We cannot sit and wait
Ardhian Novianto | August 28, 2011

Consistently outspoken since the Suharto years, as businessman, activist and the chairman of the Indonesian Employer’s Association (Apindo), Sofjan Wanandi tells Globe Asia of his continuing concerns over the development of manufacturing.

Sofjan argues that the process of building a strong manufacturing base is going too slowly, partly because the government is too absorbed in the hustle and bustle of politics.

He admits he is very worried at the slow progress in improving the investment climate, which he claims risks Indonesia losing the opportunity to benefit from the crises in the US and Europe. Excerpts from the interview:

How do you rate the state of Indonesian manufacture industry?

Since we faced the 1998 crisis, Indonesia has no longer been attractive to invest for industry, mainly labor-intensive manufacturing industries. In the last 10 years, foreign and domestic capital has favored investment in natural resources, secondly in plantations, especially palm oil, while the third area is in service industries like property, real estate, insurance, banking, leasing, multi-finance, etc. There has also been a high level of capital investment in manufacturing companies that are capital-intensive, such as the expansion of Toyota, Yamaha, Daihatsu, Suzuki etc., as well as the expansion of Korean electronics companies like Samsung and LG. That is more capital-intensive, but there has been little interest in labor-intensive manufacturing. Therefore, if you look at our economic growth, it does not absorb a lot of labor, because our growth has all been capital-intensive investments that require less manpower. For labor-intensive industries, such as shoes, textiles, electronics, consumer goods, it was very difficult to develop because of our rigid labor laws, so people are afraid to invest here. Thus, we must change.

How does this compare with China or India?

If we see the pattern of India, manufacturing is developed through a clear pattern of the government where they really start with what they call the basic industries. In China, the government enters almost all fields, using state-owned enterprises as a means of entry controlling 90% of the national economy. In addition, China is very open, and is actively opening itself by providing various incentives for the entry of foreign capital. Meanwhile in Indonesia we have not been clear from the beginning. In Suharto’s era the policy was broad-based, everything could enter. We had that advantage but we did not have any specialties. Now, with the current government, we expect to be able to build industry from upstream to downstream, starting with the raw materials that are available in the country. Therefore, we should no longer use our raw materials only for export. Petrochemicals or gas for example: Our gas can be used to help industries that use lots of gas, such as glass, gloves, etc. We don’t have this type of manufacturing industry yet.  Now we have large cocoa and coffee plantations, but the manufacturing industries are in other countries like Malaysia and Singapore. Also with palm oil, it's time for us to create a domestic industry.  Freeport has produced so much copper for more than 40 years, but no upstream industry has been built. Did Freeport create the upstream industry? No. But the company has made huge profits for 40 years.

Can we follow the Chinese or Indian example?

We cannot follow the example of China, India, or even Vietnam. We've got our own way. We also must recognize that Indonesia is a very large collection of islands, so we need to solve the infrastructure development problems that are causing connectivity problems. Now, our bad infrastructure makes logistics very expensive. In Indonesia the average logistic cost for industry has reached 15%, while in foreign countries it may not reach 5%. We cannot compete anymore. There are not enough roads. Trucks cannot enter the streets, they have to run at night, the ports are jammed, it all becomes added cost. So there needs to be a division of tasks between the government and the private sector. The task of the government is to solve the connectivity problems that will reduce logistic costs, and to create a bureaucracy that is really efficient. Do not forget, after the 1998 crisis, the business sector took all sorts of effort to raise efficiency for the sake of survival. Our bureaucracy has been so-so ever since the Suharto era, and today’s situation is even more ugly because of our high-cost economy.

How do you achieve development when the government budget for infrastructure is limited?

Change the existing regulations. By changing the law it will not need a lot of money, then we can invest in that field. Change the Agrarian Law, the Law on Spatial Planning, and Labor Law number 13. We need to change the Labor Law so that labor-intensive industries will be immediately willing to come back to Indonesia. The current labor law is very rigid, and makes it difficult for employers to manage labor. According to the law, we cannot fire an employee even if he is a criminal. This does not make sense, and as a result there is no new labor-intensive manufacturing investment. We have to understand that we have a surplus of cheap labor, but most of them are unskilled. The majority, 50%, only graduated from elementary school. So we need labor-intensive investment to absorb the labor, and provide training. Governments do not want to do their homework, while we in the private sector are told we have to do our homework, and the bureaucracy never changes. The private sector, since 1998, has been consolidated, but the government has never consolidated. That's the most important thing. You know, investment has become so costly, while on the other side we open free trade zones with 0% tax. This ends up with investors no longer interested in building a factory here. It is easier to import than to make your own factory. Especially in a situation such as now where the rupiah continues to strengthen, we should not let this continue.

What are the essential elements of the government’s homework?

If the government completely clears up the rules that interfere with the investment climate, then makes the bureaucracy more efficient, especially the relationship between central and local government and the coordination among departments, that will definitely improve investment. With the current situation, all investors choose to do is hit and run. They do not want long-term investment because the laws do not provide legal certainty. You know, the banks have about Rp400 trillion for investment credit which up until now we cannot use, because we cannot release the land to start infrastructure construction. Many friends in the infrastructure business are ready to build toll roads, but they cannot release the land.  In other business, where we have too little electricity, we want to build geothermal power plants but that is difficult, as the government has not pegged the price (at which it will purchase power) in a way that is visible.

Will the new legislation on land acquisition make it easier for business?

Sure. However, another problem is that the land is already occupied by a land broker.  It is not that people do not want to sell the land anymore, but the land brokers (interfere), so it cannot be bought with the existing budget. This is another main problem, even after we get the law.  Please, the government needs to do its homework to make the situation conducive for investment. Do not keep creating disputes, stop political in-fighting (and recognize) that in the end we, the entrepreneurs, are the ones who are being squeezed. All the root of the problem is that the government is not doing its homework. We've been working on our homework and as we have grown the economy grew, 6.5% last year, due to us, the private sector, as the locomotive. The government was not there at all, it even bothered us. If the government slept instead of bothering we could have grown 7%-8%, I guess. This is a major problem in my opinion. Do not let politics seize all the energy of the nation.

What do you think about the concept of six development corridors?

I do not believe it. We also have the program Increased Exports and Increased Investment (PEPI), now we have the Master Plan for the Acceleration and Expansion of Indonesia's Economic Development (MP3EI). That all just theory. Actually our problem is this is all that matters, it just stops with the discourse. The division into corridors is only theory. Actually MP3EI should work but until now it has not started to run.  There is no clear priority.  The progress and process become too slow. Is this the consequence of democracy?  In the era of President BJ Habibie, in one year the parliament produced 100 laws. Now, in one year they produce less than 30. It is not about democracy, but leadership. Yes, the democratic process takes time, but if we have a strong leader it does not matter. Our president must change his attitude. If not, this will destroy us. China, even where most of their business is run by state-owned enterprises, they keep moving on because the leadership is there. You see the Indian bureaucrat as too bad, but the prime minister’s leadership is good. India’s democracy is crazier than our democracy, but their manufacturing industry is leading the way.

What do we do, just wait for a new leader from the next election?

It will be a headache if we have to wait two more years for the elections; this good economic momentum will have gone. The United States and Europe are in a bad situation, so they will use their capital to secure themselves. Please, do not lose the momentum again. Yes, the economies of China and India are growing rapidly but the US and Europe are still the locomotives of the world’s economy. China and India are not yet enough to replace them. Also, it must be realized that China is more our rival in industry than complementary. Japanese industry is complementary for us, but China is not. All China’s manufacturing products are our competitors worldwide.

What will entrepreneurs do in this current situation?

Entrepreneurs will continue to invest. We have to go on. Because of the population growth, we have purchasing power in our society. Each year our population increases by 3-4 million people, and people need food, clothing, etc. Purchasing power continues. Indonesia also has the raw materials to export and this increases people's purchasing power, there is a growing middle class, so that we increase production capacity. But not many of us are doing anything, because it is easier to import, as the free trade zones have 0% tax. This activity is not optimal to make the industrialization of our country grow fast. There are a limited number of new players, as well. Then, our agriculture policy is poor. We import almost all of the most basic foods. Can you imagine that two thirds of our republic consists of sea, with sunlight the whole year, but we import salt? This year we also started to import rice. What do we do not import? We import corn, soybean, sugar, salt, even salted fish. This is what I think is wrong. It all depends on the leader, who determines the budget for development. This year’s budget mostly goes for routine expenditure, while development expenditure is only 8%.  Even in Suharto’s era, government expenditure for development was 30-40% of the budget.  Now, we spend it all on subsidies.

How about our macroeconomic picture?

The macro is good. But if our bad situation in micro continues, in the long run it will make the macro bad as well. Let’s not lose the momentum again. In investing it is not difficult to find a place to linger. We should never think that we are like a pretty girl who can always wait. In the world there are India, Vietnam, Thailand, China, etc.  Investors have many choices, even the Indonesian investors. We cannot just sit and wait.

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