Discourse: Industry downstreaming must ‘move in stages

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As one of Indonesia’s most prominent scholars, M. Chatib Basri brought a sound understanding of Indonesia’s economy to the table when he became the chairman of the Investment Coordinating Board (BKPM) in June. Not only possessing a deep theoretical background, Chatib also has extensive “real life” experience from years of working as an advisor to the government and the private sector. The Jakarta Post’s Andi Haswidi and Vincent Lingga spoke with him recently to discuss his visions for the Investment Coordinating Board (BKPM). Below are excerpts from the conversation.

Question: You are elected as BKPM chairman with only two years left until your term ends in 2014. Do you have a specific target?

Answer: I have to be realistic with this time frame. There is so much work to do, but my strategy cannot be that of someone with time on his side. What I want to focus on is investor targeting. Is the company interested? Is it big enough? Can it bring its supply-chain to Indonesia? Can it generate employment? Is it environmentally conscious? These are the kinds of companies I want to approach.

I have short-listed several companies and according to our market intelligence, they are interested. In fact, I have sat down with some of them. I went to Korea recently, where I heard from the horse’s mouth what their concerns and requests were. I facilitate what I can directly. If their investment is eligible for a tax holiday, I will facilitate an audience with the Finance Ministry.

In short, with the little time that I have, I will focus specifically on making showcases. It would be pointless to carry out road shows if no one wants to invest. The best way to do it is to attract the big names and have a showcase.

I will also focus on encouraging the participation of local government in investment promotion. I delivered a keynote speech in Korea, but to me the highlight of the visit was when the governors of North Sulawesi and West Sumatra gave their presentations. Regional government participation allows them to internalize the fact that what we are doing is not in the interest of the central government, it’s actually in their interest.

Do you have an investment value target when you approach a potential investor?

It is not necessarily about the size of the investment, but more toward the value creation. The ability to create significant employment has many linkages. The automotive sector, for example, fits that criterion. It involves many small and medium enterprises.

Back in 2007, the President invited a few scholars, including myself, to meet with Lee Kuan Yew. Lee shared a story that was quite interesting. He said that Deng Xiao Ping visited Singapore in 1979 seeking advice on how to reform China. Before Lee could answer, Deng said he knew what he had to do. ‘China is too big a country and I myself can’t solve all of the problems. I can, however, solve some of them. It’s impossible to replicate Singapore, but I will create 12 cities like Singapore in China.’

That is why Deng started with Shenzen as a special economic zone. What he wanted to create was a success story. If one region succeeds, it can be replicated in other regions. That’s what changed the global perception of China. Indonesia can do exactly the same.

People used to be skeptical about Indonesia’s auto industry, but when they saw sales breaking expectations, investors came flocking. People used to say that Indonesia could not innovate, but the emergence of batik as a brand debunked that myth. There are batik pieces that are worth millions of rupiah nowadays; Indonesia’s garment and textile industry does not have to compete with Bangladesh or China in terms of cheap labor. All I want to showcase is that Indonesia can progress.

In terms of investment constraints, not much has changed in the past few years. Nevertheless, we recorded record-high investment in the last two quarters. What was the driving force behind that?

I think Indonesia is in a period in which it cannot miss out on the opportunity. Picture this, by 2025 there will be an additional 110 million people whose spending reaches US$10 per day. Foreign investors are aware of this.

Before I joined the BKPM, I was an advisor to Toyota Global and also Axiata Berhad. They have a far-reaching view on Indonesia in the future. This is a country that they can’t afford to ignore. The figures are evident in car sales, and in the revenues of the telecommunications industry.

Indonesia used to be seen as a production base for exports, but not a production base to cater to the domestic market. So, size matters. We are 48 percent of the ASEAN economy. Our population is 42 percent. I used to joke that ASEAN was basically greater Indonesia.

Income is rising here thanks to the commodity boom. There are a lot of nouveau riches, just check out the Forbes rich list. Slowly we want to change this by creating value-added products instead of just exporting raw materials. Investors are keen on this, that’s why they have to enter now. Sure, there is uncertainty, but just look 10 to 15 years ahead. Take Jardine Matheson, I think its biggest revenue came from Astra.

The move toward value-added creation has to some extent spooked investors. Is the government still consistent on this agenda?

Commodity prices are going down. Investors will have to look to other sectors; that is why investment in manufacturing has grown significantly in the second quarter. A country such as Indonesia cannot rely on natural resources, or cheap labor costs. We have to move toward productivity-driven growth. We don’t have to build airplanes in the same sectors, but look at added value, with innovation and technology.

The problem is that this has to happen in stages. We cannot do it drastically, otherwise investors will complain. Take the downstreaming policy. It has been criticized as inconsistent. Mining companies are told to create smelters here, but there is a regulation that demands a share divestment within 10 years. A smelter can cost $3 billion, so such demands do not make sense to investors. What we can do is basically arrive at a compromise. I have spoken to officials from the Energy and Mineral Resources Ministry. I told them that I understand the objective, but we have to get there through realistic means. In this regard, bilateral communication between the BKPM and other institutions is important before we go to the coordinating economic minister for a final review.

As the BKPM chairman, it is important to be able to answer questions from investors. Things can get worse if you don’t have an answer, especially when ministers give different answers. It is important that investors are not hurt by this move toward value creation.

At the coordination level, we also talked about other ways to ensure that the downstreaming policy would be a success. For instance, on top of the export tax on minerals, we discussed incentives that could be given for investments in smelters.

One of the good news stories in investment lately was Foxconn’s plan to enter Indonesia. How is that plan progressing?

I have spoken with representatives from Foxconn directly. A team from the BKPM also traveled to Taipei to talk with them. They have given us a list of things required for their entry, like land for factories and also a local partner. We are now working to fulfill that. Industry Minister MS Hidayat and I will soon travel to Taipei for further deliberations.

I understand that people have questioned why I haven’t been so outspoken about Foxconn’s investment. That is solely because of my style; I don’t like to overexpose potential investors, out of the fear that it might affect their plan in the wrong way. I don’t want people’s expectations to run wild. I am very conservative in that way. What’s important is that everything progresses normally.