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Indonesian Experience in Conducting

Investment Policy Reviews

Based on the PFI

1

LOGO OUTLINE

1. Indonesia at a Glance

2. Economic Performance after Two Crises

3. Investment Performance

4. Investment Policy Reform

5. Experience In Conducting OECD-Investment Policy Review

6. Lesson Learned

2 ASEAN-OECD Investment Policy Conference

LOGO

INDONESIA AT A GLANCE


LOGO World’s largest archipelago, 17,000+ islands – huge development potential of infrastructure; transportation, and logistics;

World’s fourth most populous country, with young demography and rapidly growing middle class – large open market potential and competitive manpower

World’s third largest democracy – balance of power between the state and civil society; dynamic stability;

World’s third largest democracy – balance of power between the state and civil society; dynamic stability;


LOGO

2009 GDP: IDR 5,613.4 trillion (USD 610 billion dollars) or in PPP terms close to USD 1 trillion, the largest economy in Southeast Asia and the 16th in the world; Up to the third quarter of 2010, the GDP reach IDR 4,727.6 trillion (USD 521 billion dollars).

Large natural resources endowment – long-term business potential and raw material self sufficiency; and

Geo-political and geo-economic importance – comparative advantage in connectivity with other parts of the world and member of G-20.


LOGO

The various ratings show that Indonesia’s economy performs well: Fitch Ratings- BB+; Moody’s- Ba2; Standard & Poor’s - BB; UNCTAD’s World Investment Prospects Survey 2009-2011 ranks Indonesia at 8 out 193 economies for location of FDI; Survey Report on Overseas Business Operation by Japanese Manufacturing Companies (2009) of JBIC ranks Indonesia 8 out of the 20 main investment destinations; FDI Confidence Index of AT Kearney (2010) puts Indonesia at 20 in the group of 25 top investment destinations.

However, Indonesia’s economic performances lag behind in one area – DOING BUSINESS. In the WB-IFC Doing Business Report 2011 Indonesia is ranked 121 out of 184 economies.


LOGO

ECONOMIC PERFORMANCE AFTER TWO CRISES


LOGO Economic performance after the crises

Crisis in 1997/98 Crisis in 2008/09

Indonesia was the hardest hit: GDP contracted by 13.7% in 1998 (compared to growth of 7.8 % in 1996).

Indonesia is one of a handful of countries in the world maintaining positive growth rates. GDP slowed to 4.5% in 2009, from 6.1% in 2008.

Inflation jumped 77% and the rupiah lost 70% of its value vis-a-vis the US dollar. Stock prices collapsed, taking years to recover.

The rupiah exchange rate fluctuated, but inflation has been subdued. Stock prices tumbled by 50%, but quickly recovered.

Difficult political, economic and social transitions. Then government was brought down by people’s power.

Political, economic and social stability within the parameters of dynamic democracy.

High human cost, in terms of poverty and unemployment.

Domestic demand has continued to be robust, poverty and unemployment are declining.

Ballooning foreign debt, coupled with FDI outflows and sharp rating downgrades.

Declining foreign debt, with FDI inflow continuing and ratings being upgraded.

8

LOGO

INVESTMENT PERFORMANCE


LOGO Investment Realization Up to the Third Quarter of 2010

BKPM reports investment realization figures submitted through the Investment Progress Report (LKPM)

The cumulative investment realization for the three quarter (nine months) of 2010 is 149.6 trillion rupiahs. BKPM’s total investment target for 2010 is Rp. 160 trillion, the current realization figure has reached 93.5% of this year’s target.

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Tw I Tw II Tw III Tw I + Tw II + Tw

III Target

Foreign 35.4 35.6 40.1 111.1 118.4

Domestic 6.7 15.2 16.6 38.5 41.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Note: value in IDR Trillion


LOGO

706 1,060

1,941

5,653

3,771

6,698

4,628

3,473

4,866

8,230

9,877

3,509 3,083

5,445

4,573

8,911

5,992

10,341

14,871

10,815

12,344

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Note: *) up to the third quarter of 2010

Source: Investment Coordinating Board (BKPM)

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LOGO Economic Growth & Investment Target

Projection

2010 2011 2012 2013 2014

Economic Growth (%) 5,5-5,6 6,0-6,3 6,4-6,9 6,7-7,4 7,0-7,7

Investment Growth (%) 7,2-7,3 7,9-10,9 8,4-11,5 10,2-12,0 11,7-12,1

Investment Needs

(Rp Trillion) 1,894.1

2,111.1 –

2,144.5

2,348.8 -

2,465.0

2,619.9 -

2,788.4

2,939.2 -

3,168.0

Government Investment

(Rp Trillion) 220.0 272.9 - 274.5 329.9 - 336.6 417.8 - 433.1 525.6 - 552.5

% from Total Investment

Needs 11.6 12.8 - 12.9 13.7 - 14.0 15.5 - 15.9 17,4 - 17.9

Private Investment

(Rp Trillion) 1,674.1

1,838.2 -

1,870.0

2,019.0 -

2,128.4

2,202.1 -

2,355.3

2,413.6 -

2,615.5

% from Total Investment

Needs 88.4 87.1 - 87.2 86.0 - 86.3 84.1 - 84.5 82.1-82.6

Sourcer: RPJMN 2010-2014

12 12 ASEAN-OECD Investment

Policy Conference

LOGO

INVESTMENT POLICY REFORM


LOGO

Oil Boom Era

(1970s-early 1980s)

Liberalization Era (mid-

1980s to 2003)

Consolidation Era (2003-

present)

Background Economy relying on oil revenue

Economy seeking diversification A more balanced economy, with various sectors contributing to growth

Policy Process Full government discretion

Government discretion Rise of economic technocracy IMF-mandated reform (from 1997/98 through 2003)

Various new laws and regulations Policy Transparency, involving stakeholder consultations Decentralized administration Reforms are internalized and extended

FDI Policy High FDI restrictions Limited number of sectors open to FDI (“positive list” of investment) Strong Divestment requirements

Period of reform Transformation of “positive list” to “negative list” in 1986 Allowed 100% foreign equity ownership from 1994 Reduced divestment requirements Reduced minimum initial capital requirement Eased restrictions to expatriates and use of imported machinery Incentives for export-oriented investment

Liberalization adjusted to domestic conditions and capacity

Clarity and regular review of investment list Equal treatment of foreign and domestic investors Better investment services Incentives

Developments of Indonesia’s Investment Policy

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LOGO Reforms Development : 2005-2010

Infrastructure

Financial

INPRES 3/2006

INPRES 6/2007

INPRES 5/2008

INPRES on Enhancement of National Development

Priority

Focus: Investment

Climate

85 actions

i.e to reform

Investment Law,

Investment List

Focus: Real Sector and

Small-Medium Business

165 actions

4 groups of issue:

investment climate,

financial, infrastructure,

and small business

Focus: 2008-2009 Reforms

193 actions

Covering issues of

investment climate,

financial, infrastructure,

small business,

environment, energy labor,

ASEAN commitment

Among others are

Investment Climate

Improvement

INPRES= Presidential Instruction


LOGO Investment Law (Law No. 25/ 2007 )

This law reforms the investment policy in terms of:

Division of authority on investment affairs.

Equal treatment for domestic and foreign investors.

Tax and non-tax incentives.

Dispute resolution mechanism.

Integrated one-stop service.

Freedom to transfer and repatriate profits.

Protection against nationalization.

Corporate social responsibility (CSR) requirements.

Special Economic Zones.

16

LOGO

17

Investment List (Presidential Regulation No. 36/2010)

• Background:

Switch from a Priority List (“positive list”) to an Negative Investment List (Business fields that are closed and open to investments with certain requirements)

• Main considerations

environmental protection,

conservation of non-renewable natural resources,

protection against health hazards,

preservation of national culture and heritage and

empowerment of MSMEs

• Approach

Comprehensive: all sectors of the economy, including oil/gas, mining, banking, non-bank financial institutions.

LOGO Improving the Investment and Business Climate 2010-2014

1. Legal Certainty: Gradual process of regulatory reform to harmonize regulations at the national and sub-national levels, and reduce the lack of clarity and inconsistent implementation;

2. Procedure Simplification: Adoption of the Electronic System for Investment and Information Services (SPIPISE) at the PTSP centres in several cities starting with Batam.

3. Review of licensing process for simplification;

4. SEZs: Development of SEZs using the PPP scheme;

18

LOGO

EXPERIENCE in CONDUCTING OECD-INVESTMENT POLICY

REVIEW


LOGO The Background

Since 2008, Indonesia has been one of the OECD-Enhanced-Engaged Member Countries.

As a G-20 member, Indonesia has to follow-up the G-20 Leaders’ Statement in 2009 on the need to monitor the compliances of economic policies to the international best-practices.

Conducting the OECD-Investment Policy Review (IPR) is an effort to benchmark Indonesia’s investment policies to the OECD-best practices, which have been used and acknowledged by G-20s and other international cooperations.


LOGO

1. The Government of Indonesia:

Meetings, focus group discussions (FGDs), seminars, administrative matters related to the process in Indonesia and participation of Indonesian delegates to the Peer Review.

2. OECD

Participation of OECD representatives in the meetings, FGDs, seminars and visits to Indonesia

Peer Review in Paris

Preparation and Publication of the Report

Funding for the Activities


LOGO Parties Involved 1. Ministry of Finance-

Secretary General-as the OECD Coordinator of Indonesia.

DG of Tax, as Coordinator for the Chapter on Tax Policy

2. Coordinating Ministry for Economic Affairs (CMEA)-

Deputy for International Cooperation and Financing- Mr. Mahendra Siregar /Mr. Erlangga Mantik, as a Chief Coordinator

Special Staff of the Coordinating Ministry/Vice Secretary of the National Team for the Enhancement of Export and Investment- Mr. Raksaka Mahi

Senior Adviser on Investment Policy- Mr. Djadmiko, as Coordinator for the Chapter on Investment Policy

Deputy for Infrastructure Development- Mr. Bambang Susantono, as Coordinator for the Chapter on Infrastructure and Financial Development


LOGO Parties Involved…….. continued

3. Investment Coordinating Board (BKPM)- Deputy for Investment Cooperation- Mr. Hari Baktio, as Coordinator the Chapter on Investment Promotion and Facilitation

4. Commission for the Supervision of Business Competition- Commissioner- Mr. Nawir Messi as a Coordinator the Chapter on Competition Policy

5. National Planning Agency (BAPPENAS)- Deputy of Politics, Law and Security- Mr. Bambang Sutejo, as a Coordinator for the Chapter on Public Governance/Regulatory Reform and Anti Corruption Measures

6. National Committee on Governance (KNKG)- Head of KNKG-Mr. Mas Achmad Daniri, as a Coordinator the Chapter on Responsible Business Conduct

7. Ministry of Trade- DG of International Trade Cooperation- as a Coordinator for Chapter on Tax Policy

8. Related government agencies and Institutions (25 Ministries, around 100 representatives).


LOGO The process of IPR

1. The initiative of Indonesia-OECD -Investment Policy Review was raised during the meeting between Indonesia’s Delegation to the OECD Ministerial Meeting in 2008 and the OECD Investment Committee. It was then followed up by the Coordinating Ministry for Economic Affairs (CMEA) in April 2009

2. The first seminar (a Coordination Meeting) was held in Jakarta in 3 June 2009, attended by OECD Delegates (led by Mr. Pierre Poret, Head of OECD Investment Committee), and the representatives of related agencies. Deputy of International Cooperation of the CMEA led the meeting, explaining the idea of conducting the OECD-Investment Policy Review (IPR) of Indonesia to the related agencies. On the other hand, OECD delegates presented the Policy Framework for Investment (PFI) as a tool of the IPR.


LOGO …………… continued

3. The draft of Joint Statement of Cooperation 2009-2010 between Indonesia and OECD was drafted right after the meeting and the day after that it is signed by the Secretary General of Ministry of Finance and Mr. Pierre Poret, Head of OECD Invesment Committee

4. The Joint Statement states that the Indonesia-OECD Investment Policy Review includes five main chapters, as follows:

1) Investment Policy, 2) Investment Promotion and Facilitation, 3) Competition Policy, 4) Infrastructure and Financial Sector Development, and 5) Public Governance/Regulatory Reform and Anti Corruption Measures

5. Some additional chapters are also included, namely: Trade Policy, Tax Policy, Corporate Governance, and Responsible-business Conduct.


LOGO ……….. continued

6. The IPR Team (Working Group on Indonesia-OECD IPR) was established, supervised by MoF, while CMEA is the Chief Coordinator. Each Chapter is led by a Chapter Coordinator.

7. Meetings and focus group discussions (FGDs) were then conducted to prepare the answers of the PFI. The team was assisted by an outsourcing staffs to work on the translation, formatting and data base.

8. The second seminar was held in 9-10 November 2010. OECD Team from Investment Division attended the seminar. The purpose of the seminar is to facilitate the meeting between the OECD Team and related agencies. The OECD Team also visits several agenciess on 11-13 November 2009 to further clarify some information.



9. Based on the data and information obtained from questionnaire responses and other sources, the OECD prepared the First Draft Report--Investment Policy Review of Indonesia. The draft was then submitted to Indonesia-CMEA.

10. The series of meetings and FGDs were held again to study the first draft and to provide comments and inputs.

11. On 15-16 February, the third seminar were taken place in Jakarta, attended by OECD and related agencies. The seminar aims to facilitate the related agencies’ reps to discuss the first draft directly with the OECD Team.



12. The draft report of IPR was then revised the OECD to accommodate the inputs and comments from Indonesia.

13. Once approved, the draft report, was circulated to OECD Members for comments and questions.

14. Indonesia has to respond to the the comments and questions from OECD Member Countries. The questions and the responses are a part of discussion in the Peer Review.

15. The Peer Review was conducted on March 25, 2010 at the OECD Headquarters in Paris. A presentation on the related investment policies is required prior to the question and answer session.



16. The Indonesian Delegation was led by Vice Minister of Trade, Mr. Mahendra Siregar. The delegates consist of the main Chapter Coordinators.

17. The result of the Peer Review is an additional resource for the finalization of the report.

18. The Final Report was launched by Indonesia (Minister of Finance, H.E Agus D Martowardoyo) and OECD (Secretary General, H.E Angel Gurria) on 1 November, 2010 in Jakarta, Indonesia.

19. The OECD will launch the report in some cities where OECD has offices, i.e. Tokyo, New York or Washington.


LOGO Lesson Learned

1. The Policy Framework for Investment (PFI) is a very comprehensive tool for the investment policy review, covering the coherency, transparency and regular evaluation of the policies.

2. The questions in the PFI start from the very general and simple ones and gradually move to the questions which are very detail and in-depth.

3. Understanding the PFI especially the questions is a very important part in the IPR process. However, the OECD-Investment Division (OECD-ID) Team has been very helpful in assisting us to understand the PFI.

4. The PFI has guided us to organize the work of the IPR Team of Indonesia.


LOGO Lesson Learned …………. continued

5. The meeting, FGDs and seminars between OECD-ID representatives has become a kind of capacity building activities to both parties. In addition, the understanding between OECD and the agencies involved is improved.

6. The overall process needs a very serious and continuous work from the agency in charge as well as the Chief Coordinator. It is very important to have all related agencies’ support to the IPR from the very beginning.

7. In order to provide the legitimate information for the PFI, the involvement of high-level staffs of the agencies are really needed. This is also to guarantee that the policy recommendations of the IPR are implemented.


LOGO In Conclusion…………. continued

The process of IPR is a very productive ones, a two-way process, conducted with full support of both parties- the OECD-Investment Division and the related agencies in Indonesia.


LOGO

Thank you to the OECD Investment Committee/Investment Division for the cooperation and the assistance on the Investment Policy Review of Indonesia

2009-2010


LOGO

THANK YOU


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