Market Overview
Indonesia reached major milestones in its transition towards democracy in the last three years. The Indonesian electorate chose a new Parliament, including a newly formed upper house representing regional interests, its first directly elected President, and regional district heads and parliaments.
Indonesia’s macro economy demonstrated impressive resilience in 2006 following October 2005 reductions in government fuel subsidies and monetary policy tightening in response to a budget and currency crisis brought on by record world fuel prices. By the end of 2006, inflation and Bank Indonesia’s (central bank) benchmark, short-term interest rate returned to single digits, and a rebound in consumption and a record $100 billion in exports (fueled by the run-up in world commodity prices) pushed Indonesia’s GDP growth to 5.5 percent for the year. Record foreign reserves also enabled the GOI in October to complete payment of its IMF program four years ahead of schedule.
On March 2, 2006 the GOI announced an ambitious “Investment Climate Improvement Package” containing 85 planned GOI regulatory and institutional reforms to be undertaken in 2006, including significant revisions to the country’s investment, tax, labor and customs laws. The GOI announced in February an ambitious infrastructure policy reform package, listing 156 specific actions the GOI would undertake mostly in 2006. The GOI subsequently held a second Infrastructure Summit in November 2006 where it presented a focused list of 10 high-priority commercially viable “model projects” worth USD 4.4 billion. At the end of 2006, however, the GOI had not yet tendered any of the 10 model projects, and key National Committee for the Acceleration of Infrastructure Provision (KKPPI) institutions mandated to review the tendering process had not been fully staffed or funded.
Market Challenges
Much needed economic and political reform remain the main impediments to Indonesia’s economic development. The unpredictable nature of the judicial process and the arbitrary actions of local officials are two problems cited by many businesses as particularly difficult to overcome. In some cases, judges rule against foreigners in commercial disputes, ignoring the facts of the case and the contracts between the parties. It is also difficult to get international arbitration awards enforced by Indonesian courts, often leaving no recourse for international investors. The Government of Indonesia’s (GOI) policy of decentralizing political power, although well intentioned, has given local leaders greater authority, which has been used in some provinces to levy unanticipated fees and extract additional services that add to the financial burden of foreign investors. In a few high-profile cases, Indonesia has applied criminal penalties for commercial or environmental infractions that are typically covered by civil law in most countries. On the plus side, President Yudhoyono’s anti-corruption campaign made clean progress in 2006 with a slew of high-profile investigations and prosecutions of current and former government of Indonesia officials.
Market Opportunities
Assuming significant progress on economic and investment law reforms, opportunities should abound in the telecommunications, transportation, oil and gas, electric power, water treatment & sanitation and engineering sectors. Large infrastructure and reconstruction projects should drive increasing demand for all types of construction machinery and building materials. The police and other government entities are improving their capabilities to deal with the terrorist and crime threats by procuring sophisticated security equipment and services for airports, ports and tourist destinations. Indonesia's tropical climate make disease control particularly challenging, creating a good market for medical and laboratory equipment and pharmaceuticals. Other "Best Prospects" for American business in Indonesia include aircraft and parts, computer and peripherals, industral chemicals, retail, medical equipment and supplies, and food & business service franchising.
Market Entry Strategy
Although it may be possible in some cases to sell directly to the Government, there is good reason to use the services of an agent or distributor for the early stages of project development, delivery, installation and service needs. Traditionally, most government procurement decisions have been based on long-established relationships. This does not necessarily mean illegal payments are involved, but these relationships often exclude participants not well known in the market.
A New-to-market U.S. firms need the careful advice of local representatives to avoid wasting time and money participating in a competition whose outcome is not transparent. The value of a local representative in this case is to make sure the outcome is favorable to his/her client, not the reverse. U.S. firms also need to be sensitive to the difficulty some Indonesians have in delivering bad news. For example, if your agent knows a tender is structured against your company's interest, he may be reluctant to disappoint you with the bad news in advance. A close relationship with the agent is the best way to ensure frankness.