Sullivan

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Indonesia has an extensive generic market, which accounts for an estimated 75% share of the total
pharmaceutical market. The market consists of approximately 200 companies including four state-owned
companies and around 35 foreign-owned companies. Despite Indonesias enormous manufacturing
capabilities, the lack of Research & Development in domestic companies has become an obstacle to
developing an innovative pharmaceutical industry in Indonesia.

Total expenditure on health in Indonesia is estimated at being currently between USD 150 per capita per
year, around 3% of GDP (WHO 2012 figures). The population of the elderly is estimated to increase in the
next 5 years and the Indonesian population is increasingly moving to urban areas. Less than 50% of the
population is covered by health insurance, with approximately 45%- 55% still paying out- of- pocket
insurance.

Indonesia imports over 90% of raw materials used in pharmaceutical manufacturing, emphasising that its
dependence on the overseas industry is high, with approximately 70% of the imported raw materials
coming from China. Pharmaceutical products are one of the EU's most important export products to
Indonesia, whereby exports from the EU grew by 72% (value) in 2008 compared to 2005.
Growth in Indonesia by the end of 2013 is projected to be weaker than that of last year, particularly
because of the value of the Rupiah IDR against the US Dollar. This may lead some pharmaceutical
companies to review their expansion plans. In 2012, the market size of the pharmaceutical industry in
Indonesia was estimated to be worth around USD 4.6 billion, and forecasted to grow to USD 7.4 billion by
2015.

However, the partnership between the EU and Indonesia is strong, with EU - Indonesia bilateral trade
accounting for approximately USD 13,780 billion by 2013 (Center of Data and Information, Ministry of
Industry). The EU is one of the top three investors in Indonesia. For the first three quarters of 2013, the
EU made investments worth nearly USD 2.04 billion in Indonesia. The EU pharmaceutical market has
also grown substantially over the last 10 years.
It is clear that universal healthcare coverage, implemented in January 2014, will boost the generic
medicine market. The potential growth of the generic market is estimated at 20-30% in Q4-Q6 of 2014.
Generic medicine pricing will also be affected by increased competition.

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It is important to look at how opportunities in the healthcare and pharmaceutical sectors can be
developed, and how a win-win situation can be created for both Indonesia and the EU in an agreement
on investment and cooperation in the technology and pharmaceutical sectors.
The Ministry of Health is working hard to increase its budget to improve healthcare facilities. It is important
to look at how to develop regulations, with the Government currently developing the healthcare system
and the standardisation of the quality of healthcare, health workers, medical devices and regulation of
fees.

Indonesia is an attractive market for the EU pharmaceutical industry, while EU companies are set to
assist the Indonesian industry in becoming a major supplier and exporter of drugs as well as new herbal
(jamu) products.

The current situation shows that the pharmaceutical industry is growing at 15-16 % going forward to
2016. This growth is based on an increased awareness and understanding of healthcare, and
Government health spending, which is now estimated at only approximately 2.5% but, by 2025, is
projected to increase to almost 5%.

Opportunities for the pharmaceutical industry will likely arise from the growing middle classes, growth in
GDP, increasing health awareness, strong economic growth, and a shift in spending powers of the
Government. By 2020, it is estimated that half of the population - 30 million people- will be part of the
middle class. With limitations placed on foreign ownership of companies in Indonesia and with restrictions
placed on the import of certain goods into Indonesia, investment in the pharmaceutical market remains
relatively untapped and the potential to expand and develop the sector is plentiful.

10. Human Resources


Labor productivity continues to be one of the primary challenges in Indonesias economic development.
Although, on average, labor productivity grows by 4.5% per year

81

(Figure 1), gains from productivity

were deteriorating (Figure 2). Indonesias labor productivity is also lagging behind other ASEAN Member
States in almost all sectors in the economy (Figure 3). Gap between demand and supply of skilled labor,
as well as the absent of conducive policy are amongst primary factors that hampered labor productivity in
Indonesia.
81

Ministry of National Development Planning (BAPPENAS)

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Aligned with increasing the national economy, the demand for educated and skilled labor is also rising.
However, the supply of skilled labor in the market is still relatively limited. Approximately 65% of
Indonesian labor force originates from high school level, senior high school, or primary school
82

graduates . As a consequence, there is a large share of informal workers in the labor market and, with it,
a skill mis-match problem.

Figure 1. Growth of Labor Productivity in Indonesia: 1999-2011 (%)


25%
20%
15%
10%
5%
0%
-5%
-10%
-15%

Agriculture

Industry

Service

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

-20%

Total

Source: Ministry of National Development Planning (BAPPENAS) presentation at EuroCham Indonesia


Quarterly Briefing, 18 September 2013

82

CEIC Database, 2013

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Figure 2. Average Productivity Growth by Sector: 2000-2011 (%)

Source: Ministry of National Development Planning (BAPPENAS) presentation at EuroCham Indonesia


Quarterly Briefing, 18 September 2013

Figure 3. Value Added per Worker in South East Asian Countries (in 2005 PPP$)
1995

2005

2010

14000
12000
10000
8000
6000
4000

Vietnam

Lao PDR

Malaysia

Thailand

China

Phillippines

Indonesia

Mongolia

Cambodia

2000

Source: World Development Report 2013 Core Statistical Tables, I2D2

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III. Indonesia Industries Overview
The material was retrieved from the Eurocham Annual Position Paper 2013
Disclaimer
The figures in this document correspond to EIBNs best estimate of the value of the corresponding variables. Although due care was taken in the preparation of this content,
EIBN makes no warranty as to its accuracy or completeness and is not to be deemed responsible for any error or loss resulting from its use. Other organizations quoted
herein are in no way responsible for the content of the report or the consequences of its use.

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