OECD Investment Policy Reviews: Indonesia 2010

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OECD Investment Policy Reviews: Indonesia charts Indonesia’s progress in developing an effective policy framework to promote investment for development. It focuses on policies towards investment, competition, infrastructure, finance and other areas of the business environment and suggests ways the climate for both domestic and foreign investment might be further improved.

It finds that Indonesia has undertaken a decade of political and economic reform, under very difficult circumstances. Democracy is now firmly established, and the economy is growing at a steady pace in spite of the global financial crisis. Reforms over the past decade have done much to improve the resilience of the Indonesian economy, and the government has made substantial progress in creating a better climate for investment. New laws have been enacted in almost all sectors, and new institutions have been created to advise the government, implement and enforce laws, regulate newly liberalised sectors and settle disputes.

Foreign investors have taken notice. Foreign direct investment in Indonesia in the past five years has exceeded the earlier peak achieved in 1996, before the Asian financial crisis in 1997-98 brought economic contraction and net outflows of foreign investment. This investment is also becoming increasingly diversified by sector and by country of investor.


Infrastructure Development

Indonesia once outperformed many of its peers in infrastructure provision but, since the 1997-98 crisis, has lagged behind much of the region in terms of both public and private investment in infrastructure. The government has been forthright in acknowledging weaknesses in infrastructure and has taken major steps to increase funding, improve regulatory quality and allow for greater private participation. It has set a target for universal access in the power sector by 2020 and has imposed universal service obligations in other sectors, notably telecommunications. State monopolies have been eliminated in telecommunications over the past decade and currently also in the operations of major ports. Increased private participation is possible in toll roads, railroads and power generation. Where SOEs still operate, efforts are under way to ensure that they operate on commercial principles, under an independent regulatory authority. This chapter reviews these efforts to create an institutional environment suitable for private participation in infrastructure. The chapter is structured around the questions set out in the Policy Framework for Investment (PFI). Each section is preceded by the relevant PFI questions, which serves as general context for consideration of the main policy areas.


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