Indonesia - Opportunities Still Expected To Outweigh Risks.
Legal News & Analysis - Asia Pacific - Indonesia - International Trade
24 November, 2016
Last week members of Clyde & Co's Indonesia Group participated in the Australia Indonesia Business Council’s conference in Perth as part of the Australia Indonesia Business Week. The Conference, "Breaking Barriers, Building Bonds", had over 270 delegates, including government officials and business leaders from the two countries.
The conference provided a forum for the exchange of ideas, with an agenda that was both thought-provoking and practical. Following a week where global politics dominated, the conference provided a blueprint for action for governments and the business community alike, so that all stakeholders can benefit from the tremendous opportunities that bilateral trade between the two countries presents.
A week of significant change
After seven years of negotiations, the text of the proposed Transpacific Partnership Agreement (TPPA) was finalised this year. If ratified, the TPPA is expected to have a significant impact on trade and economic growth in the region. Both Australia and Indonesia have signaled their intention to ratify the TPPA. Similarly, both countries are prospective parties to the Regional Comprehensive Economic Partnership Agreement that, if ratified, will cover a third of the world's economy and a much larger share of its population compared to the TPPA. However, Mr Trump's election in the United States and broader changes to global political landscape have cast a shadow over the future of multilateral trade agreements and the TPPA in particular, with the President-Elect indicating his intention to withdraw from the deal on his first day in office. In spite of the initial disappointment in the region, the consensus at the conference was that enormous opportunity remains for international trade and business partnerships, particularly in the Asia-Pacific region.
The Indonesian government has recently renewed its commitment to building and promoting stronger trading partnerships. On 14 November 2016, the Singaporean and Indonesian governments signed four memorandums of understanding in sectors including tourism, hospitality and infrastructure. This is in addition to the continued negotiations on the proposed Indonesia Australia Comprehensive Economic Partnership Agreement, which also appear to be back on track after a three year hiatus.
What does this mean for business?
Indonesia's renewed commitment to building and promoting stronger bilateral partnerships is an encouraging sign, with the potential to increase trade and to provide greater market access. One of the key observations made at the conference is that more can be done within the existing framework, particularly in the energy, natural resources and infrastructure sectors. Throughout the two day conference, it was noted that current free trade agreements are being underutilised, leading to significant opportunities being left off the table or missed, with realised investment being consistently lower than expected. Delegates discussed the considerable upside that businesses can gain from taking advantage of the trade agreements negotiated by their governments.
What are the key points or risks to consider for doing business in Indonesia?
Predicted to be one of the world's largest economies by 2025, the opportunities that lie ahead for businesses in Indonesia are well understood; however global organisations have been slow and cautious entrants to the Indonesian market. There is often speculation that this is due to a number of risks or perceived risks associated with doing business in Indonesia. Those risks, and the Indonesian government's liberalised investment laws, were the focus of an article Clyde & Co published in October 2016.
Delegates at the conference shared practical advice and insights on ways to mitigate some of the risks associated with doing business in Indonesia. Delegates also discussed how investors may take advantage of the opportunities in Indonesia. The key messages at the conference included:
- Have a long-term strategic plan: Investing in Indonesia should be for the long-term – businesses may not see an immediate return on investment.
- Engage in a startup mentality: Things take time in Indonesia and relationships need to be built for business to grow.
- Beware regulation: Different sectors in Indonesia have different levels of regulation. It pays to research as early as possible and to get on-the-ground advice.
- Forge strong partnerships: Finding the right partnerships is integral to success in Indonesia. Take the time to identify appropriate business partners. Undertake a robust due diligence process to ensure investments are being made in the right partnerships. Capt. Michael Edwards OAM, CEO. Orpresa shared his advice at the conference: "If you have a problem with the contract, the relationship will sort it out, but if you have a problem with the relationship, there is no contract".
- Speak the language: Operating on the ground in Indonesia means regularly engaging locals whether they are employees, business partners or government officials. There are significant advantages in learning Bahasa Indonesian. Speaking the language shows commitment, and will also serve as a way to mitigate risk. With over 700 languages throughout the country, it is also worth investing in good translators.
- Look for opportunities outside of the capital: Opportunities do not solely exist in Jakarta. The outer regions of Indonesia, such as Surabaya, Bandung, Medan or Makassar, are also rapidly developing hubs.
- Take your time: Given the uncertainties in Indonesia, rushing approvals and delivery dates can increase exposure to risk. Strategic plans should factor in reasonable timeframes for deliverables and the achievement of desired outcomes.
- Leverage the existing network: Engage with businesses well established in the jurisdiction to learn from their experience and liaise with your local trade representatives to gain an insight into the market.
The conference served to demonstrate the strong relationship between the Indonesian and Australian governments, as well as the countries' business communities. Despite the changing global political landscape, and recent tensions between the two countries' governments (which were acknowledged by some delegates), there is seemingly a reinvigorated commitment to developing trade and promoting investment.
The investment opportunities for Australian businesses are still expected to outweigh the risks of doing business in Indonesia. In the infrastructure sector alone, there are 30 projects that have been selected as priority infrastructure projects in Indonesia for the period 2016-2019 that will require some IDR 5,519 trillion (approx. USD 415 billion) worth of investment. Indeed, the greatest risk for businesses looking to investment in Indonesia may be doing nothing at all.
For further information, please contact:
Glen Warwick, Partner, Clyde & Co