Oil and commodity prices have gone out of control this year. OPEC has predicted oil prices will top US$170 per barrel by the end of 2008, inevitably followed by a raise in commodity prices. These two global shocks continue to mount pressure on business people in the retail sector.

The pressure comes from both sides; production and consumption. The increased fuel prices have resulted in a hike in production costs, which directly affects sales price. At the same time, consumer purchasing power has plummeted with falling income.

On the other hand, given the different characteristics among provinces in Indonesia, the increases in oil and commodity prices have proved a blessing in disguise for some.

Oil and commodity producing regions outside Java have largely benefited from shared revenue transfers from the central government to local governments.

Moreover, Vice President Jusuf Kalla said back in January 2008 that investors should increase their investment in such regions as a pick up in domestic investment would in time encourage foreign direct investment.

Against this backdrop, the question remains: Is this a good opportunity to engage in new businesses or to expand to outside Java?

Many aspects should be taken into account, i.e. economic growth, consumer welfare, infrastructure conditions and, of course, the business climate.

Recent data has confirmed that Indonesian economic growth in 2007 was still mainly driven by provinces located inside Java. Together with Bali, Java's share in the country's national growth is on average around 60 percent.

Bear in mind that almost 80 percent of manufacturer industries are located in Java. Nonetheless, if we take a deeper look, the top five areas in 2006's economic growth came from provinces outside Java; four from Sulawesi and one from Sumatera.

In fact, those areas booked annual growth of between 6.18 and 7.80 percent, higher than the country's national growth of 5.51 percent, mainly driven by natural resources production.

Due to the increase in oil prices, provinces in East Kalimantan, Riau, Riau Islands and South Sumatra booked additional income from the central government.

In 2007, the central government's transfers to these regions, in the form of shared revenue, totaled Rp 29 trillion. This amount was supposedly spent on the local infrastructure building.

According to the 2007 World Bank report, infrastructure in areas outside Java was relatively low. For instance, in Sulawesi, only 54 percent of villages have asphalt roads, while figures in Sumatra and Kalimantan are lower at 51 percent and 37 percent, respectively.

PLN electricity coverage is also lower in provinces outside Java. On average, electricity coverage ranges from 38 percent to 67 percent. These figures form dreary reading for investors hoping to expand their markets outside Java, as they must field high private infrastructure provision costs.

So, is it still feasible to invest in regions outside Java?

Again, I would prefer to say it depends on many aspects, including the business climate and consumer purchasing power.

A business climate survey conducted by the KPPOD (Committee for Regional Autonomy Monitoring) in 2005 listed Batam, Sibolga, Sawahlunto and Kutai Kertanegara among the top-ten provinces.

Many regions are currently following the road maps that lead to such success for those areas.

The welfare figures outside Java are quite similar to Java. The number of rich people is increasing, but income distribution is getting lower.

Based on 2005 data, only three regions were reported to have inequality coefficients, or Gini figures. Those were DKI Jakarta, Riau and South Kalimantan. This means the small number of rich people share a disproportionately large piece of the income cake, and it also signals an increase in the middle-income population.

This growing affluence of the population outside Java seems to boost local economic activity.

The March 2008 sales growth for Ramayana Department Stores outside Java was 21.1 percent compared to 12.9 percent for those located in Java. Also, the company's credit growth in Sumatra, Kalimantan and Sulawesi increased sharply compared to the first quarter of 2007.

Similar statistics applied to cement consumption share outside Java.

It is clear that there are still many barriers to investing outside of Java, but due to the local government's willingness to boost economic growth in outlying areas, combined with the continuously increasing middle and middle-upper income segments, investment prospects are indeed promising.

The writer is an economist at Bahana Securities

Popular

Retail sales, consumer confidence ease as Idul Fitri boost dissipates

Students to rally against Prabowo amid economic pressures

Indosat partners with Nokia and NVIDIA to strengthen Indonesia's readiness for the AI era