Why rural Indonesia is ripe for investment

Indonesia, with a population of 250 million people, is the fourth-largest country in the world. It is spread across a sprawling archipelago made up of 18,306 islands (more than half have not been named), which spans 5,271km from West to East.

With Indonesia being the largest ASEAN country by both population and GDP, many foreign visitors have started to take notice of the nation beyond Bali. But, as I relentlessly remind others, there’s more to it than the wrath of its infamous Jakarta city traffic from Soekarno-Hatta International Airport.

Nearly half (48%) of the population live in rural areas outside urban settings. We often forget to include the voices of the other 120 million people – a group larger than the combined population of Cambodia, Malaysia and Thailand – into the international development conversation. With Indonesia’s sheer size and topology, the development of rural areas presents its own immense challenges, namely: connectivity and infrastructure.  It is vital to tackle these challenges to mobilize the rural population and improve their lives.

How the private sector can help

As part of my work, I have been living for the past two years in a town called Pangkalan Kerinci, located in the Riau province of Sumatra. This was once a remote area inhabited by only 200 households.  In the past 22 years since the APRIL Group came to set up operations, the population has grown to more than 150,000 people. Ninety thousand have found jobs, more than 2,000km of public roads have been constructed  and 200 schools have been opened.  Homes and the town are lit fully by excess electricity distributed from APRIL’s recovery boiler, powered by a renewable source of biomass called lignin.

This is not to evangelize the social and economic good that APRIL has brought to the community, but as an example of how the private sector can play a big role in developing rural areas, providing sustainable job opportunities and raising standards of accessibility and living. Without a doubt, Kerinci is one such success story, one that can be replicated elsewhere in Indonesia.

What the public sector can do

The other key player in improving rural development is the government.  The new government under President Joko Widodo has identified and unveiled big plans around developing villages and improving connectivity – trans-island highways, sea ports and railways – to link up Indonesia’s rural population. The government plans to spend US$ 23.2 billion on infrastructure this year, 60% more than in 2014 and double the amount spent in 2013. Expectations are high that this time, the government could make a breakthrough in tackling infrastructure problems. But many hurdles continue to stand in the way of implementation, with tedious tendering procedures, unclear coordination between multiple bureaucratic ministries, and decentralized provincial and central government responsibilities.

When public and private get together

While the commitment and ambitions of the new government are clear, these plans call for huge financial investments that a government in budget deficit is hard-pressed to deliver. The implementation risks are high.

The government therefore relinquishes the responsibility of key infrastructure development to companies that have a business imperative to ensure timely completion of these projects. Incentives can then be provided through aggressive tax breaks according to milestone achievements agreed by the national and provincial government. This method of public-private partnership through incentives would result in the creation of infrastructure as a public good, driven by market requirement and implemented with business urgency.

While short-term investors may complain that this is a typical chicken-and-egg problem, long-term investors should be willing to invest in infrastructure to build their businesses. APRIL’s experience in Kerinci is testament to this. I urge like-minded long-term investors to look at the other 48%, hungry for growth opportunities, and encourage visitors who stop by Indonesia to venture out to the other islands.

Author: Anderson Tanoto is Director of RGE Group.

Image: A labourer carries a steel rod as he works at a flyover under construction at Tanjung Priok port in Jakarta, October 30, 2013. REUTERS/Beawiharta