INVESTMENT COORDINATING BOARD

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1 invest in Indonesia Investment Promotion Tokyo, 4 March 2014 INDONESIA Investment and Economic Outlook INDONESIA INVESTMENT COORDINATING BOARD Mahendra Siregar Chairman 2014 by Indonesian Investment Coordinating Board. All rights reserved

2 4 th World s Most Populous Country 248 million Population (in 2013) 17,508 islands Biggest Archipelagic Nation IND N E S I A 16 th World s Largest Economy 1 trillion USD GDP (PPP) 4 Member State G20,876 USD GDP per capita (PPP) Investment Grade (Moody s, Fitch and R&I) 2

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3,000 2,500 2,000 1,500 5.

3 ,000 2,500 2,000 1, % GDP Growth in , Indonesia s GDP In the last 10 years at 2000 Constant Market Prices by Expenditure (IDR Trillion) 2 nd fastest Growing Economy Among G-20 Countries (After China, in 2013) Indonesia s Growth Beats Estimates Indonesia s GDP growth in 2013 beats all estimates in a Bloomberg News survey of 25 economists, where the median was 5.34 percent. (Bloomberg, 2014) 3

4 Indonesia s Economy 2013 Manufacturing industry covers 24% of GDP, Non-oil & gas manufacturing ind. grows above GDP Composition of GDP & Manufacturing Ind. Services 10% 11% 8% 11% 7% Mining & Quarrying 1% GDP 14% Other Non-Oil & Gas Manufacturing Ind. 24% 14% Trade, Hotel & Restaurant 21% Manufacturing Industry Agriculture, Livestock, Forestry & Fishery 12% 11% 25% 31% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Manufacturing Industry & GDP Growth % 5.8% -1.8% Manufacturing Industry Oil and Gas Manufacturing Ind. (Total) -0.9% -2.8% -1.8% Non-Oil & Gas Manufacturing Ind. (Total) 6.7% 6.4% 6.1% Food, Beverages and Tobacco Industries 9.1% 7.6% 3.3% Transport Equip., Machinery & Apparatus Ind. 6.8% 7.0% 10.5% Fertilizers, Chemical and Rubber Products Ind. 4.0% 10.5% 2.2% GDP 6.5% 6.2% 5.8% Source: BPS,

5 Indonesia s Investment Performance Indonesia Investment Performance Compared to BRIC + South Korea Total Investment in % GDP IndonesiaInvestment Coordinating Board Source: Bloomberg, 2013 *

Sustainable Investment Growth DDI FDI 23.4 27.9 34.8 24.6 42.2 28.6 42.2 billion USD total investment realization in 2013 (IDR398.6 trillion), 2.1% above the 2013 target, IDR390.3 trillion. 27.3 % increase from 2012 (IDR313.

6 Sustainable Investment Growth DDI FDI billion USD total investment realization in 2013 (IDR398.6 trillion), 2.1% above the 2013 target, IDR390.3 trillion % increase from 2012 (IDR313.2 trillion) FDI % increase from % share of total investment realization Investment Realization in Indonesia Based on Capital Expenditure (USD Billion) Excl. oil, gas, and financial sectors Assumption: Q1-Q2 rate USD 1 = IDR 9,300 Q3-Q4 rate USD 1 = IDR 9,600 DDI % increase from % share of total investment realization Source: BKPM,

Japan The biggest investor in 2013, Japan s investment increased 92% compared to 2012 6,000 5,000 4,000

Country Top-10 Countries Based on Capital Expenditure (USD million) in 2013 Excl.

Singapore 1,429 5,565 5,123 4,856 4,671 3 US 100 931 1,488 1,238 2,436 4 South Korea 613 329 1,219 1,950

517 856 786 8 Mauritius 159 23 73 1,059 780 9 Malaysia 123 472 618 530 711 10 Taiwan 28 47 243 647 403

7 Japan The biggest investor in 2013, Japan s investment increased 92% compared to ,000 5,000 4,000 3,000 2,000 1, % 47% 16% 9% 4% 8% FDI Realization in Indonesia by Origin Country Top-10 Countries Based on Capital Expenditure (USD million) in 2013 Excl. oil, gas, and financial sectors Rank Country Japan ,516 2,457 4,713 2 Singapore 1,429 5,565 5,123 4,856 4,671 3 US ,488 1,238 2,436 4 South Korea ,219 1,950 2,205 5 UK ,076 6 Netherlands 1, , British Virgin Islands 293 1, Mauritius , Malaysia Taiwan Total (Top-10 Countries) 4,914 10,580 12,570 15,493 18,708 Total (97 Countries) 10,817 16,215 19,475 24,565 28,616 Source: BKPM,

8 >90% of Japan s investment flowed to secondary sectors, Transport equip. industry covered 64% of investment in 2013 Component of Japan s Investment Based on Group of Sectors in 2013 Japan s Investment in Indonesia by Sector Top-10 Sectors Based on Capital Expenditure (USD million) in 2013 Excl. oil, gas, and financial sectors 3,500 3,000 2,500 2,000 1,500 1, Rank Sector Transport Equipment Industry ,510 3,001 7% 28% 3% 6% 7% 2 Metal, Machinery & Electronic Ind Textile Industry Chemical & Pharmaceutical Ind % 71% 94% 93% 93% 5 Paper & Printing Industry Food Industry % 2% 3% 0.1% 0.1% Primary Sectors Secondary Sectors Tertiary Sectors 7 Electricity, Gas & Water Supply Trade and Repair Rubber and Plastic Housing, Industrial Park and Office Total (All Sectors) ,516 2,457 4,713 Source: BKPM,

9 The most promising country for overseas business (Japan Bank for International Cooperation Survey ) Rank China China China China China China China China Indonesia 2 India India India India India India India India India 3 Thailand Vietnam Vietnam Vietnam Vietnam Vietnam Thailand Indonesia Thailand 4 Vietnam Thailand Thailand Russia Thailand Thailand Vietnam Thailand China 5 US US Russia Thailand Russia Brazil Indonesia & Brazil Vietnam 6 Russia Russia US Brazil Brazil Indonesia - Brazil Brazil Vietnam 7 Korea Brazil Brazil US US Russia Russia Mexico Mexico 8 Indonesia Korea Indonesia Indonesia Indonesia US US Rusia Myanmar 9 Brazil Indonesia Korea Korea Korea Korea Malaysia US Rusia 10 Taiwan Taiwan Taiwan Taiwan Malaysia Malaysia & Taiwan Taiwan Myanmar US Positive Factors 1. Future growth potential of local market 2. Inexpensive source of labor 3. Current size of local market 4. Supply base for assembler 5. Industrial cluster development Issues of Concern 1. Rising labor costs 2. underdeveloped infrastructures 3. Execution of legal system unclear (frequent changes) 4. Intents competition with other companies 5. Difficult to secure management-level staff. 6. Labor problems Source: JBIC 9

10 Growing Middle Class (Source: AC Nielsen, 2013) Middle Class Growth AC Nielsen estimates that middle class people in Southeast Asia would grow by 110.5% during 2012 to 2020 with Indonesia as the highest growth contributor. IndonesiaInvestment Coordinating Board *

110.5 % 174 % Middle class growth Middle class growth in Southeast Asia 2012-2020 in Indonesia 2012-2020 The highest middle class growth & consumer

11 110.5 % 174 % Middle class growth Middle class growth in Southeast Asia in Indonesia The highest middle class growth & consumer confidence index Middle Class Growth in ASEAN Source: AC Nielsen, Nielsen Consumer Confidence Index Source: AC Nielsen, Indonesia 11

12 Existing Policy Medium Terms Development Goal: Industrial Transformation Demographic Bonus: GDP Growth GDP per capita Dev. Plan II Dev. Plan III Dev. Plan IV 2013: USD 4, % p.a. 2019: USD 8,000 Poverty 6-8% 2025: < USD 12,000 IndonesiaInvestment Coordinating Board Source: Indonesia Development Planning Agency, 2013 *

13 FDI Realization in Indonesia by Sector Based on Capital Expenditure (USD million) in All Sectors Excl. oil, gas and financial sectors Rank Sector Project Capex Project Capex Project Capex Project Capex Project Capex 1 Mining 228 2, , , ,816 1,534 14, Transportation, Storage and Telecommunication Chemical and Pharmaceutical Industry Metal, Machinery and Electronic Industry Electricity, Gas and Water Supply Transport Equipment And Other Transport 87 5, , , , , , , , , , , ,327 1,480 8, , , , , , , , ,736 Total (All sectors) 3,077 16,215 3,661 19,475 4,579 24,565 7,432 28,616 18,749 88,870 Automotive and Auto Component Rank Subsector Project Capex Project Capex Project Capex Project Capex Project Capex 1 Spareparts and accessories , , , Coachwork (karoseri) and trailer truck Four or more wheeled vehicle Motorcycle Total (All subsectors) , , ,540 Source: BKPM 13

14 Indonesia s Investment Performance Investment Realization in Indonesia in Automotive and Auto Component (USD Million) DDI FDI 3,764 DDI FDI Total ,812 1,749 3, Project Capex Project Capex Project Capex Project Capex Project Capex Plan Realization Plan 36 1, , , , ,796 Realization , , ,540 Plan 39 1, , , , ,515 Realization , , ,725 Source: BKPM 14

15 Import Export Indonesia s Trade Performance Indonesia s Export and Import of Automotive and Auto Component (USD Million) 12,000 10,000 8,000 6,000 4,000 2, Export Import Rank Sector Automotive and Auto Component Total Non-Oil and Gas Automotive and Auto Component Total Non-Oil and Gas Trend (%) Change (%) 2012/2011 Share (%) ,971 1,958 2,900 3,329 4, ,894 97, , , , ,840 3,151 5,737 7,603 9, ,644 77, ,251 13, ,

16 Indonesia s Investment Performance FDI Realization in Indonesia in Automotive and Auto Component By Country, Based on Capital Expenditure (USD million) in Japan 5,108.7 Join countries Germany US Singapore Thailand 38.5 Taiwan 26.6 India 18.2 Malaysia 6.4 South Korea 5.4 Netherland 0.5 China 0.3 Total (11 countries) USD 6,540 million Japan Join countries Singapore US Thailand India Germany South Korea Taiwan Malaysia China By Country Based on Capex (USD million) in ,000.5 Total (10 countries) USD 3,692 million Source: BKPM 16

17 Indonesia s Investment Performance FDI Realization in Indonesia in Automotive and Auto Component By Country, Based on Capital Expenditure (USD million) in No. Country (S1) Project Capex Project Capex Project Capex Project Capex Project Capex 1 Japan , , , Join countries Germany US Singapore Thailand Taiwan India Malaysia South Korea Netherlands China Total (12 Countries) , , ,539.9 Source: BKPM 17

Unity in Diversity 248 million population 300 ethnic groups 700 languages various faiths 17,508 islands 3 rd World s biggest democracy (after India and US) The highest democracy Index in ASEAN

18 Unity in Diversity 248 million population 300 ethnic groups 700 languages various faiths 17,508 islands 3 rd World s biggest democracy (after India and US) The highest democracy Index in ASEAN Indonesia scored 6.76, higher than average in Asia (5.56) and in Latin America (6.36). (The Economist, 2013) Direct Election The third National Elections will be held in 2014 after peaceful elections in 2004 and

19 Remarkable progress over the past 15 years - economically, socially, and politically... (UNDP, 2013) Vision 2025 MP3EI as the master plan ( ) to transform Indonesia into one of the world s top 10 economies. Decentralization In 2001, transformed from an authoritarian state to a regional role model. 34 provinces 500 districts Provinces and districts provided with greater autonomy. 19

20 APEC CEOs: Indonesia has capacity to surprise with greater business opportunities than expected... Source: PwC APEC CEO Survey,

ASEAN s Most Attractive Investment Destination The ASEAN Business Advisory Council Survey on ASEAN Competitiveness 2012 Half of 405 businesses surveyed intended to invest in Indonesia over the next

Source: ASEAN-BAC, 2012 Notes: (1) Value next to each bar reflects the percentage of respondents that plan to invest or increase investments while value within the bar shows respondents average

21 ASEAN s Most Attractive Investment Destination The ASEAN Business Advisory Council Survey on ASEAN Competitiveness 2012 Half of 405 businesses surveyed intended to invest in Indonesia over the next years ( ). Source: ASEAN-BAC, 2012 Notes: (1) Value next to each bar reflects the percentage of respondents that plan to invest or increase investments while value within the bar shows respondents average rating on the investment attractiveness of each country. (2) Each respondent was allowed to select multiple responses. Percentages do not sum up to 100%. The 2012 ASEAN-BAC Survey on ASEAN Competitiveness collated responses from businesses across all ten ASEAN ountries, comprising a mix of small, medium and large firms. A majority of the businesses had been in operation for more than ten years, had trade/investment linkages within ASEAN and had at least general knowledge of ASEAN policy initiatives. 21

45 81 93 134 1999 2003 2009 2010 2015 170 million Population in Middle Income with per capita expenditure per day USD 2-20 Source: Bank Indonesia and Indonesia Statistics Agency, 2012 (Projection) 4

22 million Population in Middle Income with per capita expenditure per day USD 2-20 Source: Bank Indonesia and Indonesia Statistics Agency, 2012 (Projection) 4 th World s Most Populous Country More than 60 % Population in working age Covering 39 more % than total population of South East Asia 70 % 2015 Population (projected) in Middle Income with per capita expenditure per day USD

23 McKinsey: Indonesia today and in 2030 Source: McKinsey Global Institute, September

Abundant opportunity from growing consuming class 71 % Population in cities, producing 86% of GDP in 2030 90 million Consumer Additional consumers by 2030 7.7 % p.a. USD1.

24 Abundant opportunity from growing consuming class 71 % Population in cities, producing 86% of GDP in million Consumer Additional consumers by % p.a. USD1.1 trillion spend growth in consumer services by 2030 in urban areas Market opportunity Estimated annual revenue in 2030 (USD billion, price) Urban Households Expenditure in 2011 and 2030 (USD billion, 2010 price) 24

25 Labor issues Skilled workforce Infrastructure & logistics Ease of doing business Investment climate G l o b a l c o m p e t i t i v e n e s s Incentives & facilities 25

26 Labor issues Wage is no longer a single life support National Social Security Program (Law No.4/2011) Health Insurance (BPJS Kesehatan) Universal health care Worforce Insurance (BPJS Tenaga Kerja) Pension, old-age savings, death benefits and worker accidents Applied in January 2014 Applied in July 2015 Wage = Productivity Minimum wage is also based on productivity, besides the criteria of decent living (KHL) and economic growth (Presidential Instruction No.9/2013). Wage increase < KHL is directed to fulfill the criteria of decent living with clear plan and timeline. Wage increase KHL is designed to be in line with productivity and approved by employer and employees. Improving certainty and transparancy BKPM recommends that wage increase reffers to multiyears formula although the increase may be implemented annually. BKPM urges measurement mecanisms to monitor and evaluate wage policies. 26

Skilled workforce 20 % 12 years Share of state budget dedicated to education since 2004. From agrarian to industrialized economy Compulsory schooling since 2013. 1. Great number of employees 2.

27 Skilled workforce 20 % 12 years Share of state budget dedicated to education since From agrarian to industrialized economy Compulsory schooling since Great number of employees 2. Higher level of skills Top-5 Number of higher education graduates in 2020, covering 6% of world s total. (OECD, 2012) 1. Higher enrollment 2. Relevance & quality improvement Partnership between vocational schools and companies operating in Indonesia to produce graduates with specific skills. There are 850,000 vocational school graduates a year. 273 learning centers (balai latihan kerja) managed by Ministry of Manpower are available across Indonesia. Establishment of university of professions, dedicated for the needs of various professions, by and for the professions. Tax incentive for companies who conduct R&D programs ,000 30,000 25,000 20,000 15,000 10,000 5,000 - Enrollment Ratio (Comparison between the number of students and people at the school age) 50.9% 10.8% Education Facilities 13,000 1,900 High school University High school University 67.9% 18.5% 28,600 3,800 27

Challenges and progress in infrastructure Poor distribution systems: The price of

(Basri and Rahardja, 2010) Inefficiencies at Indonesia s numerous harbours make

al, 2007) The combination of over-lapping regulations and high domestic transport

(LPEM-AF, 2009) 14 % 2013 Share of logistic cost to product cost 10 % 2014

Global Competitiveness Rank 2013-2014 (Source: WEF, 2013) Indonesia posts the

Infrastructure leapfrogs 17 places (improved the most).

28 Challenges and progress in infrastructure Poor distribution systems: The price of commodities in eastern Indonesia (Nabire) are 3 times higher than in Java. (Basri and Rahardja, 2010) Inefficiencies at Indonesia s numerous harbours make transport costs more expensive. (Patunru et.al, 2007) The combination of over-lapping regulations and high domestic transport costs reduce Indonesia s trade competitiveness. (LPEM-AF, 2009) 14 % 2013 Share of logistic cost to product cost 10 % 2014 (Target) 2013/2014: 38 th out of /2013: 50 th out of 144 Indonesia s Global Competitiveness Rank (Source: WEF, 2013) Indonesia posts the biggest progression among G-20 countries. Infrastructure leapfrogs 17 places (improved the most). Infrastructure Budget (IDR trillion) IDR190 trillion IDR755 trillion Infrastructure budget in % 2% 1% 2% 14% 38% 18% 19% Power Road Railway Telecom Seaport Airport Water supply Others Source: National Planning Agency,

Economic policies for improving investment climate Streamlining investment licensing BKPM simplifies business start up and licensing procedures, including 60% reduction of application forms.

29 Economic policies for improving investment climate Streamlining investment licensing BKPM simplifies business start up and licensing procedures, including 60% reduction of application forms. 17 action plans package to improve the ease of doing business includes Starting a business Getting electricity Paying taxes and insurance premium Enforcing contract Resolving insolvency Registering property Dealing with construction permits Getting credits Revising the negative investment list National Interest Priority: Increasing national competitiveness Maintaining Economic Growth More open, friendly, and simple and give certainty to Investors More tax deduction (MoF Regulation No.124/PMK.011/2013) Tax dispensation to labor-intensive industries: textile, apparel, footwear, furniture, and toys industries. Additional tax deduction to firms with at least 30% export-oriented products. Tax incentive for reinvestment (to be implemented soon) Aimed at encouraging investors to reinvest their profits. Tax would be reduced to approximately zero percent (MoF in Antara, 4/2/2014). 29

30 Recent Regulation Action Plans to Improve the Ease of Doing Business Starting a business 5 action plans involving the Ministry of Manpower and Transmigration, Ministry of Trade, Provincial Government of DKI Jakarta, and Ministry of Law and Human Rights. Getting electricity 2 action plans, the issuance of Ministry of Energy and Mineral Resources and State Electricity Company (PLN) regulation concerning mechanism/procedures of electricity connection Paying taxes and insurance premium 2 action plans, the issuance of regulation concerning online tax reporting system and simplification of procedures for the payment of social security program consisting of: super annuation, death insurance, working accident insurance and health insurance Enforcing contract 2 action plans, study on settlement of small claim cases as a reference for the formulation of the Supreme Court Regulation and preparation of academic paper about procedure to resolve small claim cases Resolving insolvency assessing compatibility between regulations and implementation of procedures, time, and cost for resolving bankruptcy Registering property issuance of regulation on the property registration/land ownership transfer certificate which includes the simplification of procedures, time and cost Dealing with construction permits 3 action plans involving Provincial Government of DKI Jakarta, PT PAM Jaya, and PT Telekomunikasi Indonesia Getting credits issuance of implementing regulation of Bank Indonesia concerning Credit Information Management Institution IndonesiaInvestment Coordinating Board *

31 TAX ALLOWANCE TAX HOLIDAY IMPORT DUTY FACILITY (Government Regulation No.52/2011) (MoF Regulation No.130/PMK.011/2011) (MoF Regulation No.176/PMK.011/2009) 30 % of investment value Reduction of corporate net income tax for 6 years, 5% each year. 129business segments Eligible for tax allowance, expanded from 38 segments in the previous regulation. Under certain requirements among others: minimum amount of investment value and workforce, and certain project location (especially outside Java island) years Tax relief facility, starting from the commencement of commercial production. 50 % for a further 2 years Reduction of income tax after the expiration of the tax holiday and can be extended by MoF. Pioneer industry 1. Basic metal industries; 2. Oil refinery industries and/or basic organic chemicals; 3. Machinery industries; 4. Industries of renewable resources; 5. Communication devices industries. IDR1 trillion Minimum investment plan. Machines, goods, materials for production 2 years import duty exemption or 4 years for companies using locallyproduced machines (min.30%). Industries Which produces goods and/or services, including: 1. Tourism and culture 2. Public transportation 3. Public health services 4. Mining 5. Construction 6. Telecommunication 7. Port 31

32 Investment Policy and Facility Tax Allowance Government Regulation No.52 year 2011 Business Fields No. of Business Fields Agriculture 5 Forestry 9 Maritime and Fishery 4 Energy and Mineral Resources 15 Industry 84 Public Works 2 Culture and Tourism 1 Transportation 4 Communication and Information 1 Health 4 Total % reduction of corporate net income based on investment value for six years, 5% each year. The imposition of income tax on dividends paid to foreign tax subject amounting to 10%, or a lower rate according to Tax Treaty Agreement. Tax facilities that could be granted to investors under certain conditions has been issued. By the regulation of 2011, tax allowance will be eligible for 129 business segments, expanded from 38 segments in the previous regulation. IndonesiaInvestment Coordinating Board *

investors. Rolling-out the Electronic Information Services and Investment Licensing (SPIPISE) in 105 regions throughout Indonesia.

33 We provide one-stop shop (PTSP) licensing provision and our services for investors include INDONESIA INVESTMENT COORDINATING BOARD Establishing an Investor Relation Unit at BKPM for information, facilitation and inqueries handling from existing and potential investors. Rolling-out the Electronic Information Services and Investment Licensing (SPIPISE) in 105 regions throughout Indonesia. Helping contain various obstacles and giving consultation. Facilitating foreign workers permit. PLAY Launching the online investment tracking system.

Quality Investments Sectors Focused in BKPM s Plan Export-oriented sectors: downstream industry of palm and rubber, electrical equipment, metal, paper, textile.

34 Quality Investments Sectors Focused in BKPM s Plan Export-oriented sectors: downstream industry of palm and rubber, electrical equipment, metal, paper, textile. Import substitution of capital goods and raw materials: machinery, iron and steel, automotive and spare parts, and basic chemical. Import substitution of consumer goods: food and beverages, home appliances, and oil refinery industries. Downstream industries of mining, agriculture, fisheries and forestry: smelter, CPO and cocoa industries, paper, furniture. Industrial sectors with increasing domestic consumption trend: cement and building material industries. Infrastructure sector encouraged through PPP: energy, air and sea ports, roads, water supply, waste management and railways. Tourism and creative industries. 34

Coordinating Board Jln. Jend. Gatot Subroto No.

35 Thank You Terima Kasih Indonesia Investment Promotion Centre (IIPC) Badan Koordinasi Penanaman Modal (BKPM) Indonesia Investment Coordinating Board Jln. Jend. Gatot Subroto No. 44 Jakarta Indonesia t f e. info@bkpm.go.id

INVESTING IN INDONESIA Investment Policy & Opportunity

invest in Taipei, 30 May 2014 INVESTING IN INDONESIA Investment Policy & Opportunity Mohamad Faizal Director of Investment Dept., IETO 2014 by Indonesian Investment Coordinating Board. All rights reserved