Inquiry into the growth potential in Australia's trade and investment relationship with Indonesia

Submission 22

Submission to the Joint Standing Committee on

Trade and Investment Growth

Australia's Trade and Investment

Relationship with Indonesia

Department of Economic Development, Jobs,

Transport and Resources

February 2017
 Inquiry into the growth potential in Australia's trade and investment relationship with Indonesia
Submission 22

Australia's Trade and Investment Relationship with

Indonesia

Overview

The Victorian Government welcomes the opportunity to make this submission to the Joint Standing
Committee on Trade and Investment Growth Inquiry into the growth potential in Australia’s Trade
and Investment Relationship with Indonesia.

Indonesia is an increasingly important regional economic partner for Victoria and the Victorian
Government is committed to building on and strengthening the relationship. Indonesia is a major
market for engagement due to its significant rate of economic growth, rise in discretionary spending,
close geographical location and strong potential as a trading partner across multiple sectors. The
decision to re-open the Jakarta Victorian Government Business Office in 2013 is recognition of the
growing importance of Indonesia as an export destination and investment partner. In particular,
Victoria’s food and fibre, international education and tourism sectors are increasingly capitalising on
growing opportunities in the Indonesian market.

The Victorian Government supports both the Australian and Indonesian Government’s efforts
regarding the proposed Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-
CEPA), which will build on the existing ASEAN–Australia-New Zealand Free Trade Agreement
(AANZFTA). A comprehensive and robust free trade agreement can deliver significant opportunities
for both Australian and Indonesian businesses. Additionally we also welcome the opportunity the
proposed Regional Comprehensive Economic Partnership offers to deepen commercial ties with
Indonesia and the broader region.

The Victorian and Indonesian Economic Relationship

Merchandise exports
As the 9th largest merchandise export market and 11th largest two-way merchandise trading partner,
valued at $2.3 billion in 2015-161, Indonesia is a significant market for Victoria. Victoria’s
merchandise trade represents 22 per cent of Australia’s merchandise trade with Indonesia. Victoria
accounts for 96 per cent of Australia’s dairy exports and close to 40 per cent of beef exports (fresh,
chilled or frozen) to Indonesia.

In 2015-16, Victoria’s merchandise exports to Indonesia were valued at $715 million, including milk,
cream, whey and yoghurt ($132m), beef ($123m), fruit and nuts ($73m), wheat ($51m), other
primary plastics ($39m) and edible products and preparations ($38m). The value of Victoria’s goods
exports peaked at $804 million in 2013-14, with wheat accounting for close to 30 per cent of this.2

1
DFAT STARS Database, based on ABS Cat No 5368.0, June 2016 data.
2
DFAT STARS Database, based on ABS Cat No 5368.0, June 2016 data.

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Submission 22

Australia's Trade and Investment Relationship with

Indonesia

Services exports and investment

Tourism
Indonesia is a growing source of tourism into Victoria, currently Victoria’s 10th largest source of
International Overnight Visitors, with 56,000 for the year ending June 2016. Visitor numbers to
Victoria have been growing at an average of almost eight per cent over the last five years.

Indonesian visitor expenditure in Victoria has increased at a rate of 6.2 per cent on average per
annum over the period June 2011 to June 2016, to reach $230 million in the year ending June 2016.
Over half of all Indonesian visitors to Victoria travelled for a holiday (53 per cent), while 21 per cent
were in Victoria to visit friends and relatives and 12 per cent were education related visitors.

International Education
As of December 2015, there were 19,300 Indonesian student enrolments at Australian educational
institutions, with 5,160 (26.7 per cent) at Victorian based institutions. Student enrolments from
Indonesia are currently the 7th largest group in Victoria, however growth has been relatively flat in
recent years, dropping from 8,124 in 2002 when Indonesian student enrolments were the 2 nd largest
group. The majority of student enrolments from Indonesia (72.5 per cent) are in higher education
courses, with 14 per cent of enrolments in the VET sector.

Student diversity is important in delivering an enriching experience in Victoria’s education sector.

Victoria’s Indonesian student cohort, while not the largest, is significant to Victoria. Highly regarded
institutions such as the Australia-Indonesia Centre based at Monash University complement
Victoria’s education ties with Indonesia.

Inward Investment
Globally, Indonesian foreign direct investments have largely been strategic asset seeking,
encompassing risk diversification and security (food, resources, manufacturing inputs). Increasingly
investments seek to build brand image or enable technology transfer. Indonesian investments in
Victoria have primarily been in hospitality, construction, food and business services. Victoria’s
growing and stable economy and transparent and strong legal protections for investors help to
attract Indonesian investors.

New opportunities
Beginning to emerge as a significant regional economic powerhouse, Indonesia has the largest
economy and population in South East Asia and is the fourth largest economy in East Asia (after
China, Japan and the Republic of Korea). Demographic projections indicate that a significant number
of Indonesia’s population will have joined the world’s consuming class by 2030.

Victoria has highly regarded experience in urban planning, civil infrastructure, architecture, public-
private partnerships, water engineering technologies, health and education system design and ICT,
which can assist Indonesia’s ambitious development plans. In addition, Victoria’s food services and
agribusiness industries have a reputation as a reliable source of clean, green produce.

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Submission 22

Australia's Trade and Investment Relationship with

Indonesia

Infrastructure: The Indonesian Government has prioritised infrastructure development for the
country as a key enabler to ensure the country meets its growth forecasts. Focus areas include mass
transit systems for Indonesia’s largest cities, new seaports and water and energy infrastructure.

Education: R&D collaborations between universities in Victoria and Indonesia present a potential
opportunity. Industry specific skills that build capacity in Indonesia’s workforce (both public and
private) are also in high demand.

Food and beverage: Indonesia is Victoria’s fifth-largest food and fibre export market. Underpinned
by a rapidly expanding middle-class estimated to be some 70-130 million people, opportunities exist
across the retail and food service sectors, with a focus on premium products and leveraging
strengths of the state (e.g. premium dairy, dairy nutriceuticals and grass-fed beef).

Health and aged care: Indonesia’s healthcare system requires rapid transformation with demand far
exceeding supply in hospital services, partially as a result of general practitioner and acute care
services being carried out by hospitals. The importance and emphasis placed on health care
infrastructure and healthcare services to the elderly is driving opportunities in the market, including:
services for elderly care/home care organisations; professional training for medical staff; and
medical devices for the elderly.

Resources: Indonesia is one of Victoria’s largest markets for mining (and by extension resources –
including oil and gas) technology and services. Government mandated limitations on the export of
unprocessed commodities is driving demand for technology and services across the value-chain.
Opportunities exist supplying solutions that bring efficiencies and innovative technologies to the
sector.

Deepening Commercial Ties with Indonesia

Trade and investment settings that foster deeper commercial engagement with Indonesia and the
development of cultural, business and institutional links will enhance and sustain our bilateral
relationship in the long term. Victoria has identified these issues as key to developing and
maintaining our relationship with Indonesia and has in place several initiatives to support mutually
beneficial ties with Indonesia.

Bilateral Trade and Investment Architecture

The IA-CEPA is an opportunity for Australia and Indonesia to develop a robust platform for future
partnership and prosperity, and to address the gaps and limitations present in the ASEAN Australia
New Zealand FTA (AANZFTA). Considering Indonesia and Australia are two of the largest economies
in the region, there will be benefits from improving commercial and regulatory harmonisation
between the two economies.

Key issues in relation the IA-CEPA for Victoria (building on AANZFTA):

• Improved commitments on services and investment
• Greater mutual recognition of qualifications
• Improved market access for agriculture

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Inquiry into the growth potential in Australia's trade and investment relationship with Indonesia
Submission 22
 Inquiry into the growth potential in Australia's trade and investment relationship with Indonesia
Submission 22

Australia's Trade and Investment Relationship with

Indonesia

The IA-CEPA also provides an avenue to improve recognition of Australian Bachelor degrees in
Indonesia, where currently some Australian Bachelor degrees are not recognised as being equal to
the Indonesian Bachelor degree (Sarjana 1). An Australian Bachelors program is generally three
years in duration compared to the Indonesian Bachelors program (Sarjana 1) which is four years and
normally has a thesis component. As such some Australian Bachelor degrees are only recognised by
Indonesia’s Department of Education as a Diploma Four. Returning Indonesian students who are
interested in applying to work as civil servants and have been awarded a standard Australian
Bachelor Degree will need to take additional classes at an Indonesian University to then satisfy the
Sarjana 1 requirements. This is also an issue for Indonesian graduates returning and wanting to
undertake postgraduate study in Indonesia.

To provide certainty to exporters and investors, it is important that Indonesia commits to ensuring
that regulations on the negative list as part of the IA-CEPA do not become any more restrictive. In
this way, the IA-CEPA can help to ensure that Indonesia moves unilaterally toward a more open and
accessible market.

In addition, efforts should be made to further liberalise sectors detailed on the Indonesian Negative
Investment List. For example, Australian businesses currently face restrictions in the Public Works
sector based on project value, which limit the ability for small and medium Australian service
providers to enter the Indonesian market. Currently Australian companies cannot bid for projects
with a value of less than Rp50 billion (approximately A$5 million) for Construction services and only
Rp10 billion (approximately A$1 million) for Business/Construction Consultation services, as these
have been reserved for Indonesian SMEs.

Another example of further restriction is the new requirement of 49 per cent ownership for e-
commerce service providers where the investment amount is less than 100 billion Rupiah. This
category of service was not previously subject to any restriction. The new regulation includes
definitions which are fairly vague and creates uncertainty as to whether an investment is covered or
not. Such changes to the foreign ownership regime exacerbates commercial uncertainty associated
with investment in the Indonesian e-commerce services market.

Victoria has already provided input into the IA-CEPA through a submission to the Minister for Trade,
Tourism and Investment which highlighted key issues of interest for Victorian businesses. Victoria
will continue to advocate and work with the Commonwealth with the aim of realising a successful
and mutually beneficial conclusion to the IA-CEPA and RCEP negotiations. A robust and
comprehensive Free Trade Agreement architecture will serve as a platform to further elevate the
Australia-Indonesia economic relationship.

Cultural links
Victoria has long recognised the importance of developing personal and cultural links with important
regional partners such as Indonesia to further enhance and complement the economic relationship.

The Victorian Government is working to build Victoria’s understanding of ASEAN, with a specific
focus on Indonesia. In 2017, the Department of Premier and Cabinet intends to appoint a Victoria-

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Australia's Trade and Investment Relationship with

Indonesia

ASEAN Fellow to develop a suite of analysis papers on key issues of relevance to Victoria-ASEAN
relations, and to host a public lecture in Melbourne, with a focus on Indonesia.

Furthermore the Victorian Government Hamer Scholarships Program is a language and cultural
immersion program designed to build the Asia-engagement capabilities of Victorians and to help
strengthen cultural awareness and partnerships between Victoria and Asia.

The program, initially providing for scholarships to China was expanded to include Indonesia in 2013.
Through the program Victorian professionals spend six months in Indonesia undertaking intensive
language study (Bahasa Indonesia) and cultural immersion. Hamer Scholarship recipients can study
in either the University of Indonesia in Jakarta, Gadjah Mada University (UGM) in Yogyakarta or
Pendidikan University (UPI) in Bandung. To date 29 Victorians have been awarded a Hamer
Scholarship to Indonesia.

The program has helped recipients enhance their cultural understanding and language skills, and
assisted them to expand their professional networks and business relationships, offering valuable
capabilities to current and future employers and business partnerships.

In addition to the benefits gained by Hamer participants, the program also successfully fosters
goodwill and partnership development between the Victorian Government and Indonesian
stakeholders, both onshore and offshore, as it is able to powerfully convey Victoria’s commitment to
relations with Indonesia. Hence the program has featured strongly in high-level international
engagement activities both here and in Indonesia.

The teaching of Indonesian language and culture is also strongly supported in Victoria. For example,
in 2015 a total of 63,438 primary and secondary government school students were learning
Indonesian, making it the fourth most widely taught language in Victorian government schools.
There are 39 sister school partnerships between Victorian Government Schools and schools in
Indonesia.

The friendships and connections supported add to the strong ties we share with the Indonesian
diaspora in Victoria and some 5,000 Indonesian students in our vibrant international student
community.

Government and Business Links

Deep and sustained government-to-government and business-to-business links are crucial for
enduring commercial ties with Indonesia. At the government-to-government level, Victorian
Government Ministerial visits to Indonesia and Victoria’s hosting of Indonesian government
delegations support deeper ties, while the Victorian Government Business Office (VGBO) in Jakarta,
led by the Commissioner for Victoria to South East Asia, plays a key role in facilitating official
relationships in-market.

Understanding the value of forging regional links in Indonesia, Victoria has also entered into a Letter
of Intent to strengthen the relationship between the Government of Yogyakarta Special Region and
Victoria (September 2015). The letter is an important first step towards an MoU to expand

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Australia's Trade and Investment Relationship with

Indonesia

cooperation between the two regions, particularly in the arts and education. In this context, the
Victorian Government intends to reinforce its commitment to Indonesia in 2017 by working with the
Yogyakarta Special Region to enhance cultural understanding, encourage educational exchange and
develop opportunities for innovative industry partnerships.

Regarding business-to-business links with Indonesia, the Victorian Government has developed
connections with Indonesia through its trade mission program. This program assists participating
businesses to secure international sales, attract foreign investment, develop skills and knowledge of
international markets, enhance their international profile and also helps companies understand the
regulatory requirements, cultural sensitivities and nuances of operating and doing business in
market. The Victorian Government's trade mission program is complemented by the work of the
VGBO trade and investment specialists in market, led by the Commissioner.

The Victorian Government has also established International Chamber House (ICH) to encourage
trade and investment relationships between Victoria and key international partners. ICH promotes
strong collaboration between government and bilateral international chambers and business
associations, including with the Australia Indonesia Business Chamber, which is a tenant of ICH.

To further develop institutional links, in March 2016 the Victorian Government entered into an MoU
with the Indonesian Financial Services Authority to expand collaboration in the development of rural
finance, financial technology, communications and international affairs, through shared learning and
personnel exchange programs. Under this MoU, the July 2016 Victorian Indonesia Leaders' Program
saw Melbourne host a group of 25 Indonesian finance professionals to support the building of
networks and the sharing of expertise between Victorian and Indonesian practitioners in this
growing segment of the services economy.

Conclusion
Victoria welcomes this inquiry given the importance of Indonesia as an economic partner for Victoria
and Australia. Recognising that the relationship has still not reached its full potential, and there are
many opportunities to pursue, Victoria will work with the Commonwealth and other stakeholders to
ensure potential benefits are realised and result in deeper and more developed trade and
investment links with Indonesia.