Known as a holiday destination offering idyllic beaches, wild volcanic landscape and remote yoga retreats, is is perhaps surprising that Indonesia attracts significantly fewer tourists per year than many of its south-east Asian neighbours. In 2015 it welcomed 9.7 million visitors, while nearby Singapore received 15 million and Malaysia 27 million.

With a weak currency, the rupiah, and a booming population in need of employment, tourism has been targeted as a priority sector for development to spur growth and bolster foreign exchange revenues in Indonesia. But despite its popularity with foreigners, the country lacks the necessary infrastructure to realise its full tourism potential – a fact not lost on the government, which has announced that it is aiming to rectify this situation.

Land of opportunity

Badly hit by the 1998 Asian financial crisis, Indonesia was short of the funds to improve its infrastructure for nearly a decade. President Joko Widodo, elected in 2014 and known throughout the country as  ‘Jokowi’, has made infrastructure development and deregulation key priorities in order to address this and attract vital FDI. His ambitious plans include bringing tourist numbers up to 20 million by 2020, and raising the sector’s contribution to GDP from its current 9% to 15% by 2019.

“We are offering wonderful opportunities in tourism for Indonesia,” says Frans Teguh, the country’s assistant deputy for the development of tourism infrastructure. “Our project is now under way, and we have 10 prioritised destinations to be developed for a five-year plan, including Lombok, Mandalika, Lake Toba in Sumatra and others. We are working to develop tourism facilities and infrastructure, marinas, airports and seaports – these are the types of projects we would like to offer to investors.”

The tourism ministry is continuing its ‘Wonderful Indonesia’ campaign to raise the profiles of these destinations, armed with a $98.4m marketing budget for 2016. Mr Teguh hopes that through this, the country can upgrade numerous destinations to match the quality and popularity of its most famous tourist island, Bali.

Inaccessible areas

The world’s largest archipelagic country, Indonesia has more than 17,000 islands, 54,000 kilometres of coastline and boasts the second highest biodiversity level in the world after Brazil. Yet most of this territory is overlooked because it is difficult to access. “Once you move east of Bali, travelling around Indonesia’s islands starts to become more challenging,” says Daniel Nicholls, FDI consultant and EU representative on Indonesia’s Investment Coordinating Board.

“The air links from Jakarta and Bali to the rest of Indonesia are growing, but travelling between the more remote parts of the archipelago can be unpredictable,” he says of the serious dearth of airports, ports, roads, hotels and inter-island transport.

The inadequate infrastructure situation also means higher logistics costs, making Indonesia's investment climate less attractive. In response to this, the government is planning the construction of 2600 kilometres of roads, 15 airports, 24 ports, 3258 kilometres of railway and the addition of about 35,000 megawatts to the state electricity company’s current capacity, according to global consultancy firm Oxford Business Group. 

Unlocking potential

Besides infrastructure, many analysts claim that progress needs to be made in bureaucracy and regulation to improve FDI levels. “President Jokowi has set a target of improving Indonesia’s Ease of Doing Business ranking of 109 to 40 during his presidency,” says Anton Alifandi, principal south-east Asia analyst at IHS Country Risk. While this target may be ambitious, the government’s emphasis and drive looks certain to reap some measure of notable progress and offer confidence to investors.

Indonesia also offers special economic zones specifically for tourism, such as Mandalika in South Lombok and Tanjung Lesung in western Java, which offer between 20% and 100% tax exemptions for up to 25 years, foreign land ownership, and VAT exemptions. “Foreign ownership restrictions for restaurants, cafes and bars are also now being lifted,” says Mr Nicholls. 

Meanwhile, coupled with the infrastructure challenges is a lack of reliable power in Indonesia’s more remote parts, especially the east, where electrification ratios are often below 60%. These locations would benefit from investment in renewables, particularly solar, hydro and tidal energy, says Mr Nicholls. Off-grid power solutions may be the most effective, as difficulties remain when it comes to on-grid power supplies, ranging from foreign ownership caps on smaller projects to land acquisition and power-purchase agreements.   

Domestic demand

As the fourth most populous country in the world and with a rapidly growing middle class, Indonesia has much to offer not only in the way of workforce but also in terms of its domestic market. The government aims to increase local tourism as Indonesians made 250 million trips within the country in 2015, of which 90% were for tourism purposes, according to the tourism ministry. “We have growing middle class income now, meaning tourism is now part of our lifestyle,” says Mr Teguh. “This acts as part of our economic development platform, and through this effort we can engage the local communities to be part of the development of tourism.”

The 2002 Bali bombings that took 202 lives dramatically hit tourism levels and left heightened security concerns. Nonetheless, Bali's tourism numbers have gradually recovered to pre-bombing levels, which is testament to the appeal of the island as well as counterterrorism efforts by Indonesian authorities. “Since 2002, the terrorism threat to the tourism sector has declined considerably,” says Mr Alifandi. “Indonesia’s counterterrorism police work closely with their counterparts in south-east Asia, Australia and the US, and have arrested or killed hundreds of Islamist terrorists, greatly reducing the risk of attacks.”

The January 2016 Islamic State-claimed attack that killed eight people near a shopping centre in the capital Jakarta, close to UN headquarters and a number of foreign embassies, marks a new phase in the terror threat facing Indonesia – one that many countries in the world are facing. However, counterterrorism police are far more capable of dealing with the threat than in the early 2000s, says Mr Alifandi. “Investors should take into account the terrorism threat to Indonesia and take steps at a tactical level to mitigate the risk. Investors should also note that Indonesia’s counterterrorism capability is very good,” he adds.     

The IMF reports that with application of the right policies, Indonesia could return to economic growth of above 6% and possibly the president’s goal of 7% in the near future. Infrastructure and tourism investments will boost the economy in both the short and long term, and provide numerous direct and indirect jobs. “Difficulties for foreign investors coming to Indonesia are being taken care of by the government,” says Mr Teguh. “Of course it is still in progress, but we are moving forward and fixing these challenges.”