What are the key steps to economic growth in Indonesia?

President Joko Widodo’s historic election has ushered in unprecedented expectations for transformative change. He has emerged from outside of the established elite with popularity fuelled by a corruption-free and “down to earth, man of the people” approach. His unannounced visits with the working class – known locally as “blusukan” – have become his trademark, which is fitting for a man who started his career as a furniture salesman, progressed to mayor of Solo, then governor of Jakarta, and is now president of the world’s fourth largest democracy.

But the new president faces strong headwinds. The softening of the commodity markets has taken the wind out of the sails of Indonesia’s economic growth. In the past decade, growth averaged between 6-7%, but by 2014 growth had slowed to 5%, well below the 6.9% average for East Asia and the Pacific. Although a modest rebound to 5.58% is expected in 2015, the president’s target of 7% growth is likely to remain elusive.

Undaunted, the president has vowed to tackle some big issues, such as what he’s termed the “dangerous inequality” facing Indonesia. Improving education, ensuring equitable and universal access to healthcare, and expanding the social security system are among his top priorities. The president also has a window of opportunity to harness the 43% of Indonesia’s population that is below 25 into a powerful human capital resource base capable of driving long-term and sustainable growth. The challenge is of course finding capital to invest in these areas without widening the deficit and neglecting other pressing areas.

According to the Indonesia Investment Coordinating Board (BKPM), foreign and domestic direct investment totaled $37 billion in 2014. Although a 16.2% increase over the previous year, it is only a small fraction of what is required. And while President Widodo has signaled his willingness to make tough decisions, as demonstrated by the 30% reduction in the fuel subsidy, the savings are not enough to drive his economic agenda. What can he do in the near to medium term to attract private sector investment and partnership to help meet his challenges?

Address bottlenecks. Unblocking the chronic bureaucratic bottlenecks that have stifled investment must be a priority to facilitate new capital inflows. Indonesia ranks a disappointing 114 out of 189 countries in the World Bank’s Doing Business 2015 report. Bureaucracy at the central and regional government levels adds unnecessary complexity for investors. The report ranks Indonesia 155th for starting a business, 153rd for dealing with construction permits, and 172nd for contract enforceability. The president intends to bring reforms he implemented while governor of Jakarta, like the concept of “one-stop service” that he promoted at the APEC CEO Summit, to the national level. Quick wins will generate confidence with the investment community. Removing duplicative processes and putting in strict timeframes for responding to investor interest are two of these quick wins.

Reform the civil service. Structural reforms aimed at transforming the civil service to be more customer-centric are important to improve the investor friendliness of the country. This will require a change of mindset, often referred to locally as a “mental revolution”, similar to that demonstrated by the president in his previous capacity as governor of Jakarta and by his successor in that role. Reducing fraud and putting in place governance processes, management systems and tools to support on-time and within budget project delivery is of equal importance.

Broaden the investment base. As the competition for global capital becomes increasingly fierce, Indonesia needs to diversify and expand its traditional geographic base for investments. A coordinated marketing strategy is critical to ensure its economic agenda aligns with foreign and trade/investment policy. Investor concerns must first be understood thoroughly, and policies need to be clearly articulated. The local shareholder agenda currently informing policy in the financial services sector, especially banking and insurance, needs to be reversed in order to attract FDI and boost liquidity and funding capacity.

Focus on infrastructure. The new government has committed $22 billion in 2015 to infrastructure development. This is higher than previous years, but well short of the $80 billion annually that the government estimates it needs to sustain and improve infrastructure. The infrastructure deficit in ports, railways, roads and utilities has hampered Indonesia from reaching its full economic potential. Infrastructure development creates jobs, improves productivity, and facilitates new economic development, including expanding SMEs and the middle class. Given that the banking system can only support $40 billion to $50 billion based on existing loan to deposit ratios, external funding is therefore a “sine qua non” when it comes to addressing the infrastructure deficit.

But compared to some of its neighbours in ASEAN, Indonesia does not have the best track record when it comes to successfully designing and executing public-private partnerships. Indonesia needs to urgently address this, as well as shortcomings in its regulatory and legal framework. In doing so it should prioritize which projects have the highest likelihood of success under a PPP structure, better assess the risks associated with those projects, and execute the PPP process in a transparent and efficient way. If it is successful in doing so, it could be a real game changer for the country.

Indonesia is not alone in navigating these challenges. India and Indonesia are the region’s largest democracies. Both countries have elected new political leaders that came into power with tremendous promise and enthusiasm. Prime Minister Modi understood early on that aggressively targeting investors would be critical to achieving his broader political agenda. He recently promised investors unlimited economic reforms aimed at changing India’s image as a difficult place to do business. Both leaders have charted a progressive course that could see their countries take their respective places among the global economic powerhouses. For President Widodo to be successful, he must now move swiftly to deliver much-needed reforms in the short term while also focusing on the broader structural adjustments needed to steer his country on its journey towards long-term and sustainable growth.

This article was originally published in The Straits Times.

Authors: Avinash Boodoosingh, Director, Strategic Solutions Group, Marsh & McLennan Companies, USA; Peter Phillips, President, Director, Marsh & McLennan Companies, Indonesia; Gregory Sinnott, Executive Director, Strategic Solutions Group, Marsh & McLennan Companies, USA

Image: Workers work at a construction site to build an office building and shopping mall in Jakarta July 23, 2008. REUTERS/Beawiharta