Investment in Indonesia: Revoked Permits Expose Problems
The Indonesia Investment Coordinating Board (BKPM) announced it revoked 6,541 principle investment permits granted to foreign investors that were issued between the years 2007-2012 involving projects that would have had a combined total value of USD $23 billion. These principle permits are the first step for foreign investors to realize their investment commitments in Indonesia (it usually requires several more years for projects to be realized after issuance of these principle permits).
The BKPM, the investment service agency of the Indonesian government, decided to revoke these permits as the foreign companies failed to report their investment activities to the BKPM. Most of these foreign companies (after having obtained principle permits) faced difficulties (bureaucracy and legal uncertainty) to realize their projects, for example land acquisition troubles or failed to obtain further necessary permits from local administrations resulting in the delay or cancellation of the projects. Franky Sibarani, Chairman of the BKPM, said that after the revocation of their permits, any company which still carries out their business in Indonesia without a license is in breach of the law. Those investors whose permits are revoked will not be blacklisted by Indonesian authorities but they will need to reapply for the principle permits.
The revoked permits involve projects such as a USD $5 billion basic chemical plant in East Java, mining projects in Aceh (Sumatra) worth USD $1 billion and a USD $800 million bauxite smelter in West Kalimantan. Most revoked principle permits involved projects in West Java, Indonesia’s most populous province and also the province where most foreign direct investment (FDI) is concentrated. Reportedly, the investors involved in the above-mentioned projects had already decided to cancel their investment in Indonesia before the BKPM revoked the principle permits.
Most revoked principle permits involved the country’s trade and reparation sector (30 percent of total revoked permits), followed by the mining sector (20 percent). Azhar Lubis, Deputy Chairman of the BKPM, said that many foreign mining firms - having a total USD $3.3 billion worth of planned investment in Indonesia - were forced to shut down operations after the Indonesian government implemented a ban on exports of raw mineral ore in January 2014.
These foreign firms also had difficulty to obtain permits from regional administrations in Indonesia as the country has been plagued by severe bureaucracy and which constitutes a major obstacle to investment realization. In a move to combat red tape, the Indonesian government introduced its new integrated one-stop service center (in Indonesian Pelayanan Terpadu Satu Pintu, abbreviated PTSP) at the BKPM in January 2015 which aims to simplify licensing procedures for investment projects as investors will not need to visit various ministries or government agencies to obtain necessary permits but can simply turn to the BKPM’s one-stop service center. However, this new concept only speeds up permitting procedures among the various ministries and agencies at the central level, not the local administrations. Since the process of decentralization (started after 1998), much power has been handed to the regional administrations but due to a lack of weak human resources/human capital (including corruption) at this level as well as weak coordination with the central or other regional administrations investment projects often require a lot of time and money. In its latest Indonesia Economic Quarterly, the World Bank pointed out that the BKPM still has a long way to go in order to fully integrate its new integrated one-stop service center.
In the same report the World Bank also emphasized the need for a more conducive investment climate in Indonesia in order to attract investment and push for higher economic growth (which had eased to a five-year low of 5 percent year-on-year in 2014). Currently, Indonesia ranks 114th out of 189 nations in the World Bank’s Doing Business 2015 index. In the category of ‘Setting up a Business’ the country ranks 155th and 153rd in the category of “Dealing with Construction Permits”. Investment (foreign and domestic investment) is the country’s second-largest driver of economic growth (after domestic consumption). The administration of President Joko Widodo stated frequently that it sees investment growth as a vital source for economic growth in Southeast Asia’s largest economy in the years ahead. The BKPM targets to attract IDR 519.5 trillion (roughly USD $40 billion) of total foreign and domestic investment in 2015, up 14 percent from the preceding year.
It is also important to raise the number of Indonesian entrepreneurs in an effort to accelerate economic growth in Indonesia. Currently, only 1.65 percent of the total Indonesian population is an entrepreneur, a low figure compared to Singapore (7 percent), Malaysia (5 percent) or Thailand (4 percent). More Indonesian entrepreneurs is one of the keys for job creation and add to national income.
Foreign & Domestic Investment in Indonesia (in IDR trillion)
| 2014 |
||||
| Q1 | Q2 | Q3 | Q4 | |
| Domestic Direct Investment | 34.6 | 38.2 | 41.6 | 41.7 |
| Foreign Direct Investment | 72.0 | 78.0 | 78.3 | 78.7 |
| Total Investment |
106.6 | 116.2 | 119.9 | 120.4 |
| 2011 |
2012 | 2013 | ||||||||||
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |
| Domestic Direct Investment | 14.1 | 18.9 | 19.0 | 24.0 | 19.7 | 20.8 | 25.2 | 27.5 | 27.5 | 33.1 | 33.5 | 34.1 |
| Foreign Direct Investment | 39.5 | 43.1 | 46.5 | 46.2 | 51.5 | 56.1 | 56.6 | 65.5 | 65.5 | 66.7 | 67.0 | 71.2 |
| Total Investment |
53.6 | 62.0 | 65.5 | 70.2 | 71.2 | 76.9 | 81.8 | 83.3 | 93.0 | 99.8 | 100.5 | 105.3 |
Source: Indonesia Investment Coordinating Board (BKPM)
Further Reading:
• Investment Realization in Indonesia in Q4-2014 and Full-Year 2014
• BKPM Press Release on Investment in 2014