ABSTRACT
This paper gives an overview of the agricultural investment policy in Indonesia. It is particularly important due to the country’s heavy reliance on agriculture as a significant economic sector and its unique geographical and socio-economic context. Indonesia has an opportunity for agricultural investment in terms of a large-scale market, favorable natural resources, and developments in infrastructure and human resources. Therefore, the government of Indonesia has shown interest in promoting agricultural development and offering policy support to attract investments in the country. It includes issuing certain regulations to encourage both domestic and foreign investments in the agricultural sector. Hence, there is a need for multi-party cooperation through identifying the market, adopting modern technologies, implementing sustainable agricultural practices, forming partnerships among stakeholders, respecting cultural norms and practices, considering risk mitigation strategies, and complying with regulations.
Keywords: agriculture, investment, policy, overview, Indonesia
INTRODUCTION
Investment is important for several reasons, as it plays a crucial role in economic growth, financial stability, and individual wealth-building. In essence, investment is a fundamental driver of economic progress, individual financial well-being, and societal development channeling resources into productive ventures, fuels innovation, and shapes the future economic landscape. It involves many sectors including agriculture.
Agricultural investment is important for a variety of reasons, spanning from food security to economic development. It has far-reaching impacts on food security, economic development, poverty reduction, environmental sustainability, and the well-being of both rural and urban populations. It is a crucial component to ensure a balanced and prosperous future for societies worldwide.
Agricultural investment is particularly important in Indonesia due to the country’s heavy reliance on agriculture as a significant economic sector and its unique geographical and socio-economic context. Given the myriad of challenges facing agriculture today, from climate change to urbanization, targeted and sustained investment is more crucial than ever.
By focusing on the unique challenges and opportunities of the Indonesian agricultural sector, the country can enhance its economic growth, improve livelihoods, and ensure a more resilient and sustainable future for its population. This paper discusses the overview of agricultural investment policy in Indonesia based on its features and opportunities.
FEATURE
Indonesia is an agriculture-based country with mega biodiversity that can be used as a basis for sustainable development. It comprises of 16,056 islands with a total area of 1,916,862.20 square kilometers. The country is administratively governed under 34 provinces, 416 districts, 98 cities, 7,281 sub-districts, and 83,794 villages. The agricultural sector including food crops, horticulture, estate crops, and livestock sub-sectors plays an important role in the national economy of the country. The key macroeconomic indicators of the agricultural sector in Indonesia are summarized in Table 1 with the following description.
- The contribution of the agricultural sector to the Gross Domestic Product (GDP) of Indonesia was about 9.86%. In the last five years (2018-2022), the GDP of agriculture was about US$107.94 billion annually. It increased by about 3.21% per year. The highest contribution was the estate crops sub-sector (3.58%), followed by sub-sectors of food crops (2.77%), livestock (1.61%), and horticulture (1.52%).
- About 37.22 million people were working in Indonesia’s agricultural sector. This number accounted for 28.27% of national labor (131.65 million people). From 2018 to 2022, the growth of agricultural labor absorption was 1.53% per year.
- From 2018 to 2022, the Indonesian farmer’s terms of trade were about 103.86, in which farmers experienced a surplus i.e., production prices rose more than the increase in consumption prices or farmers’ income rose more than their expenses (farmer’s terms of trade was >100). This refers to a string of indicators that measure average changes to prices and farm costs of the agricultural sector. Price indexes measure the average growth in prices that farmers receive at the farm gate for their product, and in the prices paid for inputs to production (Zammit and Howden, 2020). It is a proxy indicator of farmer welfare as a comparison between the price index received by farmers and the price index paid by farmers.
- The trade balance increased by about 12.18% per year i.e., from US$10.32 billion to US$11.68 billion in 2022. In other words, there was a surplus of trade during these periods.
- There was an increase in agricultural investment of about 17.56% from 2018 to 2022, aggregately. It comprises of domestic and foreign investments i.e., 9.21% per year and 25.90% per year, respectively. This indicates that foreign investments are quite prospective and numerous in Indonesia. It was noted that both domestic and foreign investments were more focused on the sub-sector of estate crops (94.47%), followed by sub-sectors of livestock (3.71%), horticulture (1.25%), and food crops (0.57%). As the prime mover of the economy; therefore, it is required to encourage more agricultural investments in the country.
OPPORTUNITY
Indonesia has an opportunity for agricultural investments, driven by the country’s diverse agricultural sector, economic conditions, and environmental factors. At least there are three opportunities for agricultural investments in the country (MoA, 2021). First, Indonesia has a large-scale market. Second, the country is supported by favorable natural resources. Third, Indonesia develops infrastructure and human resources.
Large-scale market
Indonesia’s large population provides significant opportunities for agricultural investments. With 275.77 million people (BPS, 2023), there is a constant and substantial demand for food and agricultural products. A large population is strategic for potential production resources and consumption targets. The required quantity and quality of consumption for various agricultural products continue to increase from time to time.
With a large population, combined with its diverse topography and climate, Indonesia offers a multitude of opportunities for agricultural investments. The middle-income class population in Indonesia in 2045 will increase to 223 million people (70% of the total population) (Bappenas, 2019). This increase will certainly have an impact on increasing average per capita income which is predicted to reach US$23,199 in 2045 (Bappenas, 2019). Other research was conducted by the McKinsey Global Report Institute (2012) which reported that in 2030, Indonesia will have a middle-class population (as a driver of economic growth) of 135 million people and 113 million of them will be skilled and expert workers which cumulatively make Indonesia predicted to become a leading country with the 7th largest economic power in the world. In 2016, the middle class in Indonesia amounted to 53.6 million people (Databoks, 2023). The nation’s vast consumer base and rising middle class suggest a growing demand for both staple foods and diversified agricultural products. Since the country has different regions, it has opportunities that are beneficial for successful investments in the agricultural sector. It is predicted that in 2030 Indonesia will achieve a US$1.8 trillion potential consumer market or significantly increase by about 360% as compared to the achievement in 2012 i.e., US$0.5 trillion (Table 2).
Favorable natural resources
Indonesia is considered as one of the most biodiverse countries in the world due to a combination of geographical, ecological, and historical factors. The country’s vast land area provides ample space for agricultural activities, including crop cultivation and livestock farming.
Indonesia is the country with the second highest terrestrial biodiversity in the world. If combined with marine biodiversity, Indonesia is the first. The status and trends of Indonesia’s biodiversity make Indonesia one of the world’s agro-biodiversity centers with 10% of the world’s total plant species. For the diversity of fauna, approximately 12% of the world’s mammals (515 species) are found in Indonesia, placing it in second place after Brazil, at the global level. The ranking of Indonesian species in the world can be seen in Table 3.
Biodiversity has essential roles as: (1) Source of food, energy, and water; (2) Preservation of cultural heritage; (3) Quality environment; (4) Pollution absorption; (5) Maintaining ecosystem stability; (6) Producer of non/renewable natural resources; (7) Spiritual fulfillment; and (8) Mental and physical well-being (Indonesiabaik.id, 2021). All of this is a good opportunity to invest in Indonesia, especially in the agricultural sector.
As it has more than 17 thousand islands, Indonesia is ranked as the top six archipelagic countries in the world after Sweden, Norway, Finland, Canada, and the United States. Among these islands, Java is listed as the most populous island with 151.6 million inhabitants or around 56.10% of Indonesia’s total population. Therefore, the direction of developing agricultural investment is very wide open outside Java. In other words, the potential for utilization of land resources in the outer islands of Java is quite large. For example, the most potential sub-optimal lands such as swamps, tidal, dry land, and dry fields particularly exist in seven provinces i.e., Jambi, Riau, South Sumatra, East Kalimantan, South Kalimantan, West Kalimantan, and Central Kalimantan. Moreover, Indonesia has a tropical climate with sunlight throughout the year which influences high rainfall intensity, temperature, and humidity (MoA, 2021). All three are key supporting factors for agricultural investment activities in the country.
With the wealth of natural resources in Indonesia, investment in this sector will be very profitable. Nevertheless, the Indonesian Government formulate a policy in accordance with the sustainability aspects in the use of natural resources. For example, Law No. 11/2020 describes the mechanism for settling palm oil plantations located in forest areas (Articles 110A and 110B). Thus, investment in the agricultural sector should follow environmental sustainability protocols.
Infrastructure and human resources developments
Indonesia has been investing in infrastructure development as a critical issue to make connectivity since the country is an archipelagic nation composed of thousands of islands. Developing infrastructure helps bridge geographical gaps and connects different regions, while connectivity is vital for the transportation of goods, services, and people, as well as fostering development implementation.
Infrastructure development plays a vital role in creating an environment conducive to agricultural investments in Indonesia. It improves access to markets, reduces costs, enhances productivity, and ensures the sustainability of agricultural practices. As a result, it not only benefits local farmers but also attracts domestic and foreign investors to participate in the growth of the agricultural sector. Certain infrastructure developments to support agricultural development in Indonesia can be seen in Table 4.
In terms of human resources, currently, the majority (69.25%) of the Indonesian population can be categorized as under productive age between 15 and 64 years old (Figure 1). It is a so-called demographic bonus that refers to a period when the working-age population is larger than the dependent population (children and the elderly), leading to the potential for increased productivity and economic development. This can offer several advantages for agricultural investment in Indonesia, as they relate to the country’s population dynamics and potential for economic growth.
Indonesia’s demographic bonus will peak in the 2030s. At least it has two benefits, namely: (1) Getting a supply of labor, to which the economy becomes much more advanced because those who work come from a productive age towards the work process is fast and efficient; and (2) Increasing the country’s economy i.e., the GDP per capita due to generally caused by a decrease in the dependency ratio. However, the demographic bonus comes with challenges such as the need for infrastructure development and job creation to support the growing working-age population.
It is important to note that among the Indonesian population, 38.70 million people are working in the agricultural sector (Table 5). About 31.89% are categorized as young farmers (20-39 years old). These young farmers are strategic entry points in line with investment in the country. It is required to encourage young farmers to keep spirit and motivation, have innovation, convert circumstances into opportunities, take advantage of information technology, produce quality products, and expand target markets through favorable investment policies.
POLICY SUPPORT
One of the indicators related to investments is the Ease of Doing Business (EOB) index. It is an aggregate figure that includes different parameters that define the EOB in a country. There are 10 indicators; among others is “Protecting investors which cover the indices on the extents of disclosure and director liability as well as ease of shareholder suits” (World Bank, 2017 as cited by Fibra, 2018).
Indonesia is ranked 73 (index score 69.20) among 190 economies in EOB. As compared to other ASEAN countries, the rank of Indonesia is lower than those of Singapore (index score 86.20), Thailand (index score 81.50), and Malaysia (index score 80.10). Therefore, investors should be aware and well-informed of local regulations and sector-specific requirements before commencing their operations in Indonesia (Acclime.com, 2023).
Indonesia has a vision to open the widest possible investment towards reducing its barriers. As stated in his speech, the President of Indonesia (Joko Widodo) stressed that no one should be allergic to investments. Therefore, anyone who hinders investments must be cut back. Jokowi also confirmed that he would pursue and take action if licensing was slow, complicated, and illegal levies occurred (Kompas.com, 2019). Consequently, Indonesia is now becoming friendlier in terms of regulations and bureaucracy than ever toward investors.
The Indonesian Investment Coordinating Board simplified investment through Regulation Number 13/2017 on the Guidelines and Procedures for Investment Licensing and Facilities (BKPM, 2017). It regulates guidelines and procedures on application permits for investment facilities. This is aimed at: (1) Standardizing application procedures and application requirements as well as licensing processes and facilities; (2) Providing information about the requirements and time for completion of licensing applications and investment facilities; and (3) Realizing the achievement of fast, simple, transparent and integrated services. This regulation is strengthened by Regulation Number 4/2021 on Guidelines and Procedures for Risk-Based Business Licensing and Investment Facilities (BKPM, 2021). This regulation is simply intended as a guide for use in implementing risk-based business licensing and providing services for investment facilities that are electronically integrated, standardized, fast, simple, and transparent.
The Indonesian government has shown interest in promoting agricultural development and offering policy support to attract investments in the country. Following there are some noticeable regulations that are implemented to support agricultural investments in Indonesia.
Law number 11/ 2020
This law concerns “job creation” that is necessary to adjust various regulatory aspects relating to the convenience, protection, and empowerment of cooperatives and micro, small, and medium enterprises (MSMEs), improving the investment ecosystem, and accelerating national strategic projects, including increasing worker protection and welfare. It is required to accelerate job creation spread across various sectors that are unable to fulfill the legal need (GoI, 2020).
The contents of Job Creation Law are: (1) Simplification of business licensing; (2) Investment requirements; (3) Employment; (4) Convenience and protection for MSMEs; (5) Ease of doing business; (6) Research and innovation support; (7) Government administration; and (8) Imposition of sanctions. Completely, this law is aimed at:
- Absorbing Indonesian foreign workers as widely as possible amid increasing competitiveness and the demands of economic globalization;
- Adjusting various regulatory aspects towards enhancing the investment ecosystem and accelerating national strategic projects for improving the protection and welfare of workers;
- Formulating convenience, protection, and empowerment through accelerating national strategic projects is required in line with improving the protection and welfare of workers scattered in various sector regulations which are currently unable to meet the legal requirement for accelerating job creation; and
- Requiring the change of regulations related to the improvement of the investment ecosystem, stimulating national strategic projects with advanced protection and welfare of workers through amending the awkward sector regulations and synchronizing the breakthrough acceleration of legal work to which it can comprehensively resolve various problems in several regulations into single Law on Job Creation.
This Law has an effective role in developing Indonesian regulations since it can simplify various regulatory issues in just one law. It is expected that the public can simply refer to several aspects of this Law without any overlapping regulations and procedures, a convoluted bureaucratic chain of licensing, as well as illegal levies that have hampered business and investment that were previously quite complicated.
The implementation of the Job Creation Law requires certain regulations toward impact on efforts to restore the national economy as well as become a momentum for the awakening of the Indonesian nation. Hence, the Government of Indonesia (GoI) has stipulated and promulgated those regulations. The amendments of certain government regulations have consequences for re-setting them in line with Law Number 11/2020 on Job Creation.
Several regulations are mandated by Law Number 11/2020 on job creation. Among other things are: (1) Government Regulation Number 26/2021 on the Implementation of the Agriculture (GoI, 2021a); (2) Government Regulation Number 5/2021 on Implementation of Risk-Based Business Licensing (GoI, 2021b); and (3) Presidential Regulation Number 49/2021 on Investment Business Sector (GoI, 2021c).
Government Regulation Number 26/2021
This regulation focuses on the implementation of agriculture comprising estate crops, plant variety rights, sustainable agricultural cultivation system, horticulture, as well as livestock and animal health as an essential part of the agriculture sector in Indonesia. Estate crops include land use, development facility, farm, seeds, and processing unit components. Plant variety rights comprise rights, as well as their application, registration, checking, announcement, recording, and certification processes. The sustainable agricultural cultivation system is substantially related to land conversion issues in the sub-sector of food crops. Horticulture is particularly in line with the seed aspect. Moreover, livestock and animal health consist of grazing, feeds, and veterinary medicine requirements.
Government Regulation Number 26/2021 should be implemented manageably to increase employment and investments, which consequently can improve the welfare of Indonesian people in the agriculture sector. This is because agriculture has a large contribution to the Indonesian economy and absorbs high labor so this government regulation would be able to achieve a positive effect on the agriculture sector in the country (Rafani and Sudaryanto, 2021).
Government regulation number 5/2021
This regulation issues on Implementation of Risk-Based Business Licensing based on the level of risk of business activities. It covers: (1) Regulation of risk-based business licensing; (2) Norms, standards, procedures, and criteria for risk-based business licensing; (3) Risk-based business licensing through online single submission (OSS) system services; (4) Procedures for monitoring risk-based business licensing; (5) Evaluation and reform of risk-based business licensing policies; (7) Funding for risk-based business licensing; (8) Resolving risk-based business licensing problems and obstacles; and (9) Sanctions.
Risk-based business licensing is carried out based on determining the risk level and scale ranking of business activities including MSMEs and/or large businesses. Determination of risk levels is carried out based on the results of risk analysis, including: (1) Identification of business activities; (2) Assessment of the level of danger; (3) Assessment of potential hazards; (4) Determination of risk level and business scale ranking; and (5) Determination of the type of business permit.
The implementation of risk-based business licensing is simplified by a standard method based on the risk level of business activity in determining the type of business licensing and quality/frequency of supervision by Law Number 11/2020 on Job Creation. It requires a change in mindset (management) and adjustments to the work procedures for providing business licensing services (business process re-engineering) as well as requiring the regulation (re-design) of the business licensing process in the electronic business licensing system.
The risks that are the basis for business licensing are classified into low, medium-low, medium-high, and high-risks. For low-risk business activities, business actors are only required to have a Business Identification Number (NIB), which is an identification number given to every business entity in Indonesia. For medium to low-risk business activities, business actors are required to have an NIB and a statement of compliance with standard certificates. For medium to high-risk business activities, business actors are required to have a verified NIB and standard certificate. Meanwhile, for high-risk business activities, business actors are required to have a verified NIB and permit. Thus, the implementation of issuing business permits can be more effective and simpler because not all business activities are required to have a permit. Apart from that, supervisory activities become more structured both in terms of the period and substance that must be supervised.
Presidential regulation number 10/2021
This regulation emphasizes on Investment Business Sector. It covers, among other things, priority business category i.e., national strategic programs/projects which has: (1) Capital intensive; (2) Labor intensive; (3) High technology; (4) Pioneer industry; (5) Export orientation; and (6) Orientation in research, development and innovation activities.
The list of priority businesses in the agricultural sector includes: (1) Corn, soybean, hybrid and inbred rice, various secondary crops, fibrous crops, tropical and subtropical fruit, beverage crops, spice crop farming, aromatics/fresheners, narcotics and other medicines and ornamental plant farming; (2) Sugar cane and pepper plantations; and (3) Breeding and rearing beef and dairy cattle (MoA, 2021). Investors who invest their capital in the list of business fields are provided with fiscal and non-fiscal incentives (Table 6).
Potential priority investments for agricultural commodities
The Indonesian Ministry of Agriculture (MoA, 2021) has identified 49 potential commodities for directed investment based on an analysis of the Input-Output Table of the Central Bureau of Statistics comprising forward and backward linkages and a high multiplier effect. It includes: (1) Nine commodities of food crops; (2) Four commodities of horticulture; (3) 12 commodities of estate crops; (4) Five commodities of livestock; and (5) 19 commodities of agricultural product processing (Table 7).
Based on the results of the analysis of the distribution coefficient, degree of sensitivity, output multiplier, and worker income, the potential investment for agricultural commodities grade ranking is obtained spread across each sub-sector (MoA, 2021). They are:
- Food crops: (1) rice; (2) corn; (3) soybeans; (4) cassava; and (5) sweet potatoes.
- Horticulture: (1) mangosteen; (2) banana; (3) durian; (4) potatoes; and (5) garlic.
- Estate crops: (1) rubber; (2) oil palm; (3) coffee; (4) cocoa; and (5) coconut.
- Livestock: (1) goat/sheep; (2) dairy cattle; (3) pigs; (4) beef cattle; (5) edible-nest swiftlet; (6) poultry and poultry products; and (7) non-food/development products.
CONCLUSION AND RECOMMENDATION
Agricultural investments in Indonesia hold the potential to promote sustainable development. The country has an opportunity for agricultural investments in terms of a large-scale market, favorable natural resources, and infrastructure and human resources developments. The government of Indonesia has shown interest in promoting agricultural development and offering policy support to attract investments in the country.
Fundamentally, the Indonesian government has issued a Law on Job Creation to simplify various regulatory issues in just one law. It is aimed at avoiding overlapped regulations and procedures, a convoluted bureaucratic chain of licensing, and hampered illegal levies on business and investment that were previously quite complicated. Some regulations are mandated by this Law, including regulations on the investment business sector and implementation of risk-based business licensing. There are certain potential commodities for directed investment and potential investment for agricultural commodities spread across each sub-sector. Investors who invest their capital in the business including the agricultural sector are provided with fiscal and non-fiscal incentives.
The government of Indonesia encourages both domestic and foreign investments in the agricultural sector. However, this should be accompanied by multi-party cooperation through: (1) Identifying market to understand the specific needs and opportunities in the Indonesian agricultural sector in relation to demand for specific products and its dynamics; (2) Adopting modern technologies to increase productivity and reduce operational costs that might involve the use of precision agriculture, improved crop varieties, or mechanization; (3) Implementing sustainable agricultural practices that conserve resources and protect the environment to ensure long-term viability; (4) Forming partnerships with agricultural stakeholders towards building trust among them; (5) Respecting cultural norms and practices through developing positive relationships among stakeholders building for the success of agricultural investments; (6) Considering risk mitigation strategies, such as insurance, to protect investments from unforeseen events like natural disasters or commodity price fluctuations; and (7) Complying with regulations to ensure that investments align with standard of requirements
REFERENCES
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[Bappenas] Badan Perencanaan Pembangunan Nasional. 2019. Indonesia 2045 Berdaulat, Maju, Adil, dan Makmur. Jakarta (ID): Badan Perencanaan Pembangunan Nasional.
BKPM. 2017. Peraturan Badan Koordinasi Penanaman Modal Republik Indonesia Nomor 13 Tahun 2017 tentang Pedoman dan Tata Cara Perizinan dan Fasilitas Penanaman Modal (Regulation of Indonesian Investment Coordinating Board Number 13/2017 on Guidelines and Procedures for Investment Licensing and Facilities). Badan Koordinasi Penanaman Modal (Indonesian Investment Coordinating Board). Jakarta.
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Databoks. 2023. 115 million Indonesians are moving towards the middle class. Retrieved from: In 2016, the middle class in Indonesia amounted to 53.6 million people (Databoks, 2023).
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Indonesian Agricultural Investments Policy Overview
ABSTRACT
This paper gives an overview of the agricultural investment policy in Indonesia. It is particularly important due to the country’s heavy reliance on agriculture as a significant economic sector and its unique geographical and socio-economic context. Indonesia has an opportunity for agricultural investment in terms of a large-scale market, favorable natural resources, and developments in infrastructure and human resources. Therefore, the government of Indonesia has shown interest in promoting agricultural development and offering policy support to attract investments in the country. It includes issuing certain regulations to encourage both domestic and foreign investments in the agricultural sector. Hence, there is a need for multi-party cooperation through identifying the market, adopting modern technologies, implementing sustainable agricultural practices, forming partnerships among stakeholders, respecting cultural norms and practices, considering risk mitigation strategies, and complying with regulations.
Keywords: agriculture, investment, policy, overview, Indonesia
INTRODUCTION
Investment is important for several reasons, as it plays a crucial role in economic growth, financial stability, and individual wealth-building. In essence, investment is a fundamental driver of economic progress, individual financial well-being, and societal development channeling resources into productive ventures, fuels innovation, and shapes the future economic landscape. It involves many sectors including agriculture.
Agricultural investment is important for a variety of reasons, spanning from food security to economic development. It has far-reaching impacts on food security, economic development, poverty reduction, environmental sustainability, and the well-being of both rural and urban populations. It is a crucial component to ensure a balanced and prosperous future for societies worldwide.
Agricultural investment is particularly important in Indonesia due to the country’s heavy reliance on agriculture as a significant economic sector and its unique geographical and socio-economic context. Given the myriad of challenges facing agriculture today, from climate change to urbanization, targeted and sustained investment is more crucial than ever.
By focusing on the unique challenges and opportunities of the Indonesian agricultural sector, the country can enhance its economic growth, improve livelihoods, and ensure a more resilient and sustainable future for its population. This paper discusses the overview of agricultural investment policy in Indonesia based on its features and opportunities.
FEATURE
Indonesia is an agriculture-based country with mega biodiversity that can be used as a basis for sustainable development. It comprises of 16,056 islands with a total area of 1,916,862.20 square kilometers. The country is administratively governed under 34 provinces, 416 districts, 98 cities, 7,281 sub-districts, and 83,794 villages. The agricultural sector including food crops, horticulture, estate crops, and livestock sub-sectors plays an important role in the national economy of the country. The key macroeconomic indicators of the agricultural sector in Indonesia are summarized in Table 1 with the following description.
OPPORTUNITY
Indonesia has an opportunity for agricultural investments, driven by the country’s diverse agricultural sector, economic conditions, and environmental factors. At least there are three opportunities for agricultural investments in the country (MoA, 2021). First, Indonesia has a large-scale market. Second, the country is supported by favorable natural resources. Third, Indonesia develops infrastructure and human resources.
Large-scale market
Indonesia’s large population provides significant opportunities for agricultural investments. With 275.77 million people (BPS, 2023), there is a constant and substantial demand for food and agricultural products. A large population is strategic for potential production resources and consumption targets. The required quantity and quality of consumption for various agricultural products continue to increase from time to time.
With a large population, combined with its diverse topography and climate, Indonesia offers a multitude of opportunities for agricultural investments. The middle-income class population in Indonesia in 2045 will increase to 223 million people (70% of the total population) (Bappenas, 2019). This increase will certainly have an impact on increasing average per capita income which is predicted to reach US$23,199 in 2045 (Bappenas, 2019). Other research was conducted by the McKinsey Global Report Institute (2012) which reported that in 2030, Indonesia will have a middle-class population (as a driver of economic growth) of 135 million people and 113 million of them will be skilled and expert workers which cumulatively make Indonesia predicted to become a leading country with the 7th largest economic power in the world. In 2016, the middle class in Indonesia amounted to 53.6 million people (Databoks, 2023). The nation’s vast consumer base and rising middle class suggest a growing demand for both staple foods and diversified agricultural products. Since the country has different regions, it has opportunities that are beneficial for successful investments in the agricultural sector. It is predicted that in 2030 Indonesia will achieve a US$1.8 trillion potential consumer market or significantly increase by about 360% as compared to the achievement in 2012 i.e., US$0.5 trillion (Table 2).
Favorable natural resources
Indonesia is considered as one of the most biodiverse countries in the world due to a combination of geographical, ecological, and historical factors. The country’s vast land area provides ample space for agricultural activities, including crop cultivation and livestock farming.
Indonesia is the country with the second highest terrestrial biodiversity in the world. If combined with marine biodiversity, Indonesia is the first. The status and trends of Indonesia’s biodiversity make Indonesia one of the world’s agro-biodiversity centers with 10% of the world’s total plant species. For the diversity of fauna, approximately 12% of the world’s mammals (515 species) are found in Indonesia, placing it in second place after Brazil, at the global level. The ranking of Indonesian species in the world can be seen in Table 3.
Biodiversity has essential roles as: (1) Source of food, energy, and water; (2) Preservation of cultural heritage; (3) Quality environment; (4) Pollution absorption; (5) Maintaining ecosystem stability; (6) Producer of non/renewable natural resources; (7) Spiritual fulfillment; and (8) Mental and physical well-being (Indonesiabaik.id, 2021). All of this is a good opportunity to invest in Indonesia, especially in the agricultural sector.
As it has more than 17 thousand islands, Indonesia is ranked as the top six archipelagic countries in the world after Sweden, Norway, Finland, Canada, and the United States. Among these islands, Java is listed as the most populous island with 151.6 million inhabitants or around 56.10% of Indonesia’s total population. Therefore, the direction of developing agricultural investment is very wide open outside Java. In other words, the potential for utilization of land resources in the outer islands of Java is quite large. For example, the most potential sub-optimal lands such as swamps, tidal, dry land, and dry fields particularly exist in seven provinces i.e., Jambi, Riau, South Sumatra, East Kalimantan, South Kalimantan, West Kalimantan, and Central Kalimantan. Moreover, Indonesia has a tropical climate with sunlight throughout the year which influences high rainfall intensity, temperature, and humidity (MoA, 2021). All three are key supporting factors for agricultural investment activities in the country.
With the wealth of natural resources in Indonesia, investment in this sector will be very profitable. Nevertheless, the Indonesian Government formulate a policy in accordance with the sustainability aspects in the use of natural resources. For example, Law No. 11/2020 describes the mechanism for settling palm oil plantations located in forest areas (Articles 110A and 110B). Thus, investment in the agricultural sector should follow environmental sustainability protocols.
Infrastructure and human resources developments
Indonesia has been investing in infrastructure development as a critical issue to make connectivity since the country is an archipelagic nation composed of thousands of islands. Developing infrastructure helps bridge geographical gaps and connects different regions, while connectivity is vital for the transportation of goods, services, and people, as well as fostering development implementation.
Infrastructure development plays a vital role in creating an environment conducive to agricultural investments in Indonesia. It improves access to markets, reduces costs, enhances productivity, and ensures the sustainability of agricultural practices. As a result, it not only benefits local farmers but also attracts domestic and foreign investors to participate in the growth of the agricultural sector. Certain infrastructure developments to support agricultural development in Indonesia can be seen in Table 4.
In terms of human resources, currently, the majority (69.25%) of the Indonesian population can be categorized as under productive age between 15 and 64 years old (Figure 1). It is a so-called demographic bonus that refers to a period when the working-age population is larger than the dependent population (children and the elderly), leading to the potential for increased productivity and economic development. This can offer several advantages for agricultural investment in Indonesia, as they relate to the country’s population dynamics and potential for economic growth.
Indonesia’s demographic bonus will peak in the 2030s. At least it has two benefits, namely: (1) Getting a supply of labor, to which the economy becomes much more advanced because those who work come from a productive age towards the work process is fast and efficient; and (2) Increasing the country’s economy i.e., the GDP per capita due to generally caused by a decrease in the dependency ratio. However, the demographic bonus comes with challenges such as the need for infrastructure development and job creation to support the growing working-age population.
It is important to note that among the Indonesian population, 38.70 million people are working in the agricultural sector (Table 5). About 31.89% are categorized as young farmers (20-39 years old). These young farmers are strategic entry points in line with investment in the country. It is required to encourage young farmers to keep spirit and motivation, have innovation, convert circumstances into opportunities, take advantage of information technology, produce quality products, and expand target markets through favorable investment policies.
POLICY SUPPORT
One of the indicators related to investments is the Ease of Doing Business (EOB) index. It is an aggregate figure that includes different parameters that define the EOB in a country. There are 10 indicators; among others is “Protecting investors which cover the indices on the extents of disclosure and director liability as well as ease of shareholder suits” (World Bank, 2017 as cited by Fibra, 2018).
Indonesia is ranked 73 (index score 69.20) among 190 economies in EOB. As compared to other ASEAN countries, the rank of Indonesia is lower than those of Singapore (index score 86.20), Thailand (index score 81.50), and Malaysia (index score 80.10). Therefore, investors should be aware and well-informed of local regulations and sector-specific requirements before commencing their operations in Indonesia (Acclime.com, 2023).
Indonesia has a vision to open the widest possible investment towards reducing its barriers. As stated in his speech, the President of Indonesia (Joko Widodo) stressed that no one should be allergic to investments. Therefore, anyone who hinders investments must be cut back. Jokowi also confirmed that he would pursue and take action if licensing was slow, complicated, and illegal levies occurred (Kompas.com, 2019). Consequently, Indonesia is now becoming friendlier in terms of regulations and bureaucracy than ever toward investors.
The Indonesian Investment Coordinating Board simplified investment through Regulation Number 13/2017 on the Guidelines and Procedures for Investment Licensing and Facilities (BKPM, 2017). It regulates guidelines and procedures on application permits for investment facilities. This is aimed at: (1) Standardizing application procedures and application requirements as well as licensing processes and facilities; (2) Providing information about the requirements and time for completion of licensing applications and investment facilities; and (3) Realizing the achievement of fast, simple, transparent and integrated services. This regulation is strengthened by Regulation Number 4/2021 on Guidelines and Procedures for Risk-Based Business Licensing and Investment Facilities (BKPM, 2021). This regulation is simply intended as a guide for use in implementing risk-based business licensing and providing services for investment facilities that are electronically integrated, standardized, fast, simple, and transparent.
The Indonesian government has shown interest in promoting agricultural development and offering policy support to attract investments in the country. Following there are some noticeable regulations that are implemented to support agricultural investments in Indonesia.
Law number 11/ 2020
This law concerns “job creation” that is necessary to adjust various regulatory aspects relating to the convenience, protection, and empowerment of cooperatives and micro, small, and medium enterprises (MSMEs), improving the investment ecosystem, and accelerating national strategic projects, including increasing worker protection and welfare. It is required to accelerate job creation spread across various sectors that are unable to fulfill the legal need (GoI, 2020).
The contents of Job Creation Law are: (1) Simplification of business licensing; (2) Investment requirements; (3) Employment; (4) Convenience and protection for MSMEs; (5) Ease of doing business; (6) Research and innovation support; (7) Government administration; and (8) Imposition of sanctions. Completely, this law is aimed at:
This Law has an effective role in developing Indonesian regulations since it can simplify various regulatory issues in just one law. It is expected that the public can simply refer to several aspects of this Law without any overlapping regulations and procedures, a convoluted bureaucratic chain of licensing, as well as illegal levies that have hampered business and investment that were previously quite complicated.
The implementation of the Job Creation Law requires certain regulations toward impact on efforts to restore the national economy as well as become a momentum for the awakening of the Indonesian nation. Hence, the Government of Indonesia (GoI) has stipulated and promulgated those regulations. The amendments of certain government regulations have consequences for re-setting them in line with Law Number 11/2020 on Job Creation.
Several regulations are mandated by Law Number 11/2020 on job creation. Among other things are: (1) Government Regulation Number 26/2021 on the Implementation of the Agriculture (GoI, 2021a); (2) Government Regulation Number 5/2021 on Implementation of Risk-Based Business Licensing (GoI, 2021b); and (3) Presidential Regulation Number 49/2021 on Investment Business Sector (GoI, 2021c).
Government Regulation Number 26/2021
This regulation focuses on the implementation of agriculture comprising estate crops, plant variety rights, sustainable agricultural cultivation system, horticulture, as well as livestock and animal health as an essential part of the agriculture sector in Indonesia. Estate crops include land use, development facility, farm, seeds, and processing unit components. Plant variety rights comprise rights, as well as their application, registration, checking, announcement, recording, and certification processes. The sustainable agricultural cultivation system is substantially related to land conversion issues in the sub-sector of food crops. Horticulture is particularly in line with the seed aspect. Moreover, livestock and animal health consist of grazing, feeds, and veterinary medicine requirements.
Government Regulation Number 26/2021 should be implemented manageably to increase employment and investments, which consequently can improve the welfare of Indonesian people in the agriculture sector. This is because agriculture has a large contribution to the Indonesian economy and absorbs high labor so this government regulation would be able to achieve a positive effect on the agriculture sector in the country (Rafani and Sudaryanto, 2021).
Government regulation number 5/2021
This regulation issues on Implementation of Risk-Based Business Licensing based on the level of risk of business activities. It covers: (1) Regulation of risk-based business licensing; (2) Norms, standards, procedures, and criteria for risk-based business licensing; (3) Risk-based business licensing through online single submission (OSS) system services; (4) Procedures for monitoring risk-based business licensing; (5) Evaluation and reform of risk-based business licensing policies; (7) Funding for risk-based business licensing; (8) Resolving risk-based business licensing problems and obstacles; and (9) Sanctions.
Risk-based business licensing is carried out based on determining the risk level and scale ranking of business activities including MSMEs and/or large businesses. Determination of risk levels is carried out based on the results of risk analysis, including: (1) Identification of business activities; (2) Assessment of the level of danger; (3) Assessment of potential hazards; (4) Determination of risk level and business scale ranking; and (5) Determination of the type of business permit.
The implementation of risk-based business licensing is simplified by a standard method based on the risk level of business activity in determining the type of business licensing and quality/frequency of supervision by Law Number 11/2020 on Job Creation. It requires a change in mindset (management) and adjustments to the work procedures for providing business licensing services (business process re-engineering) as well as requiring the regulation (re-design) of the business licensing process in the electronic business licensing system.
The risks that are the basis for business licensing are classified into low, medium-low, medium-high, and high-risks. For low-risk business activities, business actors are only required to have a Business Identification Number (NIB), which is an identification number given to every business entity in Indonesia. For medium to low-risk business activities, business actors are required to have an NIB and a statement of compliance with standard certificates. For medium to high-risk business activities, business actors are required to have a verified NIB and standard certificate. Meanwhile, for high-risk business activities, business actors are required to have a verified NIB and permit. Thus, the implementation of issuing business permits can be more effective and simpler because not all business activities are required to have a permit. Apart from that, supervisory activities become more structured both in terms of the period and substance that must be supervised.
Presidential regulation number 10/2021
This regulation emphasizes on Investment Business Sector. It covers, among other things, priority business category i.e., national strategic programs/projects which has: (1) Capital intensive; (2) Labor intensive; (3) High technology; (4) Pioneer industry; (5) Export orientation; and (6) Orientation in research, development and innovation activities.
The list of priority businesses in the agricultural sector includes: (1) Corn, soybean, hybrid and inbred rice, various secondary crops, fibrous crops, tropical and subtropical fruit, beverage crops, spice crop farming, aromatics/fresheners, narcotics and other medicines and ornamental plant farming; (2) Sugar cane and pepper plantations; and (3) Breeding and rearing beef and dairy cattle (MoA, 2021). Investors who invest their capital in the list of business fields are provided with fiscal and non-fiscal incentives (Table 6).
Potential priority investments for agricultural commodities
The Indonesian Ministry of Agriculture (MoA, 2021) has identified 49 potential commodities for directed investment based on an analysis of the Input-Output Table of the Central Bureau of Statistics comprising forward and backward linkages and a high multiplier effect. It includes: (1) Nine commodities of food crops; (2) Four commodities of horticulture; (3) 12 commodities of estate crops; (4) Five commodities of livestock; and (5) 19 commodities of agricultural product processing (Table 7).
Based on the results of the analysis of the distribution coefficient, degree of sensitivity, output multiplier, and worker income, the potential investment for agricultural commodities grade ranking is obtained spread across each sub-sector (MoA, 2021). They are:
CONCLUSION AND RECOMMENDATION
Agricultural investments in Indonesia hold the potential to promote sustainable development. The country has an opportunity for agricultural investments in terms of a large-scale market, favorable natural resources, and infrastructure and human resources developments. The government of Indonesia has shown interest in promoting agricultural development and offering policy support to attract investments in the country.
Fundamentally, the Indonesian government has issued a Law on Job Creation to simplify various regulatory issues in just one law. It is aimed at avoiding overlapped regulations and procedures, a convoluted bureaucratic chain of licensing, and hampered illegal levies on business and investment that were previously quite complicated. Some regulations are mandated by this Law, including regulations on the investment business sector and implementation of risk-based business licensing. There are certain potential commodities for directed investment and potential investment for agricultural commodities spread across each sub-sector. Investors who invest their capital in the business including the agricultural sector are provided with fiscal and non-fiscal incentives.
The government of Indonesia encourages both domestic and foreign investments in the agricultural sector. However, this should be accompanied by multi-party cooperation through: (1) Identifying market to understand the specific needs and opportunities in the Indonesian agricultural sector in relation to demand for specific products and its dynamics; (2) Adopting modern technologies to increase productivity and reduce operational costs that might involve the use of precision agriculture, improved crop varieties, or mechanization; (3) Implementing sustainable agricultural practices that conserve resources and protect the environment to ensure long-term viability; (4) Forming partnerships with agricultural stakeholders towards building trust among them; (5) Respecting cultural norms and practices through developing positive relationships among stakeholders building for the success of agricultural investments; (6) Considering risk mitigation strategies, such as insurance, to protect investments from unforeseen events like natural disasters or commodity price fluctuations; and (7) Complying with regulations to ensure that investments align with standard of requirements
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