This chapter highlights key challenges to be addressed to attract sustainable investment in agriculture, drawing from the OECD Policy Framework for Investment in Agriculture (Annex 3.A1).

While total domestic and foreign investment have steadily increased in Indonesia since the Asian crisis in 1997-98, investment in agriculture has remained relatively low compared with the importance of the sector in terms of GDP and employment. Access to land is still a long and difficult process for companies, due to low land registration levels and complicated land rights. Unclear legislation following the decentralisation process has generated higher uncertainty for investors. While significant efforts have been made in recent years to streamline licensing procedures, companies still need to obtain numerous permits and licenses from the central and local governments. Infrastructure development can effectively contribute to increasing agricultural productivity and enhance the development of competitive value chains, but Indonesia lags behind most Southeast Asian countries. Investment by smallholders is also constrained by a limited access to credit. Finally, foreign investment is constrained by increasing restrictions on foreign ownership.

The policy framework must ensure that new investments generate not only higher but also sustainable growth. Promoting environmentally and socially responsible investment in agriculture remains a major challenge. Although efforts have been made to strengthen environmental legislation, its enforcement is still weak. Agricultural extensification led to deforestation, and confusing forest classifications and vested interests undermine the efforts to curb high deforestation rates. Due to the complex land tenure system and the weak recognition of customary land rights, land rights of smallholders and local communities are often ignored by large-scale investors, leading to an increasing number of land conflicts. Business partnerships between large investors and local communities have the potential to bring inclusive development if existing land rights are respected.