05/07/2014 Talking Business with Linda Yueh

goes the polls. What will it take for Indonesia to

consider its potential. We are Talking Business.

A warm welcome to the programme. Indonesia has potential that is

reminiscent of the United States with a population that is smaller

than that of the world's largest economy. It has been dubbed one of

the fragile five countries, at risk of a potential crisis once the era

of global cheap money ends. I went on a road trip around Indonesia to

discover for myself, what potential the country has. Rich in resources,

green fields, a large population. It could be the United States, but it

is Indonesia. The country has huge potential, but economic growth has

slowed dramatically. What are the roads locks holding back growth? I

am Linda, can I come with you to Jakarta. OK. The roads are slowing

is down. Congestion, potholes. It can take over an hour to travel just

two kilometres. How bad is the traffic?

TRANSLATION: From the outskirts of Jakarta into the centre takes an

hour of the night. Usually four hours, and eight hours on a bad day.

It is really boring. Our driver is transporting T`shirts from a factory

to Jakarta. At least he is trying to. Poor infrastructure means

logistics cost one of his T`shirts is four times higher than in Japan.

Why doesn't the government spend more money on roads and rail? Part

of the reason is the government spends more subsidising this than

the roads. Petrol costs just 50 cents a litre. But leading

presidential candidates have said they will cut fuel subsidies, but it

is a tough political cell. For some Indonesians, they will suffer

because they will find it difficult to send their children to school and

suffer more hardship if you'll is more expensive.

The average speed of traffic in Jakarta is eight kilometres per

hour. A person can run faster. It has taken about four hours and I

have still not got to my destination. I am going to walk for

a little while. It seems I am not the only one looking for a break

from the traffic. These consumers are why companies come here, in

spite of the roads. Like cosmetics giant, L'Oreal, they chose Indonesia

to build their biggest factory in the world. They are producing

shampoos and other products tailored to Asians. And targeting the 240

million potential consumers. A market that is only smaller and the

United States. Longer queues to get into the city. Preventing businesses

from giving up will be the big challenge for the next Indonesian

government. Building roads and operating is among the

infrastructure challenges. Regardless of the outcome of the

upcoming presidential elections, there will be a new government that

will have to address these issues. Since the president 's's term will

end. I caught up with his finance minister to find out the prospects

and the challenges for the economy. What about sure spending? Even be

allocated amount is less than what you are spending on fuel subsidies.

If you wanted to strengthen your economy, surely infrastructure,

roads, over the last ten years that should have been a much vigour

priority in terms of delivery? I entirely agree with you. But I am

also very realistic that the capacity of the government is very

limited. Even though we cut fuel subsidy entirely, it is not enough

to finance infrastructure. The main problem is land procuring. If you go

around the area, one of the reasons why until now, the government has

not been successful in building these roads is because land

clearing. If there is one family who refuses to surrender their land, you

cannot surrender `` you cannot build the road. If you go to Bali, you can

see how the government could build the road above C. Less than 12

months. Why? It is above the sea. No land issue. In many cases, it is

much easier to create a miracle like Moses and do land procuring. I want

to talk a little bit about the fuel subsidy point you raised. If it

mostly benefits middle income and rich people, why keep it in place?

Why hasn't your government eliminated it? I agree with you, but

unfortunately we are not living in the best world. We are living in a

second`best world and there is bureaucracy. That is the reality. We

cannot just put this in perspective. It is very clear the

decision is fuel subsidy, but politically it is not easy because

people always use this as support for the poor people. My question is,

who is going to benefit for the protection of the agriculture

product? Do you think it is the poor people? No, I don't think so. It is

the is this group who will benefit. The protection is in Asia. The

answer is politics. One thing about Indonesia is the business

environment is ranked as one of the lowest in the region. Is that a

failure of your government? Of course, it is not easy. I have two

at mid`the problem. I said to my colleagues, people have to deal with

the government. If you submit a document, you never know when this

document could be completed. In my role as Minister of Finance, the

major complaint is about tax. We introduced a policy where you pay by

filing it just once. I think I introducing this we will be

improving this online system somehow. But there is a problem.

Sometimes the expectation of the people is too high. What I have

heard from businesses in particular is there is frustration around the

traffic jams and the infrastructure. One of the

frustrations is corruption and leakages of the money being spent.

Why hasn't that been sorted? It is important to look at the current

situation than the previous one. Let me ask you a question. Do you think

the corruption previous was relatively low? Maybe the answer is

no. Why did the economy grow by 7.6%. We have built and

infrastructure. We were not able to build it after the 1998 crisis. It

is not about corruption, it is about certainty. You deal with the one

single family that everything will be settled. But since we have this

democratic setting now, there is a fragmentation of power. It means you

have to talk to the parliaments, the local government, central

government. So the problem is uncertainty. There is one thing, the

thing that I learned, there is something worse than organised

corruption and that is unorganised corruption. What do you see as the

biggest challenges? You said it, it is infrastructure. Because I do

believe in ten years, 75 cents of our population will live in urban.

It will be clean water, public transport, sanitation, housing

facilities and there is no way you can handle this issue unless you

provide and infrastructure. The second one is, we cannot rely on

these natural resources and cheap labour. So we should emphasise on

the human capital. That is why I am preparing the ground for introducing

this tax incentive, scholarship, training and the third one, I don't

believe the future of Indonesia will rely on this physical capital. You

are talking about resources, the advantages will be no longer

tangible assets, but intangible assets. It is governance. If you are

talking about the role of the IT system to eradicate corruption, that

will be the crucial thing. If we could handle those three things, I

would not be surprised if Indonesia with the one of the seven largest

economies in the world. How do you cope with traffic jams? What are

they expecting from upcoming presidential elections that will

usher in the first change in government for a decade. I caught up

with the head of the Indonesian employers Association. What would

you like to see the next government do? The free priorities. The first

priority is is... The second priority is infrastructures. The

last five to ten years we have had huge unemployment. There was still

30 million people living below $1 per day. You have a gap between the

people who have and the people who have not. How do you cope with the

traffic jams? The only way to do it is to build infrastructure. There is

a good baton for electric `` for infrastructure for electricity. The

government is not providing enough legal certainty. Not just for

foreign investment, we have enough money to build infrastructure. There

are all combinations that we can do but give us the gleeful certainties.

There has been a lot of discussion the role of foreign investment in

Indonesia, the resource sector, whether they are needed, how do you

view foreign countries and the roles? We need capital. We need

expertise. We have to look for a way to win the situation. Indonesia has

become a middle income country in the past decade. It is a notable

achievement but recently growth has begun to slow. Will it begin to grow

in a virtual suckle or could it form into a vicious cycle? Resource which

Indonesia saw global prices boom skyrocket. That boosted growth.

Higher economic growth meant for those more money for investment.

Indonesia was in a constant cycle of growth and investment.

Will the end of the commodity boom mean that Indonesia could fall into

a vicious circle were aboard investment leads to lower growth and

less income? If the country could attract investment into new areas

like consumer goods, then that could launch Indonesia into a new cycle of

growth and prospects. Indonesia has got to traits which are particularly

enticing to business, resources and people. What the foreign companies

need to see from the next government to get them to invest? I asked the

American head of the chamber of commerce. What are the factors that

make Indonesia had to do business in? Traffic jams. You hit one of

them, infrastructure. I am two kilometres away and it took me an

hour to get to this interview. Infrastructure is one big issue.

Electricity and trains. The second issue is the regulatory environment.

We referred to it as a gold field in a minefield. It is not easy and it

takes a lot to set up a business here. To set up a business in

Indonesia takes on average ten procedures and 48 days. Singapore

has two procedures and three days. You see the difference. The Ford

area is human capital. As companies are looking to invest the looking at

a 24 `` 21st`century workforce that does not exist in Indonesia. We do

not have the same educated German people, 20% of young people do not

graduate from elementary school. Infrastructure, regular Tory

environment and human capital. What you most like to see changed with

video government? Decision`making. That is the biggest issue for

investors. The ambiguity. Dishes being made in the ear of natural

resource, the extract and sector. Progress is slowing down. `` extract

mint. I think you're going to see for one thing, we expect to see oil

subsidies go away. Or be reduced. That will free up more money for the

infrastructure. The government are serious about infrastructure,

bringing the private sector in. The problem has been the have been

looking at low`cost beds. They have not been looking at the full

cautiously optimistic they will be cautiously optimistic they will be

some movement on infrastructure. What we are looking for is a more

certain to regular Tory environment. Despite the poor infrastructure,

foreign companies and the investment have been growing quickly in

Indonesia but still at low levels. I caught up with the Indonesian boss

of this factory to find out why? Indonesia made sense for a few

reasons. Manpower is easily available. We looked at the

availability of raw materials and that makes a big difference when

you're setting up a factory, you you're setting up a factory, you

have to have access to materials. We looked at the economic and political

stability of the country. If you look at the economy, it is one of

the most stable in the world. It has become a fully functional democracy

in a short period of time. These factors combined with the fact that

is the biggest potential market in the region. How do you cope with the

traffic jams? It is a part of your contingency planning, it is how you

manage your stock, how many we have houses do you have, how many

distributors, your supply chain. We do you people live and we do you

picture a new head office? It is a way of life. It somebody at me how

people in Russia manage on a cold environment, the Wear jackets. If

you have to carry extra stock, it adds to the cost. I think overall it

balances out because there are other areas where Indonesia has low costs.

Who are you expecting to win and are you confident that what you are

hearing for the bureaucracy will continue? Both of the candidates are

pragmatic. I have read the excerpts of some debate and they are saying

the right things. They are talking about building infrastructure and

investing in education. Whoever comes in, it does not matter, they

are business friendly and pragmatic and then do the right thing. `` and

will do the right thing. There are a lot of problems with the business

environment, do you have any instances where you have had to cope

environment where you have bought, environment where you have bought,

only in Indonesia? Once you have come from India that is nothing that

is only in Indonesia because you have seen that or worse in India. I

have not came across any such cases. The challenge is usually, the 2`mac

areas where it is the most challenging, we have touched on it

already, it is the infrastructure. It is improving. There are

investments in the woods. I think it will get better. I think everybody

at the lodge is that there is a shortage of talent today in the

country. The shortage is likely to become more acute in the future.

Everybody is working towards this. These are the two areas. What

particular clearly do you do for your products? The extent to which

consumers are using consumer products which is the penetration

which is much lower in Indonesia compared to western Europe or Japan.

Japan is by far the highest in the world. Consumers want more benefits

from the same products. A lady in South Korea could use eight products

before she leaves home but in Indonesia the Ladywood use one or

two. It will triple. Indonesia has come a long way in the past decade.

But to continue to grow it will need to invest in infrastructure,

education and its legal system. There is certainly a lot at stake in

the upcoming elections. That is all we have got time for. Join us next

time for more talking business.