I

ndonesia’s infamous red tape could discourage investment from United States pharmaceutical companies looking to relocate from China, experts say.

The Indonesian government is in talks about the possibility of offering a new production base to US-controlled pharmaceutical firms that wish to move factories out of China, according to Coordinating Maritime Affairs and Investment Minister Luhut Pandjaitan.

“President [Donald] Trump is currently at odds with his Chinese counterparts, and he wants to relocate industries out of China,” Luhut said during an interview with state broadcaster RRI on May 9. The government is now preparing a 4,000-hectare special economic zone for the industry in the Brebes Industrial Zone (KIB) in Central Java.

“President Jokowi [Joko Widodo] has been frequently discussing the relocation [of US pharmaceutical companies] with President Trump,” Luhut said. He added that 90 percent of the raw materials for pharmaceutical products remained unavailable in the country and needed to be imported.

Indonesian Pharmaceutical Association (GP Farmasi) chairman Tirto Koesnandi said an unsupportive regulatory framework and high wages could deter investors from setting up operations in the country. “Our investment climate is still unattractive for future investors, including US pharmaceutical companies. Wages are still too high, and there are many regulations that make investment unattractive,” he told The Jakarta Post on Tuesday.

Statements issued by the US State Department in 2019 noted that legal uncertainty, economic nationalism and restrictions on imports and exports were some of the factors that made investing in Indonesia challenging.

The fact that Indonesia ranked 73rd on the World Bank’s ease of doing business index, last updated in October 2019, also discourages investors, as neighboring Malaysia and Thailand fare better in 12th and 21st position, respectively.

“I think it will be quite challenging for corporations to quickly move their operations to Indonesia if we don’t improve our regulatory [environment]. While Trump could encourage companies to relocate their facilities, in the end it’s the companies that make the decision,” Center for Indonesian Policy Studies (CIPS) researcher Andre Surianta told the Post.

He said regulations mandating the use of locally sourced raw materials were a major factor discouraging pharmaceutical investors.

The low productivity of Indonesian workers is another major challenge for the government as it seeks to attract investors.

According to a survey conducted by the Japan External Trade Organization (JETRO), Indonesia’s manufacturing productivity scored only 74.4 on an index where Japanese productivity levels define 100. Indonesia’s score is lower than those of the Philippines, Singapore, Thailand and Vietnam at 86.3, 82.7, 80.1 and 80.0, respectively.

The survey also showed that more than half of the Japanese companies polled were not satisfied with the minimum wage compared to Indonesian worker productivity.

“Even though the pharmaceutical industry is a capital-intensive investment, which makes worker productivity less [impactful], investors still list our human capital as one of their greatest concerns,” Andre said.

He said that industrial zones with sufficient infrastructure and accessibility were not easy to find in Indonesia, which could make investors opt for other countries.

Brebes Development Planning Agency head Edy Kusmartono acknowledged that the local administration had heard about the potential relocation, even though there had been no formal notification from the central government so far.