Remarks for BCG breakfast meeting
Mr. Sofjan Djalil, Indonesia's Coordinating Minister for Economic Affairs
Mr. Sofjan Wanandi, Special Advisor's Vice President
Mr.Hans-Paul Burkner, Chairman Boston Consulting Group
Mr. Junichi Sasak, Managing Executive Officer, CEO for ASEAN & SW Asia Bloci
Mr. Nandu Nandkishore, Executive Vice President Nestle for Asia, Oceania, Africa
Ladies and Gentlement,
It is a great pleasure to be here with all of you, the distinguished leaders. I welcome you all to this stakeholders' breakfast meeting which is co-hosted by the Boston Consulting Group and APINDO under the theme " Winning in Indonesia: Accelerating Economic Progress and Partnership". Through this meeting, we bring together leaders from the government, private sector, international business communities to discuss investment and business opportunities in Indonesia and more urgent to discuss how partnership can be formed to realize these opportunities.
Ladies and Gentlement,
As we may be aware, the new government is under its optimism to bring comprehensive and forward-looking reform agenda to achieve its ambitious economic progress. The President Joko Widodo has boosted market confidence since early of its term through implementing several decisive reforms. A notable step the new government made in his early days is to raise subsidized fuel prices effective November 18, 2014. It is then shoring up Indonesia's fiscal position and freeing up space for development spending from more than 200 trillion rupiah saving made by this fuel reform. This move was not without political risk. We know that furious protest broke out when the predecessor president, Susilo Bambang Yudhoyono, wanted to raise fuel prices. But, this time, the president Jokowi only was greeted by small protest. For that, we should also thank for falling of globall oil prices: even without any subsidy, a litre of petrol now costs below than a subsidised fuel price.
We also see that the new government is on their way to overhaul its system of isuing business licenses that known for costly red tape by making a truly one-stop integrated service. Under the new system, it is intended to create a business-friendly bureacracy by eliminating those red tape for entrepreneurs and investors.
All these reforms are likely also creating optimism for business community as depictured in the result of APINDO's business sentiment survey that monitor enterprises' perceptions on the first 100 days of Indonesia's new government performance. The survey reports rather positively on the new Government's performance during its first 100 days and predominantly voices confidence in its ongoing activities and reforms. It reports that 61% of enterprises felt the new government's actions to date have been highly effective. The enterprises in the survey, accounted for 53%, also felt that the new govenrment was receptive for their needs.
Ladies and Gentlement,
We can see that the optimism brought by the new government as it pursues the ambition to achieve 7% economic growth target also comes with its growth strategy which is by focus on infrastructure investment. The 2015 revised state budget explicitly reflects a dramatic shift in budget allocation from major fuel subsidy burden to infrastructure spending. The fuel subsidies reduction saving, around Rp 210 trillion, has been reallocated to capital expenditure, which has now doubled from Rp 156 trillion to Rp 290 trillion.
This state budget shifting also was a reform for heading to the path of infrastructure development. As we all know that infrastructure development is an urgent as its less developed and inadequate has been gnawing our global competitiveness for years. The poor infrastructure certainly affects our competitiveness through logistic performance that has poor record in most logistic indicators - lack behind compared to its peer countries such as Singapore, Thailand, and Malaysia. In the regard of logistic costs, Indonesia account for approximately 24% of its GDP, while Singapore only at 9 %, Malaysia and Thailand are only at 13% and 15% respectively. Moreover, in more comprehensive and sophisticated indicator by World Bank, Indonesia Logistic Performance Index for 2014 is ranked for 53rd out of 160 countries that is lower than Thailand (35) and Vietnam (48).
Ladies and Gentlements,
We fully understand that investing in infrastructure is one of appropriate strategy for accelerating Indonesia economic progress as the government has been trying to do, but we also see that even with that state budget dramatic shifting toward more infrastructure spending, it would not meet the financial need for the new government ambitious infrastructure project which is ranging from 5,000 km of railways, 2,600 km of roads, 1,000 km of toll roads, 49 dams, 24 seaports to power plants with a combined capacity of 35,000 megawatts. In other words, there is challenge for government to achieve its ambitious projects that is the needs for massive financing resources is going beyond its financing capacity.
This challenge in financing capacity of infrastructure project could be seen as investment opportunity for business community in doing public-private partnership (PPP) and at the same time this partnership is also part of the solution for infrastructure financing problem to expendite economic progress. But, we also know that the PPP scheme for infrastructure has already proposed since several years ago with alot of effort to attract private sector involve in the projects. It seems that the former PPP scheme has faced great challenges including cumbersome bidding process, legal and regulatory framework especially related to land acquisition, and no incentive for low profit projects.
We have seen that the long, cumbersome, and unclear selection criteria of bidding process has been the part of the reason behind the slowing PPP realization. It would seems that this problem would be overcome hopefully soon in the future as the government just recently revised the regulation on PPP by allowing the selection of the best bidders according to certain criteria, such as project cost, bidders' reputation and financial guarantee.
Besides, in the past, regulatory certainty also remains a substantial issue especially in terms of land acquisition. Land acquisition has been the main barrier for various strategic infrastructure projects, including 2,000 megawatt coal-fired power plant project in Batang sponsored by Japan that has been delayed for several years due to land acquisition problems. But for this acquisition problem, we have seen the new government breakthrough by signing the Presidential Decree No 20/2015 that expected to expedite the implementation of land acquisition law No 2/2012. With this new regulation, private investor would be able to acquire land as contractors on behalf of the government.
Apart from that, another problem challenging the PPP was about that there is no special incentive for investment in the project with low profitability, such as the project in the eastern Indonesia. But now, it seems that the government has tried to cope with this problem through viability gap funding program in which the government would hand over a sum of cash to private investors willing to carry out slim margin project, defined as having profit of less than 15% of total project value.
Ladies and Gentlenments,
As my concluding remarks, I am also optimistic that the PPP for infrastructure invetment in Indonesia would have bright future as the government has reformed those PPP related regulations that would make infrastructure investment more attractive and eventually would accelerate Indonesia economic progress.