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«adb economics no. 411 working paper series october 2014 ASIAN DEVELOPMENT BANK   ADB Economics Working Paper Series Industrial Policy in Indonesia: ...»

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A. Improving the Effectiveness of Policy Implementation The GOI has placed a greater focus on policy implementation and effectiveness recently. The need to translate policies into well-formulated and administered regulations in order to effectively meet policy objectives is recognized, as is the need for better intra- and inter-ministerial and central or regional coordination for policy implementation.

22 | ADB Economics Working Paper Series No. 411 The MP3EI has placed regulatory reforms (debottlenecking) at the heart of the GOI’s efforts to accelerate economic development. In a number of cases, policy implementation failed due to lack of implementation regulations. In others, it is hampered by overlapping regulations between central and regional governments, sectors, and institutions. Implementation of the MP3EI would require establishment or revision of required regulations as well as acceleration and simplification of regulatory processes. Part of this effort is the ongoing exercise to identify relevant regulations, incentives, permits, and their status for the implementation of the MP3EI.

B. Infrastructure Catch-up

Indonesia has a long way to go in meeting the infrastructural needs of its industries and households, although the greater focus on infrastructure by the GOI recently is beginning to show some result. In the newly released 2014–2015 Global Competitiveness Index of the World Economic Forum, Indonesia ranks 56 out of 144 economies, or a score of 4.4 out of 7, a considerable increase from its previous ranking of 80 out of 148 but still lower than Malaysia (25), Singapore (2), and Thailand (48).

Any firm, no matter how efficient, will not become competitive without the support of efficient infrastructure. The GOI has shown commitment to tackle the problem of infrastructural shortcomings in Indonesia. At the same time, the GOI is aware of its own limitations and is therefore encouraging greater private sector participation in infrastructural development through public-private partnership (PPP). Presidential Regulation No.67/2005, later replaced by Presidential Regulation No.13/2010, concerns PPP on infrastructure provision.

The GOI has included 33 PPP projects in the MP3EI to accelerate infrastructure development.

The National Development Planning Agency (Badan Perencanaan Pembangunan Nasional or BAPPENAS) has set a target of Rp327.8 trillion to finance these projects through PPP (IRSDP BAPPENAS 2011). Investors are being invited to participate in designing, financing, and operating in many areas of infrastructure projects. Infrastructure sectors that will be provided for in the short to medium term include roads and bridges, water supply, solid waste, air transportation, marine transportation, land transportation, railways, telecommunications, power, oil and gas.

The PPP infrastructure projects in the MP3EI are divided into three categories: potential project, priority project, and project ready for offer. Potential projects are projects planned by the government but still require completion of pre-feasibility documentation and risk analysis, while priority projects are projects that already have pre-feasibility studies, PPP modality, risk analysis, and government support (where necessary). PPP ready projects are those that already have tender documentation, market sounding reports, PPP procurement schedules, and government support (where necessary).

A number of other supporting regulations are in place to support infrastructure development.

Minister of Finance Decree No.38/PMK.01/2006 provides clearer project risk allocation and risk guarantees. Presidential Regulations No.65/2006 and No.36/2005, which was later replaced with the Land Acquisition Bill of 2012, are intended to provide a clear direction and mechanism in land acquisition process. A number of new laws on rail, ports, airports, land transport, and electricity have also been issued reflecting a greater shift toward private sector participation.

The GOI’s effort to promote PPP has faced two main challenges. First is the lack of institutional capacity in developing PPP projects. Second is the low interest of domestic capital resources to finance infrastructure projects. The GOI has finalized an integrated government support scheme for PPP Industrial Policy in Indonesia: A Global Value Chain Perspective | 23 projects consisting of Project Development Capacity to assist PPP project preparation, Viability Gap Fund to increase PPP project financial viability, Infrastructure Guarantee Fund, Infrastructure Fund for long-term financing, and Geothermal Fund Facility to enhance PPP geothermal projects. Besides these schemes for PPP projects, there are also several fiscal supports for non-PPP projects, such as the Land Fund for toll road development, guarantee fund for electric power development, and fiscal support for local government water company.18 The first problem, which is the lack of adequate preparation of PPP projects, arises from the absence of adequate and reliable technical and financial information, particularly a detailed analysis of risk sharing and government contributions. Without support, potential investors, especially from overseas, will continue to be wary of investing. The GOI together with support from the Asia Development Bank (ADB) has been implementing the Infrastructure Reform Sector Development Project (IRSDP), managed under the Project Management Unit at BAPPENAS. BAPPENAS is also providing project preparation services through the Project Development Facility (PDF) to assist in the selection of appropriate private partners in infrastructure services. The PDF will also ensure that project preparation and transaction are in line with PPP principles.19

C. Economic Corridors

The MP3EI lists improving domestic connectivity as one of its main pillars. This strategy also has a special focus on improving connectivity to rural, less-developed areas of Indonesia. An important part of the MP3EI is the development of six economic corridors which are based on the potentials and advantages inherent to each region (Table 3). The decision on the six economic corridors also takes into account inter-region connection.

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Source: Authors’ compilation.

The corridors will increase connectivity based on the GOI’s holistic plan of an integrated system of national logistics (Sistem Logistik Nasional or Sislognas), national transportation system (Sistem Transportasi Nasional or Sistranas), the RPJMN, and communication and information systems. This is a highly challenging task due to the archipelagic nature of Indonesia. The GOI has indicated that effectiveness, efficiency, and global connectedness are key considerations in the development of the connectivity system in each economic corridor. So far, priority activities have been identified for each corridor, based on its specific needs and challenges.


Interview with a representative of the Fiscal Policy Agency, Ministry of Finance, on 11 April 2014.

transparency, accountability, competition, and public-private equality.

24 | ADB Economics Working Paper Series No. 411

D. Power and Energy

Indonesia’s total energy demand has been growing annually by around 7.0%, and is expected to increase to 9.0% by 2019 as transportation and industrial sectors grow and households become more affluent. A large proportion of demand is currently met by fossil fuels, mainly oil. Electricity demand represents a significant share of total energy demand.

Indonesia’s electricity demand is estimated to grow at 9.5% annually for the next 5 years, and demand growth easily outpaces growth in power generation capacity. The country’s electrification rate has been on the rise, standing at 80.1% in September 2013, a 13.0% increase from 2011, bringing Indonesia closer to its electrification target of 90.0% by 2020. Nevertheless, this rate remains relatively low compared to other ASEAN members, and there are still 50 million people without access to electricity.

The GOI has launched two 10,000 megawatt (MW) Fast Track Programs (FTPs) for completion in 2013 and 2015. Under the GOI’s power generation development planning, 57,000 MW of power generation would be developed by 2021, 53.0% by the state-owned electricity company, Perusahaan Listrik Negara (PLN), and the rest by Independent Power Providers (IPPs).20 The total investment required is $77 billion. Anecdotes gathered from the field, however, suggest that only 30.0% to 35.0% of projects under FTP 1 were successful due to poorly written project proposals. FTP 2 also has not been progressing well, due to its high reliance on geothermal projects,21 few of which have materialized due to problems with the issuance of licenses.

In the MP3EI, additional electricity demand is projected to reach about 90,000 MW by 2025, a near doubling of the September 2013 total installed capacity of 46,420 MW. The GOI aims to increase electricity generation capacity by 5,000 MW per year to meet growing demand and support economic growth. The country’s electrification drive had added 4,000 MW to 4,500 MW of capacity per year since 2011. From 2014 to 2020, the average annual capacity increase should be gradually increased to 5,000 MW per year if power generation capacity is to catch up with demand.

Apart from issues relating to infrastructural development, another (distorting) contributory factor to Indonesia’s power problem is the strictly regulated and under-priced electricity market. The domestic political realities mean that the GOI faces great difficulty in bringing the current subsidized selling price of electricity closer to the market rate as any changes to the price require parliamentary approval and hence are prone to political decisions. Efforts to reduce fossil fuel subsidy have also been hampered by the difficulty in diversifying to more sustainable supply sources.

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Understanding the value of global linkages, Indonesia has been actively participating in trade and economic partnership talks with partners around the world, either individually or jointly as a region with the rest of ASEAN member states.


Jarman (2013) Indonesia’s Electricity Policy and Cooperation between Japan and Indonesia, Presentation by the Director General of Electricity on the Occasion of Visit by FEC Delegation, 18 March 2013, Jakarta: Directorate General of Electricity, Ministry of Energy and Mineral Resources (MEMR).

Big players are involved in geothermal projects, such as Chevron and Medco.

Industrial Policy in Indonesia: A Global Value Chain Perspective | 25 Indonesia already has a number of agreements in place with bilateral and plurilateral partners and is also a signatory to the ASEAN Free Trade Agreement (AFTA). It also has its first economic partnership agreement (EPA) with Japan, implemented since 2008. Indonesia is currently negotiating bilateral agreements with Iran, India, Pakistan, Australia, and the European Free Trade Association (EFTA) countries, and undertaking joint studies on potential FTAs with Chile, Turkey, Tunisia, and Egypt. In July 2012, Indonesia held the first round of negotiations for a free trade and investment cooperation agreement with the Republic of Korea known as the Indonesia Korea–Comprehensive Economic Partnership Agreement (IK–CEPA).

Indonesia is one of the founding members of ASEAN. The ASEAN FTA is one of the pillars that would support effective implementation of the ASEAN Economic Community (AEC) in 2015. As a member of ASEAN, Indonesia is a party to preferential trade agreements with Australia and New Zealand (AANZFTA), the PRC (ACFTA), Japan, the Republic of Korea, and India. In November 2012, Indonesia, with ASEAN, started negotiations, with the six regional free-trade partners of Australia, the PRC, India, the Republic of Korea, Japan, and New Zealand under the Regional Comprehensive Economic Partnership (RCEP). ASEAN has also started FTA negotiations with Hong Kong, China as well as negotiations to upgrade the ACFTA with the PRC. A plan to commence negotiations for a comprehensive economic partnership agreement with the EU is also in the pipeline.

In multilateral negotiations, the Ministry of Industry is the lead negotiator of Non-Agricultural Market Access (NAMA), as its portfolio covers almost 80.0% of tariff lines. The new Industrial Bill states that the Ministry of Finance would be in charge of setting the level of tariffs. More information is needed on the consultation and decision making process, particularly among the relevant authorities, including Ministry of Finance, Ministry of Trade, Ministry of Industry, other line ministries as well as relevant non-state stakeholders.


This section briefly discusses some of the policy instruments used by Indonesia to pursue its industrial policy objectives. The list is non exhaustive and is intended to give a broad outline of how the GOI translates these objectives into action and what are the likely implications. It serves as a precursor to the next section that focuses discussions on a specific sector.

A. Trade Taxes

The level of trade taxes, including import duties and export taxes, are influenced by a number of factors including fiscal consideration, trade facilitation, industrial policy objectives and international commitments. While there are currently no international rules governing export taxes, there are growing pressures for greater future export disciplines at various fora.

Under its WTO obligations, Indonesia has bound 96.6% of its tariff lines, with 94.6% at a rate of 40.0%. Its simple average bound tariff is 37.5%, with an average bound tariff for agricultural products of 47.7%. Despite the high bound rates, Indonesia’s simple average Most Favoured Nation (MFN) applied tariff is only 6.8%, much lower than most of the ASEAN economies. Its simple average applied tariff for agricultural products is 8.4%, while its average applied tariff for non-agricultural products is 6.6% (Hidayat 2012).

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