Taxi drivers say that driving through Kuta – the first stop-off for visitors to Bali – has always been a nightmare. But over the past few months, it has become an even more irritating assault of horn-honking madness. The increase in both noise and air pollution is caused by the construction of an underpass that is designed to ease congestion at one of the city’s major intersections.

The underpass – along with the expansion of Bali's airport and construction of a newly elevated toll road to the south of the island – is all part of an infrastructure upgrade, which is scheduled to be completed in time for the arrival of diplomats for the Asia-Pacific Economic Cooperation summit, which is being held in Bali in October 2013. Transport is not the only focus of the infrastructure investment for the summit; early in 2012 construction began on the $280m Bali International Park, which will host the summit.

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Construction was opposed by both environmentalists and non-government organisations who say that tourism – which already accounts for 30% of the country’s revenue and is growing at a pace, with visitor numbers increasing from 2.4 million in 2010 to 2.7 million in 2011 – has put increased pressure on water supplies, waste management and infrastructure. The predominantly Hindu island off the east coast of Java is far from the deserted beach getaway depicted in the 2010 film 'Eat Pray Love' starring Julia Roberts and Xavier Bardem; in a 2011 article, Time magazine warned that trips to Bali could turn into a “holiday from hell” because of the island's major infrastructure problems such as rolling blackouts, increased crime and congestion.

Powering on with policies

Indonesia's infrastructure issues are not unique to Bali, a fact not lost on Muhammad Chatib Basri, the chairman of the Indonesia Investment Coordinating Board (BKPM). “Infrastructure is not easy,” says Mr Basri, who is based in the Indonesian capital of Jakarta. However, he points to the passing of a 2011 land acquisition bill as a positive sign. Before the bill was passed, government efforts to acquire land were blocked and major infrastructure development stalled across the country.

“With the new land bill, issues in court will be settled in 90 days,” says Mr Basri. “This will apply only for new projects, unfortunately, not for existing ones, so the transition year will be 2014. [This means] progress for 2013 may be slow but in the medium to long term, Indonesia can tackle the issue of infrastructure.”

Enrico Tanuwidjaja, a Singapore-based economist at RBS who specialises in south-east Asia, is also optimistic about the bill. “The land bill was a serious game changer,” he says. “This was a significant boost because in order to build infrastructure, you need to have very solid legality on land clearing to build roads and ports. Investment in this space has been pretty low.”

An alternative to China?

Foreign investment in general, however, has seen a huge boom in Indonesia in the past few years. According to Mr Basri, 2012 saw a record level of foreign investment in the country, with $24.5bn capital expenditure, up from $19bn in 2011. “Indonesia is the second fastest growing economy in the G-20,” he says. “So this has put it on the radar.” 

Consumer goods company Unilever and food manufacturer Nestlé have both announced plans to increase investment in Indonesia. Meanwhile, car manufacturer Toyota announced at the end of 2012 that it plans to invest $2.7bn in the country over the next four years.

According to greenfield investment monitor fDi Markets, consumer goods company Proctor and Gamble has announced plans to invest in a new factory, set to open in 2015, while merchandise store Ito-Yokado will move its textiles production capacity from China to Indonesia (and Myanmar). The company had outsourced production of 80% of its clothing to factories in China in the previous fiscal year, but it aims to lower this figure to 30% by 2015. Two other Japanese companies – multinational corporation Nikon and clothing manufacturer Uniqlo – are also investing in the country; Nikon will invest $20m in a new sales and subsidiary in Jakarta, while Uniqlo will open its flagship store – also in Jakarta – in mid-2013.

Indonesia has obviously been doing something right to attract such major investments in the past year. According to Jim Brumby, the lead economist in Indonesia for the World Bank, Indonesia's appeal is down to three factors. “We sometimes talk of this as three legs of a stool in terms of Indonesia’s attractiveness,” he says. “First, the country has a lot of raw materials you can produce as commodities. Second, it has its own consumer base, which is growing quite strongly with a burgeoning middle class. And a third reason is the competitiveness [of its] environment, where it is still relatively low cost to operate a business from.”

Political potholes

Another influential factor is the relative stability of Indonesia's political scene since the ousting of president Suharto and his dictatorship in 1998. “In terms of macroeconomic stability, Indonesia is less risky than many countries in Asia,” says Mr Basri. “The debt-to-GDP is relatively low at 24%, the country has a relatively strong reserve and political stability. People can demonstrate on the streets, not like in other parts of Asia where they have not made the complete transformation to democracy.”

In May 2011, the government launched a comprehensive plan to attract more foreign investment, with the rather grandiose title of 'Masterplan for the Acceleration and Expansion of Economic Development of Indonesia' (MP3EI). The launching document explained that the MP3EI provided “the building blocks to transform Indonesia into one of the 10 major economies in the world by 2025”. It divided the country into six economic corridors and identified 22 major economic activities including shipping, steel, palm oil and rubber as possible areas for more investment.

The aim is that by 2025, Indonesia will have grown its GDP from the 2010 figure of $700bn to $4500bn, with the help of $468bn of investment. It is an achievable goal, but there are issues such as corruption and transparency in business operations that still need to be addressed.

“Indonesia still faces the problem of corruption in both central and local government,” says Mr Basri. “We still face a problem of the relatively high cost of doing business, bribery and complicated licensing. But there have been improvements. Maybe this is a good, or bad, example but, over the past few years, many high-level government officials in central and local government, as well as governors, heads of districts and members of parliament, have been investigated for corruption. So, I think this shows that Indonesia is serious about combating this problem.”  

In a bid to increase transparency for investors, Mr Basri has implemented a tracking system on the BKPM website, which allows investors to follow their application through each step of the process. “So if they see they are stuck in one section, they can complain to us,” says Mr Basri. “The process is transparent, which also gives a strong signal.”

Size is everything

Indonesia also has the benefit of a large domestic market – with 250 million residents, the country has the fourth largest population in the world – which has lured investors such as cosmetics and beauty company L’Oréal. In September 2012, the company opened its largest factory in the world in Cikarang, West Java. The factory is expected to manufacture 200 million units of skin and hair products in 2013, with 70% of this set to be exported and the rest expected to be purchased by the local market.

It is not just the size but also the demography of Indonesia that attracts investors. Half of the population is under 30, giving the country a young and healthy workforce.

Though 53% of investments are focused on the island of Java, on which the country's capital lies, there are more than 1700 other islands for investors to consider, with opportunities in everything from oil to manufacturing. And, many of these islands – including Lombok, Kalimantan and Sulawesi – offer quiet and less hectic beaches, making it likely that Indonesia's tourist industry will continue to thrive.