Investment policies to ‘focus on maximizing value creation’

Monday, 8 February 2010

The Jakarta Post

Senior editor Manggi Habir recently met up with Gita Wirjawan in his new position as head of the Investment Coordinating Board (BKPM) and talked about his strategy and plans going forward.
What is your investment strategy when you came into the BKPM?
Let me answer that question by explaining what I call my investment philosophy. The first one is to go after the low hanging fruits, which are easy to get and this is the natural resources sector.
Here, any perception of negativity is already taken into account, given that companies operating in this sector are used to difficult environments. Now, the second phase is how we can actually get these investors into reinvesting.
What do you mean by reinvesting? Haven’t they already invested?
What I mean is to invest in a broader scope, for instance, related infrastructure development, like roads, bridges and power generation in their respective locations. Let them invest and actually operate them as well.
Let me give you an example of what we have done in East Kutai with Ras Al-Khaimah from the United Arab Emirates (UAE).
Early last year, we initially signed with them about less than US$1 billion investment for a coal mining project in  East Kalimantan . But this investment was broadened to include building a 139-kilometer railway project to transport coal, other products and people, raising total investment to $1 billion.
They are doing the ground clearing and laying down the rail tracks. However, after further discussions, the investor decided to invest another $4.2 billion to build a coal terminal, a 1,400 MW power plant and an aluminium smelter plant, given the bauxite deposits in the area. This brings the total investment to $5.2 billion.
You talked about the first two phases of your investment philosophy what is the next phase?
The third phase is hilirisasi, or going downstream to develop manufacturing of our natural resources. We should do it, because you look across the archipelago, and the common theme is lack of integration, people take the cocoa, ship it to  Malaysia  and  Switzerland and we buy the Kit Kat.
We miss out on the value chain. That’s what I think investment policy needs to focus on, by maximizing value creation through the value chain. And it does create jobs.
The fourth phase is building a knowledge economy. We need to invest in education and produce 75,000-100,000 PhDs in the next 20-30 years. That’s the longer term challenge.
But how can you attract investment in this area?
This requires longer term thinking. First is a proper education infrastructure.
Second is government willingness to provide tax incentives. We’ve been talking about tax holidays, but we have not been able to properly quantify the impact.
For instance, if the government foregoes tax revenue with the tax holidays, how much will it eventually get back in tax revenue as a result of rising investments? It’s going to take time. For the past 20 years,  China  provided tax holidays to drive investments.
Now, China can afford not to provide tax holidays, because they want the economy to be driven more by consumption.
I think Vietnam  will be going through the same transition in about 5-10 years time.
Indonesia  is where China was 20 years ago, where it needs to have tax holidays. We have been driven by consumption for the past 15 years. We now need to reconfigure ourselves to transition into an industrial economy.
You have given your investment philosophy, how are you going to implement it?
This is what I call my promotional strategy. In the past, Indonesia has been operating tactically, reacting to events, as opposed to anticipating events and being proactive.
My first layer of investors that need attention is the traditional ASEAN plus, which includes Japan , South Korea and  Taiwan .
This investor base has been very loyal to us. ASEAN plus represent between 50 to 70 percent of the dollars that come in. The next layer is the new emerging economies of China , India and the  Middle East
These are investors who are thirsting for resources, but they will need to come in a way that is beneficial to Indonesia , in the context of jobs. They cannot just be taking out resources. The last layer is the developed economies. This market has a perception issue.
These investors prefer to go to Vietnam and China , because of a few things we have not got right. The first is the resolution and arbitration of business disputes. What is important to emphasize is that Indonesia is on a right trajectory, and not getting worse.
Can you be more specific on how you are going to approach these different layers?
For the first layer or ASEAN plus, it is sitting down with small-, medium- and large-scale enterprises. For the emerging economies, it’s talking to large companies that are keen on getting raw materials, but with reinvestment to build related infrastructure.
For the third layer, rather than sitting down with large corporations, it is better to approach the academic world and think tanks and provide more information to change their negative bias. And by the time Indonesia starts to industrialize, then they will come in by themselves.
What have you achieved in the first 100 days and what are your plans going forward?
Getting a sign-off from each of the 15 ministers that we recently did for delegating authority to us, as difficult as it sounds, was actually the easy part. It is implementation that will be hard.
I also spent two and a half months visiting 22 provinces. If you want to attract investment you need to understand what you are promoting. We are also close to having closure on the negative investment list, which was in limbo for three years.
I am optimistic about increasing investment. We’re going to project seven regional champions. We also would like to target Indonesia to become the top 40 in IFC’s investment ranking.
Now we’re ranked 122. Another end game is for me to be able to convince someone from Omaha , Nebraska (Warren Buffet) and in 20 seconds have him put a dollar in Indonesia . That would make my job so much easier