Data Sources: Newspaper and other Media Reports

A New Beginning For Indonesia

Time for Choices The next few months will test the newly installed President like nothing else the country has seen in the past few years. At the very heart of the matter, Indonesia’s new government needs to make stark choices quickly, that will have long-lasting implications on its growth trajectory and overall development. This comes about when not only is the external environment challenging, but when domestic economic growth is slowing. What Indonesia needs beyond the new President’s publicly stated good intent and objectives, is both, (large amount of) funds and easier rules for foreign investors. Both, the government’s ability to carve out funds for more productive uses and its ability to convince foreign investors to choose Indonesia over other (competing) markets for manufacturing and infrastructure related investments will determine how quickly Indonesia can move up to the 7% and above year-on-year growth in its GDP.

Cautionary Macro Economic Tale 2014 full year economic growth for Indonesia is seeing slipping to just over 5% – its lowest rate since 2009. Sobering as it may be, it demands great caution from policy makers and investors alike. There are significant reasons for it: i. Slowing Domestic Demand: Domestic demand seems to be not holding up anymore, from

what seemed fairly resilient through much of this year. This may get more challenging in the coming few quarters, with further reduction in fuel subsidies.

ii. Increasing Investment Needs: Plans of Indonesia’s National Development Planning Agency

can easily be termed eye-popping, if one takes into account the timeframe associated with some of these. It intends to develop 25 dams, 10 airports, 10 industrial parks and 2000 km. of roads in the next 5 years, with US$ 490 Bn. ballpark needed for it! The moot question is whether foreign investors will oblige right away and if the government has the necessary funds to start implementation (& the processes in place). Looking at the recent past, whether FDI trends or government investments in some of the areas, whether this is likely or not is not difficult to guess.

The President himself mentions that Indonesia has spent more on fuel subsidies than on infrastructure development in the last 5 years – US$ 58.5 Bn. on fuel subsidies vis-à-vis US$ 46.7 Bn. on infrastructure (and even lower on healthcare). This has not only to reverse (and fast), but funds needed to grow productive investments must be found. Social Security and Focus on Universal Health Coverage Roll Out Indonesia’s attempts towards providing social security are ambitious, to say the least. The National Team for Acceleration of Poverty Reduction (or TNP2K as it is called) plans to issue Social Assistance Cards (or KPS) to some 15.5 Mn. families (or est. 69 Mn. people) over the next few months. These families will then get direct cash transfers to their bank accounts (linked to the card holder under various schemes). And this is just one of the many. More ambitious is the Universal Health Coverage scheme roll out that is expected to cover the entire population – estimated to be nearly 258 Mn. people by end-2019. When launched on

When writing this blog – on the evening of November 17, 2014 – news came in that fuel prices were raised upwards of 30% (depending on fuel), in effect reducing the subsidy on fuel. This will narrow the gap in the current account, reduce deficit and provide succor to budgetary allocations in 2015. Preliminary estimates suggest some US$ 8 Bn. will be shaved off fuel subsidy – large savings, as a proportion of total government spending!

Data Sources: Newspaper and other Media Reports

January 1, 2014 the country had approx. 122 Mn. under various insurance schemes brought together to be managed by the BPJS (or the National Health Insurance Agency). What is remarkable is that no detailed fiscal capacity studies were conducted to assess how this program will be funded over the long term. This, when one also notes that Indonesia’s government spending on health is among the lowest per capita. Keeping in mind that the program is intended to be ‘comprehensive’ i.e., cover all illnesses caused by natural disease, it requires significant funds outlay year-on-year.

Presently, pilots are being conducted in the first 19 districts across 9 provinces. These are to be completed by mid-December 2014. Upon review and ironing out of problems, this then, will be replicated across the country. The real test would come from how much funds are allocated in the 2015 and 2016 government budgets, since there are not only multiple priorities – infrastructure, social benefits, education, healthcare, et al, but also limited funds (notwithstanding the reduction in fuel subsidy). Some Options to Consider for the Healthcare Sector At the outset, the legacy challenges Indonesia faces in healthcare are very well documented –inadequate & non-functional infrastructure, shortage of personnel, poor quality health services, et al – so, this note shall not belabor those. However, on the subject of kick-starting investments in this area there are options for Indonesia to consider. A select few ideas (only) are outlined below: i. Attracting Private Investments

a. Capacity Creation: Capacity creation across type of services (specialty care, or even general wards) can be capital intensive. Since the country severely lacks state funds, efforts to attract private investments (whether from local, &/or foreign investors) must get a concerted push. So, while Public Private Partnership model of development is well known, what Indonesia has not done is take a leaf from success stories elsewhere to replicate. India is a good example to study in this regard. Various Indian state governments have now followed this approach. Such an approach can lead to improvement in service quality, skill & technology upgradation and also improvement in the state of existing infrastructure. Of course, this may be possible only in select areas, but the underlying idea lends itself to sustained benefits for all stakeholders.

b. Technology Adoption: A critical dimension gaining significant traction in healthcare is adoption of latest technologies (to deliver services). Indonesia must invite companies to leverage technology to gain access to its vast geography. Whether in preventive care, or for treatment, private companies (large, or small) are delivering care using latest technologies to gain customer access. Given its size (~250 Mn. people spread across the large archipelago), providing market access on the back of technology adoption should be explored by the government in many ways.

ii. Country-level Partnerships: How countries like Singapore have become magnates for high-

quality health services (leading to a vibrant health tourism industry) could show the path to country-level partnerships. Country agreements on transfer of knowledge and best practices, in return for market access could very much encapsulate such elements. Attracting best practices into Indonesia is foremost in its own interests. Though not straightforward (esp. guarding against local vested interests), service pacts (as also envisioned under the aegis of ASEAN Economic Community) could easily lend themselves to sector specific (in this case, healthcare), outcome driven agreements between countries. If companies are willing to help countries develop institutional capacity, why can’t country-level partnerships be undertaken, especially when we consider the likes of Indonesia and Singapore?

Many suggest Indonesia is at a crossroads. Not really. Its only hope is to move ahead aggressively across multiple dimensions – in adoption of technology, in improving skills-levels, in expanding capacity to treat, in reducing legacy costs and not necessarily going about doing all this in the old ways of doing things. All this can also be done in conjunction with allowing investors to partake in economic growth and development to take the country forward and make it more self-reliant.